Like the wildfires that have raged across the globe recently, disputes related to climate change continue to flare up. Most recently, in July 2023, the High Court in London handed down its final judgment in a claim brought by ClientEarth against Shell and its board of directors.
The decision is the first recorded attempt to use a derivative action to hold directors liable for a company’s response to the climate crisis. ClientEarth sought injunctive and declaratory relief, rather than damages, presumably reflecting the challenges presented by demonstrating shareholder loss in the context of such climate claims, with the value of major oil companies continuing to rise significantly.
ClientEarth is a charity that seeks to use the law to fight climate change. It is also a minority shareholder in Shell plc and in this capacity it sought to bring a derivative claim on Shell’s behalf against its directors.
The basis of ClientEarth’s claim was that the directors had breached their statutory duties under the Companies Act 2006 (CA 2006) by mismanaging the material and foreseeable risk that climate change presents to Shell. ClientEarth also argued that the directors were in breach of their duties by failing to ensure Shell’s compliance with the order of a Dutch court made in another eco-claim (Milieudefensie -v- Royal Dutch Shell plc ECLI:NL:RBDHA:2021:5339) which imposed an emissions reduction target on the company (the Dutch order).
Based on those alleged breaches, ClientEarth sought a declaration that the directors were in breach of their duties and requested that the court issue an injunction compelling the directors to: (a) implement a strategy to manage climate risk, and (b) take steps immediately to comply with the Dutch order.
As per section 261 of the CA 2006, ClientEarth required the court’s permission to continue its claim. The matter was considered initially by Mr Justice Trower who, in a judgment delivered in May 2023 without having heard any oral argument from the parties, denied ClientEarth permission. ClientEarth asked the court to reconsider its decision at an oral hearing, which led to Mr Justice Trower’s second, reconsidered, judgment.
Unfortunately for ClientEarth, Mr Justice Trower maintained his original decision, refusing permission. His reasons for doing so largely mirror those given in the May judgment and are considered below.
Derivative claims require the court’s permission, because they are an exception to the usual principle that a company’s board, not its shareholders, should decide whether pursuing a particular cause of action is in the company’s interests. Accordingly, the onus was on ClientEarth to demonstrate the limited and restricted circumstances justifying its claim.
For permission to be granted under CA 2006, the procedure is as follows. A prima facie (ie self-evident, or obvious) case must be demonstrated supporting the grant of permission.
The court confirmed that this provides a filter for ‘unmeritorious’ or ‘clearly undeserving’ cases. If a prima facie case cannot be established, the application will be dismissed by the court. If a prima facie case is established, the court will consider the application at a hearing.
ClientEarth relied on the following two statutory duties owed by the directors: to promote the success of Shell (as required by section 172 of the CA 2006); and to exercise reasonable care, skill and diligence (as required by section 174 CA 2006). The court accepted that the evidence demonstrated that the directors owed the above duties for at least part of the relevant period.
In addition, ClientEarth argued that six incidental duties were owed by the directors given the risks posed by climate change. These were:
Shell argued that the attempt to impose those incidental duties on the directors was misconceived. Shell contended that the duties were vague and could not amount to enforceable personal legal duties, and cut across the principle that it is for the directors to determine which factors have to be regarded in the performance of their duty to promote the success of a company. Further, they were incompatible with the subjective nature of the duty imposed on directors under section 172 of the CA 2006 and amounted to an inappropriate extension of the duty imposed by section 174 of the CA 2006.
The court agreed with Shell’s arguments, finding that ClientEarth was seeking to impose specific obligations on the directors as to how Shell’s business and affairs should be conducted. That was inconsistent with the well-established principle that it is for directors to determine how best to promote the success of a company.
Finally, ClientEarth argued that there was a further obligation imposed on the directors to take reasonable steps to ensure that a court order they were aware of (ie the Dutch order) was obeyed.
Again, the court sided with Shell, ruling that there were no separate duties under English law, distinct from those under the CA 2006, which required the directors to take reasonable steps to ensure compliance with the order of a foreign court.
To establish a prima facie case ClientEarth had to show that there was no reasonable basis upon which the directors could conclude that their actions were in the best interests of Shell.
The breaches of duty alleged against the directors fell within the following three categories:
The central theme of ClientEarth’s evidence in relation to the first two categories of alleged failure was that the directors were mismanaging the risk that climate change presents to Shell. ClientEarth submitted that it should be common ground that Shell faced risks due to climate change, a proposition with which Shell broadly agreed.
However, that alone was not enough. The crucial issue was Shell’s response to those risks and whether there was a prima facie case of breach of duty by the directors in managing them.
The court agreed with Shell and found there was no such breach because:
When it came to the third alleged breach of the directors’ duties, the court again found in Shell’s favour. It noted that the Dutch court accepted that Shell was not acting in an unlawful manner and recognised that Shell had freedom and discretion as to how it complied with Dutch law.
The relief sought by ClientEarth was held to be as important as the alleged breaches of duty. ClientEarth sought an injunction that compelled Shell to implement a strategy to manage climate risk and to comply with the Dutch order. However, those requests were too imprecise for enforcement. Accordingly, any grant of the desired injunction would have breached the prohibition on granting injunctions if the court’s constant supervision would be required. Further, the court was concerned that an injunction might have a disruptive impact on Shell’s business, to the detriment of its shareholders.
As to the declaration ClientEarth sought, even if the directors had breached their duties, the court was loathe to express a view on their conduct that would have no substantive effect, and which would fulfil no legal purpose. The appropriate forum for the expression of views on the directors’ conduct was a general meeting of Shell’s shareholders.
For the above reasons the court held that ClientEarth had not established a prima facie case that the directors were in breach of their duties, and its application was dismissed.
In dismissing the application, the court made further observations that may be of consequence in future derivate claims.
If ClientEarth had established a prima facie case then a substantive hearing would have occurred where the court would consider various discretionary factors under section 263(3) of the CA 2006. One of those factors was whether the claimant brought its claim in good faith. Despite ClientEarth having no prima facie case, the court considered this requirement. Shell argued that ClientEarth’s application was an attempt to pursue its own policy agenda. ClientEarth denied that and maintained that the action was brought in good faith.
The court acknowledged that if the primary purpose of the claim was to advance ClientEarth’s policy agenda, that would demonstrate a lack of good faith. It was noted that ClientEarth held just 27 shares in Shell but nevertheless proposed entitlement to relief on the company’s behalf. Mr Justice Trower found there was a clear inference that ClientEarth’s interest was not in promoting Shell’s success and that it was focused on imposing its views on climate change. Accordingly, ClientEarth would have likely failed at any substantive hearing.
Another factor the court must give particular regard to in deciding whether to give permission is the views of shareholders who have no personal interest in the matter (section 263(4), CA 2006).
It was noted that ClientEarth had received support for its claim from holders of 12.2 million shares in Shell. That amounted to approximately 0.17% of Shell’s shares. Further, ClientEarth had obtained support from holders of another 12.5 million shares who stated that their position was aligned with ClientEarth’s. Those shareholdings represented a small proportion of Shell’s total shares.
In contrast, at Shell’s 2021 AGM, 88.4% of votes were in favour of the company’s energy transition strategy (the ETS), which set Shell’s target to become net zero by 2050. That figure fell to 80% at Shell’s 2022 AGM and a similar level of support was supposedly given at the company’s 2023 AGM.
The court ruled that the level of member support for the ETS would have counted strongly against ClientEarth.
ClientEarth has confirmed that it will seek permission to appeal Mr Justice Trower’s judgment. It remains to be seen therefore if the story is over for Shell and its directors.
It might be said, whatever the result of any appeal, that ClientEarth has to some extent succeeded with its claim already, having shone a spotlight on Shell’s activities and demonstrated to energy companies that they should be extremely wary of operating without affording due consideration to climate change. To do so would increase the risk of litigation and, even if successfully thwarted, have a potentially negative impact on organisations.
However, the court’s decision highlights the difficulties faced by environmental activists in trying to dictate company policy via derivative claims. Those include the discretion that is afforded directors as to how a company is run, the lack of accepted guidance on how companies should tackle climate change, the challenges faced by minority shareholders who may be acting with an agenda and the need for focused and enforceable remedies.
What appears certain however is that companies can expect increased scrutiny of their climate strategies and potential litigation arising from their response to the climate crisis.
This article was originally published in the New Law Journal in October 2023.