ClientEarth twice refused permission to pursue directors of Shell

Quick read

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 net zero energy transition and was failing to manage climate change risks.

The High Court has since refused permission for ClientEarth's claim to proceed, twice: first in a judgment dated 12 May 2023 without a hearing (in accordance with the procedure contemplated by CPR 19.15) (the May Judgment), and secondly in a judgment dated 24 July 2023, after ClientEarth exercised its right to ask the High Court to reconsider the May Judgment at an oral hearing.

The May Judgment and the July Judgment (the second of which is, in the words of the Judge himself, to a "significant extent" a repetition of the May Judgment) (together the Judgments) provide 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 (the CA06)).

ClientEarth sought 1) a declaration that the directors had breached their duties, and 2) a mandatory injunction requiring the directors to (a) adopt and implement a strategy to manage climate risk in compliance with their statutory duties; and (b) comply immediately with an order the Hague District Court made on 26 May 2021 (following a class action) which had directed Shell to reduce its emissions by at least net 45% by 2030 relative to 2019 (the Dutch Judgment).

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) CA06).

What did the Court conclude?

The Court found against ClientEarth in both Judgments. The Court's reasons included the following:

The duties in sections 172 and 174 of CA06 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. In the July Judgment, the court emphasised that the management of climate risks does not have an overriding status among the many competing considerations the directors need to have regard to when managing a business of Shell's size and complexity.
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 were 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. Interestingly, the Judge noted that the witness statement provided by ClientEarth's senior lawyer (being the main support for the argument that the directors' approach to climate risks falls outside the range of possible responses open to the board of a company such as Shell) was a collection of views expressed by others, which, merely because they are widely accepted worldwide, does not mean that they are facts. In circumstances where no admissible expert evidence was provided, the Judge said it was very difficult to treat what was said as providing a proper evidential basis for concluding that the directors had breached their duties.
When looking at the relief sought, the Judge said a court would not grant mandatory injunctive relief if constant supervision would be required, which is a particularly acute factor if the relief sought is not sufficiently precise. The Judge said the mandatory orders sought by ClientEarth were indeed too imprecise to be enforceable and would cut across the court's reluctance to interfere with bona fide business decision-making, in a situation where the court is being asked to essentially require Shell to conduct its business in a manner in which it would not otherwise be conducted.
When looking at the discretionary factors for consideration, he suggested that permission would also be refused on the basis that the claim had not been brought in good faith: while the Judge recognised there will occasionally be scenarios where an ulterior motive goes hand in hand with conduct that is most likely to promote the success of Shell for the benefit of its members as a whole, these are two different things. He said the primary purpose of the claim at hand appeared to be the ulterior motive of advancing ClientEarth's own policy agenda. The Judge said the "but for" test (ie, would the claim have been brought but for the ulterior motive?) was an appropriate test in this context.

What's next?

ClientEarth has already announced in a press release that they intend to apply for permission to appeal the July Judgment.

In tandem, Shell appealed the Dutch Judgment, and it is expected the appeal will be heard some time this year or next year.

Comment

The Judgments reinforce the high hurdle that shareholder claimants have to pass in order to bring a derivative claim against a company and its directors and confirm that the courts will be slow to interfere with company management decisions. This is made clear in several parts of the Judgments. We await the outcome of the application for permission to appeal and will report on it together with any 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.
It will also be interesting to see how an appeal of the July Judgment and the Dutch Judgment interplay.