Court declines permission to bring climate related derivative claim against energy major’s directors

The English High Court has now twice refused permission to allow a claimant to bring a shareholder action (known as a derivative claim) on behalf of Shell plc (Shell) against its directors - once in May then again in July 2023. ClientEarth applied for permission to appeal the July 2023 High Court judgment with the Court of Appeal, but in November 2023 the Court of Appeal refused permission.

What is the claim about?

The claim was brought by ClientEarth, an environmental organisation, which holds a small number of shares in Shell. ClientEarth claims that Shell's strategy to manage its climate change risk is insufficient, including in relation to the company's emissions reduction targets.

What is the legal basis of the claim?

The claim was brought as a derivative action under Part 11 of the Companies Act 2006 (the Act). Section 260(3) of the Act allows shareholders to bring a claim on behalf of a company against its directors in relation to actual or proposed unlawful acts or omissions, such as breaches of their statutory directors' duties.

There is a two-stage process to derivative claims: a court must first grant permission for the claim to continue before a substantive assessment of the merits. This process reflects the fact that derivative claims are only permissible in limited and restricted circumstances, given the foundational company law principle that a company's directors - not its shareholders - are charged with corporate decision making.

The legal basis for ClientEarth's claim is that Shell’s directors allegedly have six specific legal duties in relation to climate change mitigation which are incidental to their general duties under the Companies Act 2006 (specifically ss. 172 and 174: to promote the success of the company, and to exercise reasonable care, skill and diligence). ClientEarth also alleges that the directors are subject to a duty under English common law and Dutch law to ensure that the orders of domestic and foreign courts are obeyed.

ClientEarth contends that the directors have breached these duties in three ways: (1) by allegedly failing to set an appropriate emissions target; (2) by allegedly failing to put in place a strategy to achieve net zero targets; and (3) by allegedly failing to ensure compliance with a Dutch Court order in the landmark Milieudefensie v Royal Dutch Shell case (see our previous briefing on this case).

What has the claimant asked the court to do?

ClientEarth is seeking the following remedies:

• a declaration that Shell's directors breached their directors' duties in the way alleged in its claim;
• a mandatory injunction requiring the directors to adopt and implement a climate risk strategy in accordance with the interpretation of their duties alleged in the claim; and
• a mandatory injunction requiring compliance (on the basis of alleged non-compliance) with the Dutch Court order in Milieudefensie v Royal Dutch Shell.

What did the High Court decide?

In its May 2023 decision, the Court concluded that ClientEarth had not put forward a prima facie case for permission to continue its derivative claim and dismissed the claim subject to ClientEarth's right to apply for a separate oral hearing:

• Alleged incidental climate-related directors’ duties: the Court found that ClientEarth's approach was tantamount to imposing absolute duties on directors, which was inconsistent with their general duties under s.172 of the Act to have regard to many competing considerations when considering how best to promote the success of the company for the benefit of its shareholders as a whole. The Court also found that while a director is obliged to take reasonable steps to ensure that an order of an English court is obeyed, a director does not owe any specific duty to the company itself in relation to orders of English or other courts.
• Breach of duty: the Court found that the alleged breaches did not establish any prima facie case on the evidence. It held that ClientEarth's allegations relied heavily on impermissible opinion evidence, and that: (a) it had not established that there was any universally accepted methodology as to how Shell might achieve its Energy Transition Strategy; and (b) it had not shown that the directors' decision making was one that no reasonable director would adopt (particularly given the complexity of Shell's business). Indeed, the court commented that the directors' weighing up of complex competing considerations constituted "classic management decision[s] with which the court is ill-equipped to interfere".
• Relief sought: the Court held that in any event it could not grant the mandatory injunctions sought by ClientEarth because they would require continuous supervision by the court (a factor against granting an injunction under English law).
• Discretionary considerations: the Court also noted that ClientEarth only held 27 shares in Shell. Given its status as an environmental organisation the Court decided that ClientEarth had not sufficiently countered the inference that its application was brought for collateral reasons, i.e. its own "policy agenda" rather than "a balanced consideration as to how best to enforce the multifarious factors which the Directors are bound to take into account when assessing what is in the best interests of Shell”.

The 24 July 2023 High Court judgment consolidates, and repeats to a significant extent, the original May 2023 judgment. However, there are a few key points worth noting:

• ClientEarth tried to rebut some of the Court’s earlier criticism and shifted its arguments in relation to the duties owed by directors. However, the Court rejected these submissions. The Court again emphasised that it is for the directors of a company to make management decisions and the court will be slow to interfere with these, particularly where they involve balancing a variety of competing interests.
• The Court commented on the motive for bringing the action, finding that ClientEarth would not be acting in good faith in seeking to bring the claim – “where the primary purpose of bringing the claim is an ulterior motive in the form of advancing ClientEarth’s own policy agenda with the consequence that, but for that purpose, the claim will not have been brought at all, it will not have been brought in good faith.” ClientEarth’s small shareholding “gives rise to a very clear 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.”
• The Court also found that ClientEarth had not satisfied the evidential burden as it had failed to provide expert evidence to establish that the directors’ approach to climate risk fell outside the range of reasonable responses open to the board of a company such as Shell.

Takeaways

In its decisions, the Court did not accept arguments that directors owe specific, climate-related, legal duties to the company arising from their statutory duties. In so doing, and in keeping with relevant case law, the Court demonstrated a reluctance to interfere in strategic corporate decision making, particularly in the context of a global corporate group with highly complex operations where directors are required to weigh up many competing considerations. This approach was affirmed by the Court of Appeal when it declined to grant ClientEarth permission to appeal the High Court decision in November.

Nonetheless, the case is demonstrative of a global trend of ESG-related claims against companies. Claimants continue to examine how existing legal frameworks in jurisdictions across the globe may be used to determine liability for companies and directors alike to ultimately influence corporate strategy. This trend is unlikely to abate given the continued prominence of ESG in legal and political discourse globally.

The full judgments are available here (May 2023) and here (July 2023).