On 12 May 2023, the High Court of England and Wales dismissed ClientEarth’s application for permission to bring a claim against Shell plc’s (Shell) board of directors (the Directors). This was the first climate case which sought, via a derivative action, to hold a company’s directors personally liable for a company’s alleged failure to adequately address the risk of climate change.
Whilst there remains a possibility of a reconsideration of the permission application at an oral hearing, the Court identified a number of compelling reasons why permission should not be granted.
ClientEarth applied for permission to bring a “derivative action” against the Directors (i.e. a claim on behalf of Shell, in ClientEarth’s capacity as a minority shareholder of Shell). ClientEarth argued that the Directors had breached the duties which they owed to Shell under the Companies Act 2006 to: (i) act in way which most likely promotes the success of the company; and (ii) exercise reasonable care, skill and diligence. In particular, ClientEarth argued that the breaches arose out of the Directors’ acts and omissions in relation to Shell’s climate change risk management strategy.
- a declaration that the Directors had breached their duties; and
- orders requiring the Directors to:
- adopt and implement a strategy to manage climate risk in accordance with their alleged statutory duties; and
- comply with the May 2021 order made by the Hague District Court, which requires Shell to reduce its Scope 1, Scope 2 and Scope 3 CO2 emissions by 45% by 2030 (as compared to its 2019 levels).
The judge dismissed ClientEarth’s application for the reasons set out below.
In explaining his decision to dismiss the application for permission to proceed with the derivative action, the judge made a number of observations:
- It is a matter for a company acting through its “proper constitutional organs” (as opposed to its shareholders) to determine whether or not the company should pursue a cause of action that may be available to it. For this reason, ClientEarth would have to show that the circumstances were “appropriate” for the Court to authorise a derivative action. In order for its application to progress to the next stage, ClientEarth would have to show a prima facie case that there is “no basis on which the Directors could reasonably have come to the conclusion that the actions they have taken have been in the interests of Shell”.
- While ClientEarth alleged that a number of incidental duties relating to climate risk arise from the Directors’ general duties under the Companies Act, the judge agreed with Shell that: (i) the duties alleged to exist were “inherently vague and incapable of constituting enforceable personal legal duties”; (ii) it is for the Directors themselves to determine how best to promote the success of the company and how much weight to afford each of the factors which they are obliged to have regard to in their performance of this duty; and (iii) these alleged incidental duties are incompatible with the “subjective nature” of the duty to promote the success of the company.
- Management of businesses of the size and complexity of Shell will require directors to take into account a number of competing considerations. The Court is not well equipped to interfere with these management decisions.
Appropriateness of the claim
- At this stage of the process, the Court must consider the precise nature of the relief sought and the prospects of the Court granting it if proceedings were to be continued. It was “difficult to see” what legitimate purpose a declaration would give, and the Court would not make the orders sought by ClientEarth because constant supervision of the Directors would be required to ensure compliance.
- In examining the motivations behind the claim, the judge concluded that ClientEarth’s small shareholding in Shell gave rise to an inference that “its real interest is not in how best to promote the success of Shell for the benefit of its members as a whole”, and found that a person acting to promote the success of the company would not seek to continue the claim.
- An important factor for the Court was the fact that 80% of Shell’s shareholders supported the Directors’ strategic approach to climate risk (i.e. Shell’s Energy Transition Plan) and that a “very small proportion of the total shareholder constituency” had expressed support for ClientEarth’s claim.
The May 2021 order by the Hague District Court
- There is no recognised duty owed by directors to a company in which they hold office to ensure that they comply with the orders of a foreign court.
The strength of ClientEarth’s evidence
- Limited weight was given to the opinions expressed in the witness statement of ClientEarth’s lawyer, which examined Shell’s progress in meeting commitments made in relation to climate risk management and emissions reduction. The judge found that, because their expertise was in law and policy as opposed to climate science or other relevant areas, neither ClientEarth nor its lawyer were able to give expert evidence on which the Court could properly rely.
Key points to note:
- This decision provides helpful guidance regarding the high legal threshold which must be met in order for shareholders to be found to have a prima facie case to justify allowing a derivative action to proceed, and reiterates the significant degree of discretion afforded to company directors in managing companies.
- The judge’s finding that evidence put forward by ClientEarth should be given little weight where it was not supported by necessary scientific expertise indicates that courts will take a restrictive approach to evidence and opinions proposed by campaigning groups without underlying technical evidence.
- The Court’s focus on the legitimate purpose of the suit and practicality of the relief sought indicates that similar claims (i.e. ones which seek declarations and/or would require significant monitoring by the Court) will similarly face major challenges. Instead, shareholder votes at general meetings are likely to be the more appropriate forum for expressing a view of directors’ conduct.
- The judge’s comments regarding ClientEarth’s motivations suggest that courts are unlikely to view derivative actions as an appropriate avenue for climate-focused NGOs to bring climate-related claims against company directors, particularly in circumstances where they have a very small shareholding in the relevant company.