Disputes Quick Read: ClientEarth refused permission to pursue directors of Shell

In February we reported that ClientEarth had issued a derivative action, in its capacity as shareholder, against the Board of Directors of Shell alleging that the Board was not doing enough to prepare for the net zero energy transition and was failing to manage climate change risks. The Court has since refused permission for ClientEarth's claim to proceed.

The judgment provides guidance on the nature of directors' duties in the context of climate change, the willingness of the court to intervene in this context, and the relevance of the shareholder's motivation and other shareholder views.

What did ClientEarth want?

ClientEarth alleged that Shell's directors had breached their statutory duties to promote the success of the company and to act with reasonable care, skill and diligence (sections 172 and 174 of the Companies Act 2006 (CA)).

ClientEarth sought:

• a declaration that the directors had breached their duties
• a mandatory injunction requiring the directors to:

• adopt and implement a strategy to manage climate risk in compliance with their statutory duties
• comply immediately with an order of the Dutch court (which had directed Shell to reduce its emissions by 45% by 2030).

At this initial stage, ClientEarth needed to demonstrate that they had a prima facie case for obtaining permission. If they could not, the Court had to dismiss the application (section 261(2)(a) CA). 

What did the Court conclude?

The Court found against ClientEarth. The Court's reasons included:

• The duties in sections 172 and 174 are general duties. The Judge was not willing to impose the more specific obligations that ClientEarth contended were necessarily incidental to those general duties. He cited the well-established principle that it is for the directors themselves to decide (acting in good faith) how best to promote the success of the company, and that this is essentially a commercial decision that the court is ill-equipped to take, except in a clear case. 

• Accordingly, the Court will only intervene in exceptional cases, where the shareholder can show that there is no basis on which the directors could reasonably have concluded that the actions they have taken have been in the interests of the company.

• While it was common ground that (in broad terms) Shell faces material and foreseeable risks as a result of climate change which have or could have a material effect on it, ClientEarth did not establish a prima facie actionable breach of duty by the directors in their management of climate change risk. 

• When looking at the discretionary factors for consideration, the Judge suggested that permission would also be refused on the basis that the claim had not been brought in good faith, because he said the primary purpose of the claim appeared to be the ulterior motive of advancing ClientEarth's own policy agenda. 

What's next?

The Judge's decision was made solely by reference to the papers. ClientEarth has requested (and been granted) an oral hearing at which the Judge will reconsider his decision. We expect further guidance to be provided following that hearing. 

Comment

This judgment reinforces the high hurdle that shareholder claimants have to pass in order to bring a derivative claim against a company and its directors. Courts will be slow to interfere with company management decisions. This is made clear in several parts of the judgment. We will report on further developments.

The Judge's comments on good faith are particularly noteworthy. These comments could be seen as a warning shot to activist shareholders seeking to use derivative claims as a means of forcing change in company behaviour on issues like climate change. However, these comments were not the primary basis on which the claim was dismissed, so the extent to which they may be followed subsequently remains to be seen.