ClientEarth v Shell: High Court refuses permission for novel climate change action to be brought by ClientEarth against the directors of Shell Plc
In ClientEarth v Shell plc & Ors [2023] EWHC 1137 (Ch), ClientEarth, which owns a small number of shares in Shell Plc as an ‘activist shareholder’, sought to bring a derivative claim on behalf of Shell against eleven directors of Shell (“the Directors”), alleging breach of their duties under Section 172 and 174 Company Act 2006 (“CA 2006”). A derivative claim allows a shareholder to step into the company’s shoes in order to seek relief on the company’s behalf.
In simple terms, ClientEarth’s case was that the Directors’ climate change risk management strategy for Shell failed to manage risks to the company which could harm its future success because it needed to move away from fossil fuels towards an alternative business model in order to stay competitive in an increasingly green energy market. In failing to put in place an appropriate climate change strategy which aligned with the global temperature objective of 1.5°c under the Paris Agreement on Climate Change 2015, ClientEarth argued that the Directors had breached the duties they owed to Shell to promote the success of the company (s.172 of CA 2006) and to exercise reasonable care, skill and diligence (s.174 of CA 2006).
Further, it was argued that the Directors had breached these duties by failing to ensure compliance with the 2021 order made by the Hague District Court in Milieudefensie v Royal Dutch Shell plc (“the Dutch Order”), itself a landmark decision by which Shell was ordered to cut its CO2 emissions by 45% by 2030 in order to align its policies with the Paris climate accords (the case is presently being appealed by Shell).
The Procedure
In order to proceed with its derivative claim, ClientEarth needed to overcome the two-stage filtering process which is set out under s. 261 CA 2006.
ClientEarth first needed to establish a prima facie case for the grant of permission. The Court would consider the same on the papers and on the basis of evidence presented by ClientEarth alone, without requiring the Directors to file any evidence.
If ClientEarth succeeded in meeting this initial hurdle, the matter would then continue to a hearing to determine the substantive question of whether the derivative claim should have permission to proceed, for which the defendant parties would be made respondents to the application (CPR 19.15(12)).
This two-step procedure generally enables the Courts to dismiss unmeritorious claims at an early stage without involving the defendants or the company.
As to the substantive application for permission, the test which the Court is required to apply is set out in s.263 of CA 2006:
- 263(2) provides that an application for permission must be refused if the Court is satisfied: (i) that a person acting in accordance with his duty to promote the success of the company would not seek to continue the claim or (ii) that any act or omission from which the cause of action arises has been authorised or ratified by the company before or since it occurred;
- 263(3) makes provisions for a number of discretionary factors which the Court must take into account in reaching its decision: (i) whether the member concerned is acting in good faith in seeking to continue the claim, (ii) the importance which a person acting in accordance with his duty to promote the success of the company would attach to continuing it, (iii) whether any act or omission from which the cause of action arises would be likely to be authorised or ratified by the company, (iv) whether the company has decided not to pursue the claim and (v) whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company;
- The Court is required by section 263(4) of CA 2006 to have particular regard to any evidence before it as to the views of members of the company who have no personal interest, direct or indirect, in the matter.
- Further, the test “necessarily entails a decision that there is a prima facie case both that the company has a good cause of action and that the cause of action arises out of a directors’ default, breach of duty (etc.)” (as per Lewison J in Iesini v Westrip Holdings Limited [2010] BCC 420 at [78]).
The components of this test presented real issues for ClientEarth given the ostensible contradiction in terms that was a climate-change activist organisation attempting to bring a claim whilst standing in the shoes of a multinational oil and gas giant.
The Judgment
Mr Justice Trower found on the papers that ClientEarth had failed to establish a prime facie case for the grant of permission to continue with its derivative claim.
In order to show that there was a prima facie case that the company had a good cause of action against its Directors, ClientEarth needed to show a prima facie case that there was no basis on which the Directors could reasonably have come to the conclusion that the actions they had taken were in the interests of Shell (as per TMO Renewables v Yeo and others [2021] EWHC 2033 (Ch) at 391)).
The crux of the Court’s decision was that the way in which ClientEarth had puts its case inappropriately sought to impose specific obligations on the Directors as to how the management of Shell’s business and affairs should be conducted. It was not the Court’s position to act as a kind of supervisory board over decisions honestly taken by a company’s directors [25] and it was a well-established principle that it is for directors themselves to determine (acting in good faith) how best to promote the success of a company for the benefit of its members as a whole [19].
The evidence presented by ClientEarth did not engage with the issue of how the Directors were said to have gone so wrong in their balancing and weighing of the many factors which should go into their consideration of how to deal with climate risk, amongst the many other risks to which Shell’s business will inevitable be exposed, that no reasonable director could properly have adopted the approach that they have. This was a fundamental defect in ClientEarth’s case because it ignored the fact that the management of a business of the size and complexity of that of Shell would require the Directors to take into account a range of competing considerations, the proper balancing of which was classic management/commercial decision with which the court was ill-equipped to interfere (as per Lewison J in Iesini at [85]).
Further, it was accepted by ClientEarth that the Directors did have policies and targets to achieve net zero by 2050. In the Court’s view this was inconsistent with a suggestion that the Directors had not in fact considered what was in the best interests of Shell and its members as a whole when addressing the most appropriate manner in which to deal with climate risk [48].
In respect of the Dutch Order, Trower J agreed with Shell that there was no recognised duty owed by directors to a company in which they held office to ensure that they complied with the orders of a foreign court [22]. Whilst a director of a company is under a legal obligation to take reasonable steps to ensure that an order made by an English court is obeyed (see Attorney-General for Tuvalu v Philatelic Distribution Corpn [1990] 1 WLR 926 at 936E-F), there was no authority for the proposition that there is any such duty owed to the company itself [23].
Relief too imprecise to be enforceable
The Court also considered the precise nature of the relief sought by ClientEarth and the prospects of the Court granting it if proceedings were to be continued.
ClientEarth were seeking a mandatory injunction that Shell (a) adopt and implement a strategy to manage climate risk in compliance with its statutory duties and (b) comply immediately with the Dutch Order. The Court held that such an order would be most unlikely to be made because it was too imprecise to be suitable for enforcement given it would require constant supervision from the Court [55-58]. Further, Trower J queried whether continued disputes over compliance with such an order would have a disruptive effect on the conduct of Shell’s business which itself might lead to the serious adverse impact on the success of Shell which ClientEarth contended the proceedings were designed to avoid.
The s. 263(3) and 264(4) CA factors
The Court further held that regard to the factors referred to under ss.263(3) and 263(4) CA confirmed that ClientEarth had not established a prima facie case that permission would be granted.
Trower J’s starting point was that the primary purpose for ClientEarth bringing the claim was an ulterior motive of advancing ClientEarth’s own policy agenda, rather than a concern over the long-term success of Shell [63-64]. On the basis that but for ClientEarth’s primary purpose of bringing the claim, it would not have been brought at all, Trower J found that the claim had not been brought in good faith (a factor under s. 263(3)(a) CA 2006).
Trower J also put considerable weight on the fact that Shell’s Energy Transition Strategy, its strategy for dealing with climate-change risks, received an 80% vote for support by its members at an AGM held on 24 May 2022 [68]. Set against that figure was the fact that ClientEarth had received support for its claim from members holding just 0.17% of Shell’s shares [69]. Trower J considered that this was evidence of the views of members of Shell generally as to which he was required by s.263(4) to have particular regard and which pointed towards the acts or omissions of the Directors relied on by ClientEarth having been authorised or ratified by Shell (ss.263(2)(b/c) CA 2006)
ClientEarth is entitled to ask for an oral hearing to reconsider this decision in accordance with CPR 19.15(10) and it has confirmed that it has already asked for the same. The matter will therefore proceed to an oral hearing, though that will likely lead to the same result in the circumstances.
Outcome
ClientEarth’s filing of proceedings to pursue a derivative claim against directors for a failure to manage risks posed by climate change was a world-first. Nevertheless, this was a novel and inventive claim which was always bound to stretch the ‘limited and restrictive’ [3] legislative procedure for derivative claims overly far.
The Judgment, as it stands, is a firm rejection at an early stage of the use of derivative claims by ‘activist shareholders’ with de minimis shareholdings in a company to re-direct the company’s strategy in line with their own policy agenda. That was not a purpose for which the legislation was made and is not one for which the Court appears to be willing to stretch the CA 2006 to entertain. In this matter, that was perhaps unsurprising given it would have involved the Court enforcing the views of a very small minority of Shell shareholders on the group as a whole. Whilst the good intent of ClientEarth is not in doubt, it would be an unattractive and undemocratic position for the Courts to dictate the commercial strategy of a private company against the views of its directors and members.
The acknowledgment by the Court that the management of a business was a complex task requiring the consideration of a range of competing considerations as to which the Court was ill-equipped to intervene, will be of comfort to directors. It was underlined that generally it was for the directors of a company themselves, rather than for the Court, to determine how best to promote the success of a company and that the Court would be reluctant to interfere.
Nevertheless, environmental litigation in a variety of forms, pursued by a range of NGOs and other stakeholders, is very likely to become a more common occurrence; one which often generates wide-spread press coverage and public interest. This litigation further raises the stakes by targeting the individuals running a company rather than the company itself.
In the insurance world, the increased risk of litigation is something which directors and their brokers will increasingly need to consider when reviewing their policy wordings and which insurers will need to assess at the underwriting stage. There may well emerge insurance products which are designed specifically to cover litigation and reputational risks arising from environmental issues, both in respect of the company and the directors and officers of that company.
Hamish Fraser.
