Lecturers’ USS lawsuit frustrated by centuries-old precedent

The case was bought by Dr Neil Davies, senior research fellow at the Bristol Medical School, and Dr Ewan McGaughey, senior lecturer at King’s College London, in November last year.

The claimants were backed by several branches of the University and College Union, and filed suit against USS directors and chief executive Bill Galvin.

Davies and McGaughey filed a multiple derivative claim alleging that USS directors had conducted a flawed valuation as a pretext for making cuts to USS members’ retirement income of around 30 per cent, and that they had failed to conduct a public equality assessment of the impacts of these cuts, which they say disproportionately impact women and minorities.

We are confident that this decision is wrong. The statutory duties of directors are to follow the rules of their companies, use their powers for the companies’ purposes, act in good faith, and not engage in conflicted conduct

Neil Davies, KCL, and Ewan McGaughey, Bristol Medical School

A multiple derivative claim is a claim brought or continued by a shareholder on behalf of the company in relation to a breach of duty by a director.

The pair also allege that the directors failed to cut the “super-inflated” operating costs, preferring to cut members’ benefits instead, and that they had failed to divest from fossil fuels in line with the wishes of a purported majority of scheme beneficiaries.

The USS disputed these claims, and the case ended up before the High Court.

High Court claims fail

Davies and McGaughey needed the court’s permission to pursue their multiple derivative claim, and the resultant hearing was the first time USS representatives were able to put their counter-case.

The judge held that, while it is in some circumstances permissible for members of a pension fund corporation to sue on these grounds, Davies and McGaughey (and their representatives) would have to show that the USS suffered a loss mirroring that suffered by Davies and McGaughey, and that this was because of a deliberate or dishonest breach of duty, or otherwise as a result of USS directors improperly benefiting themselves at the scheme’s expense.

They would furthermore have to justify the expense of going to trial, and the judge was asked to consider whether he could accept the counter-evidence filed by the USS’s representatives without the need for cross-examination.

Law firm CMS, which represented the USS, said in its summary: “In each of the four claims, [the judge] decided that the evidence was sufficiently clear that a full trial with cross-examination would not be justified.”

Specifically, the judge found no evidence that the USS had suffered such a loss as was required for the first claim to proceed. Moreover, he found that Davies and McGaughey had failed to prove a prima facie case with the evidence they presented.

There was not sufficient evidence to suggest that USS directors had pursued self-interested motives, and the judge concluded that the claimants would be unlikely to persuade the court that any of the information put forward by the USS was false or misleading.

On the point of discrimination, the judge found that the claimants had produced no statistical evidence to justify their claims of indirect discrimination arising from changes to USS benefits, though he stopped short of ruling on whether the benefits changes did in fact amount to indirect discrimination, arguing instead that the question should be settled and not by the multiple derivative claim filed by Davies and McGaughey.

When considering the allegation of inflated costs, the judge ruled that scheme members might have recourse to the multiple derivative claim mechanism, but he was not satisfied that Davies and McGaughey had a prima facie case, they having not presented sufficient evidence to support the charge that USS directors had used their influence in this respect to benefit themselves.

Similarly, when considering the question of divestments and climate change, the judge was not satisfied that there was a prima facie case that the USS had suffered any loss as a result of its directors’ actions, concluding it was likely that the court would have struck the suggestion that directors had acted in their own interests in this respect on the grounds that there were no reasonable grounds for bringing the claim.

He acknowledged that members might disagree with the investment approach taken by the USS, but held that the USS was within its rights to exercise its decision-making powers.

Any allegation that it had breached legislative requirements with its investment decisions would be better tested by a trust law claim against the USS, rather than a multiple derivative claim against the scheme’s directors, he held.

A USS spokesperson said: “We are pleased that the High Court has denied permission for these claims to be pursued. We welcome the thoroughness with which the judge has assessed this case, and the way he has fully considered both the appropriateness of the ‘derivative’ claim mechanism and the underlying claims themselves. 

“While pleased with that outcome, we are concerned that anyone should feel it necessary to take such action. We are committed to moving forwards and to building stronger relationships with all stakeholders. 

“Much of the material considered by the court was already available on our website. We encourage members to make use of that information to help them better understand the scheme and how we run it for them.”

Verdict to be challenged

Davies and McGaughey said they would challenge the verdict, however.

“We are incredibly grateful to everyone that has supported and donated to our case, and against incredible odds to get this far. Today the High Court has rightly said that beneficiaries of a pension fund corporation have the right to sue directors for breach of duty, and we welcome that part of this path-breaking decision,” they said.

“However, on a technicality dating back to a case called Foss v Harbottle, from the year 1843 — 10 years before Charles Dickens published Bleak House — Justice Leech felt bound to dismiss our claims. He says duties cannot be enforced unless directors personally benefit from their breach. 

“We are confident that this decision is wrong. The statutory duties of directors are to follow the rules of their companies, use their powers for the companies’ purposes, act in good faith, and not engage in conflicted conduct,” they continued.

“Statutory duties must not be defeated by common law technicalities in enforcement. The law is on the side of accountable governance and secure retirement. So we will confer with our superb legal team, led by David Grant QC, to explore every avenue of appeal and to win justice for the hundreds and thousands of university staff who deserve social security.”

One of their grounds for appeal is that the judge had missed “a number of key elements of our claim”, Davies and McGaughey added.

They said the High Court hearing “failed to adequately deal with our evidence from Professor Raghavendra Rau that even if USS went through an era of depression and war there would still be a £30bn surplus, and the empirical evidence from Imperial College London that renewables have outperformed fossil fuels for over a decade. 

“We are therefore looking at an appeal as a matter of urgency. We are organised, and determined to bring accountability to the directors of USS for the harm they have caused.Again, we are so grateful for everyone’s support. The cuts are billions, but if we all stick together, we will win,” they said.

Grant had already appealed to the judge for reconsideration of points he said had been missed, leading to the judge making two amendments to his verdict. He declined, however, to recall and revise the draft judgment.