Lawrence Ewan McGaughey & Anor v Universities Superannuation Scheme Limited & Ors

A common-law company derivative action is an exceptional claim pursued on behalf of a company to remedy harm suffered by it for its benefit. The company must have suffered loss or harm, and the applicant must have a sufficient interest, ordinarily shown by loss reflective of or causally connected with the company’s harm. A pension-scheme member is not analogous to a shareholder merely because the trustee is a one-trust company. The trust, trustee and members retain distinct legal identities, and members’ interests may conflict. The fraud-on-the-minority exception requires a prima facie deliberate or dishonest breach or improper benefit to the defendants at the company’s expense. The derivative procedure cannot be used to challenge trustee decisions or avoid direct-claim and representation requirements.

Two active members of the Universities Superannuation Scheme sought permission to continue four common-law company multiple derivative claims on behalf of the corporate trustee, against current and former directors. The claims concerned the scheme’s valuation and benefit changes, alleged indirect discrimination, operating costs and remuneration, and investment in fossil fuels.

Leech J dismissed the permission application. His judgment is reported at [2022] EWHC 1233 (Ch). The appeal concerned whether the claims were company derivative claims, whether the applicants had standing and a sufficient interest, whether the fraud-on-the-minority exception and prima facie merits requirements were met, and whether permission should be refused in any event as a matter of discretion.

Asplin LJ gave the leading judgment, with Snowden LJ and Flaux Ch agreeing. The appeal was dismissed on all grounds.

1. Nature of a derivative action. A common-law company derivative action is the company’s own action, brought on its behalf to remedy harm suffered by the company and for its benefit. The rule in Foss v Harbottle (1843) 2 Hare 461 and the explanation in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 require a prima facie company claim within the relevant exception. Loss or harm to the company is essential. The applicant must also have a sufficient interest, normally shown by loss reflective of, or correlating with, the company’s loss.
2. Corporate trustee and scheme members. USSL, the Scheme and the members were legally distinct. The Scheme’s assets were held by USSL on trust and were not USSL’s own assets. Membership of the Scheme did not place the applicants in the position of shareholders. The interests of different classes of members could diverge, and there was no causative link between the alleged harm to USSL and the applicants’ complaint about reduced future benefits. The Valuation, Discrimination and Fossil Fuels Claims therefore were not company derivative claims.
3. Fraud and prima facie evidence. The fraud-on-the-minority exception requires a prima facie deliberate or dishonest breach of duty, or an improper benefit to the defendants at the company’s expense. The benefit need not be exclusively financial. The court must consider the totality of the evidence. It must not assume that the company’s evidence will be accepted at trial where disputed issues, such as good faith, require assessment. The applicants showed no prima facie equitable fraud, improper benefit or breach.
4. Individual claims. The Discrimination Claim was better pursued by individual or group claims against USSL, which would have the same practical effect under section 61 of the Equality Act 2010. The Fossil Fuels Claim challenged investment management without identifying a breach or loss. Regulation 4 of the Occupational Pension Schemes (Investment) Regulations 2005 required security, quality, liquidity, profitability and diversification, and the evidence disclosed compliance. The Costs Claim would also fail for lack of prima facie evidence of improper benefit.
5. Alternative procedures. The claims were, at most, suited to direct, administration or beneficiary derivative proceedings. The derivative mechanism was exceptional and could not be used to avoid the requirements of representation, costs or a direct claim against the trustee.

• Court of Appeal (Civil Division): Dismissed the appeal on all grounds.
• High Court of Justice, Companies Court (ChD): Leech J dismissed the application for permission to continue the claims; judgment reported at [2022] EWHC 1233 (Ch).