22 February 2023
This month environmental charity ClientEarth issued a claim in the English High Court against Shell's board of directors, naming them individually as defendants. Brought in ClientEarth's capacity as a shareholder, it alleges that Shell's board is not doing enough to prepare for the net zero energy transition and is failing to manage climate change risks.
We wrote about this potential claim back in March 2022. At that point, ClientEarth had written to Shell's board of directors asking them to take further steps to achieve net zero, and notifying them of a potential claim if they failed to do so.
Since then, ClientEarth reports that it has secured support for its claim from institutional investors collectively holding more than 12 million shares in the company, including several European pension funds.
ClientEarth has now formally issued the claim in the High Court. The next step will be for the court to decide whether to give permission for the claim to continue.
The claim has received significant press coverage, largely due to the fact that it targets Shell's directors personally. Shell's directors (and all directors of UK companies) each owe a statutory duty to the company to promote the success of the company for the benefit of its members as a whole (s172 Companies Act 2006). ClientEarth's claim is brought in the form of a 'derivative claim' on behalf of Shell against its own directors, for breach of that duty.
The claim alleges that Shell's directors are failing to promote the financial success of the company, in terms of shareholder value, by failing to prepare properly for the net zero energy transition. ClientEarth says that Shell's directors are failing to adapt the company to the changing legal, political and regulatory landscape. In the long term, ClientEarth says, business strategies that do not align with the Paris Agreement and worldwide net zero commitments are bound to fail. For example, assets associated with heavy carbon emissions, such as oil rigs, are likely to reduce significantly in value and become 'stranded'. It is said the company needs to adapt in order to maintain relevance and value in years to come.
In discharging their s172 duty, directors are required to have regard to a number of matters including the impact of the company's operations on the community and the environment, the likely long-term consequences, and the interests of the company's employees. ClientEarth relies on these provisions in support of its claim.
Similar arguments were run in McGaughey v USS (a derivative claim against the directors of a pension scheme trustee company for breach of their duties under the Companies Act 2006 and/or fiduciary duties), albeit they were not the main focus of that claim. In that case, the court did not give permission for the claim to continue.
ClientEarth's claim against Shell raises interesting issues on the scope of directors' duties in the context of combatting climate change. It's also an example of activist shareholding moving into new areas: ClientEarth strategically positioned itself as a shareholder in the company in order to open up new avenues for scrutiny and accountability.
Regardless of whether the court gives permission for the claim to continue, and whether it ultimately succeeds, the publicity of the claim and support it has garnered from institutional shareholders may encourage other shareholders to re-examine the directors' strategy and decision making in companies they are invested in. It could lead to similar claims against other defendant directors in the future.
by multiple authors
by multiple authors
by Jessica Thomas and Karel Daele