English Court denies permission for ClientEarth climate claim against Shell directors

Background

In February 2023, the UK environmental NGO ClientEarth announced that it had commenced a claim in the English High Court against the directors of Shell Plc ("Shell") in respect of the company's management of climate change risks.

ClientEarth's claim was brought in its capacity as a shareholder of Shell on the company's behalf under the "derivative claims" procedure in the Companies Act 2006 (the "Companies Act").  A derivative claim requires the permission of the court to proceed and permission must be refused in specified circumstances, including if the application and supporting evidence do not disclose a prima facie case.  Other factors to be taken into account include whether the shareholder is acting in good faith.

Alleged breaches of duty

ClientEarth claimed that Shell's directors had breached their duties under section 172 (duty to promote the success of the company) and section 174 (duty to exercise reasonable care, skill and diligence) of the Companies Act, together with a number of alleged "incidental duties" and "further obligations", most of which referred specifically to climate risk.

ClientEarth alleged (among other things) that the directors had failed to set an appropriate emission target, and that the directors' strategy for managing climate risk did not establish a reasonable basis for achieving net zero or global temperature targets.

ClientEarth asked the Court to make a declaration that the directors had breached their duties to Shell and to issue a mandatory injunction requiring the directors to adopt and implement a particular strategy to manage climate risk.

Decision

Trower J held that ClientEarth had not made out a prima facie case that the directors' management of Shell's business could not properly be seen by them as being in the best interests of Shell's members as a whole.

Key findings include:

• ClientEarth's attempt to impose "incidental duties" and "further obligations" on the Shell directors ran contrary to the 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.

• 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.

• ClientEarth's case ignored the fact that the management of a business of the size and complexity of Shell would require taking into account a range of competing considerations, a balancing act which the court was ill-equipped to conduct and with which it should not interfere.

• A derivative claim will not have been brought in good faith where the primary purpose of it is an ulterior motive, for example to advance ClientEarth's own policy agenda.  The fact that ClientEarth was the holder of only 27 shares "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".

• A mandatory injunction of the type sought would be too imprecise to be suitable for enforcement.

• It is not the court's function to express views as to the directors' conduct, by making the declaration sought, which have no substantive effect and which fulfil no legally relevant purpose.  The proper forum for such views is a vote of members at a general meeting, which ClientEarth could itself propose as shareholder.

Takeaways

ClientEarth has seven days to request reconsideration at an oral hearing, otherwise its claim will be dismissed.

This is the first claim brought by a shareholder against directors in respect of a company's climate change strategy.  The fact that it appears to have fallen at the first hurdle might give pause for thought around the use of the derivative claim procedure to further policy agendas. 

That said, some may still see a benefit to be gained from commencing such a claim, seeking to increase the reputational risk in order to encourage changes in behaviour and drive more ambitious ESG strategies.

Authored by Hannah Piper and Georgina Denton.