Written By: Ralph McClelland
& James Bingham
Ralph McClelland and James Bingham of Sacker & Partners outline how a high court decision could have far-reaching consequences for the LGPS
The recent Galaxy High Court ruling against Durham County Council¹ is a potentially significant judgement for council decision makers and, perhaps more so, for the council executives who report to them.
The case turned on perceived deficiencies in a report prepared by council officers. Shortcomings in the report were found to be sufficient to invalidate an important council decision which relied on the challenged report. LGPS investment decision makers and their executives may wish to review their practices in light of the court’s comments.
Galaxy is not an LGPS investment decision, but as we explore the council’s role in the Galaxy decision, it bears clear analogies to an LGPS investment committee’s role. Both are involved in complex, high-value decisions in technical and specialised areas. It is not far-fetched to imagine an LGPS investment decision being challenged in the same way as the Galaxy decision. Nor need one look far to see those who would bring such a challenge.
A successful challenge to an LGPS investment could, in the worst case scenario, be both embarrassing and costly to the council. The investment in question might have to be unravelled and any investment gain forfeited. The only people to benefit would be the lawyers, the press and the person who wanted out of the investment in the first place. If this seems like scaremongering, ask yourself, have many people in this industry have forgotten the Hammersmith & Fulham decision in 1991 in which council swaps were found to be ultra vires?
The facts of Galaxy date back to 2009 and relate to a long running property development project involving council land. The proposals were fairly complex and involved collaboration between the council and a number of other stakeholders through special purpose vehicles (SPVs). Various agents, intermediaries and advisers were involved, as well as in-house experts.
In reaching his decision, the judge observed:
“the Cabinet did not need to be appraised of everything which was within the knowledge of the officers. The officers are there to digest material and to bring to bear their expertise, which the Cabinet members will not have. The Cabinet can rely on the officers’ fair summary of relevant matters and their balanced evaluation of the implications. If the officers have given proper consideration to different arguments and then come to a conclusion, there is no necessary error should the report not refer to the different contentions but only to the conclusions reached.”
The council’s decision was overturned because the court found material shortcomings in the officers’ report including a lack of evidence that “obviously relevant” issues had been raised including a failure to address “pungent” criticisms of the proposal raised by the council’s advisers.
This pronouncement should give even the most conscientious officer pause for thought: communicating complex, dry information is extremely challenging, particularly to a group of people who may have very different skill sets and limited time.
LGPS sections are high profile vehicles. Unlike their private sector counterparts they are forced to disclose information about the disposal of their portfolios. This makes for easy scrutiny and goes a long way to explaining why any ethically or socially minded share action group will tend to focus on the LGPS when campaigning on, for example, tobacco or arms investments.
Following the Galaxy decision, it is not difficult to imagine the judicial review of a socially or ethically controversial investment decision. Any vulnerability in a report upon which the decision making committee relied could be seized upon. Particular risk might arise if a council report failed to show due regard to any social, ethical, governance or environmental policy to which the council ascribed.
A second scenario which comes to mind forcibly in the context of the Galaxy decision is infrastructure investment. The Galaxy challenge was brought by a developer involved in an earlier SPV structure. This may not have been the case in Galaxy, but it is not unheard of for those involved in development or infrastructure projects to look for a way out of a deal that has turned sour.
LGPS sections are being actively targeted as infrastructure investors. This is also an area where larger schemes are exploring new structures. Such structures can involve more direct involvement in the underlying development opportunities rather than the use of more traditional pooled investment vehicles. There is scope here for deals to become less attractive and, in that scenario, any weakness in a decision-making process could become a costly vulnerability where, for example, a counterparty was looking for a way to exit the venture.
For those preparing reports on which complicated decisions will ultimately be based, there is little comfort in the Galaxy decision. In that case, the cabinet reached a decision on 17 April 2014 having considered a report entitled Durham City Strategic Site and Infrastructure Delivery Strategy. The report was prepared by two of the council’s corporate directors. They, in turn, were relying, at least in part, on the work of other council employees who had the benefit of some external advice (though not necessarily extensive advice in that instance). The project was, after all, complicated and took place over several years. Preparing a “perfect” report would be no mean achievement. It is always easy to pick holes with the benefit of 20:20 hindsight.
Many investment decisions will be less complicated than the Galaxy decision, and an investment adviser (whether internal or external) will invariably be involved. Sometimes external legal advice is also taken. However, the pensions investment world has also become more sophisticated. LGPS investors are increasingly, in our experience, being drawn into more complex investments including infrastructure, liability-driven investing and alternative asset classes. This is also at a time when resources within local authorities are under extraordinary pressure both from budget cuts and the heavy burden of additional legislation. In this context, a Galaxy-style challenge could be a time-consuming and costly problem, even were it ultimately unsuccessful.
The Galaxy decision is a good reason for LGPS investment decision makers to focus on risk management in their decision-making processes.
1. (Galaxy) v Durham County Council  EWHC 16 (Admin)