On 12 May 2023 the English High Court refused ClientEarth permission to proceed with its derivative action against Shell’s 11 directors, finding that the NGO had failed to establish that no reasonable director would have taken the same action as the board with respect to the company’s climate risk. The claim had alleged that the board’s mismanagement of climate risk put the directors in breach of their duties under the UK Companies Act. In our article of 9 March 2023 we considered ClientEarth’s claim when it was first issued, noting the high bar to obtaining permission. It is therefore unsurprising that ClientEarth’s action failed at the first hurdle.

Although this claim has been dismissed, it is a reminder of the increasing scrutiny given to companies’ climate performance and wider ESG credentials.

 High Court’s decision

 As a shareholder, ClientEarth was only entitled to bring a derivative claim in respect of actual or proposed breaches of duty by one or more directors and it required the court’s permission to continue the claim. The reason the legislation imposes an obligation on a shareholder to obtain permission is that such a claim is an exception to a basic principle of company law: it is a matter for a company, acting through its proper constitutional organs, not any one or more of its shareholders, to determine whether or not to pursue a cause of action that may be available to it. ClientEarth therefore had to show that the limited and restricted circumstances in which it is appropriate for the court to authorise it, as a shareholder of Shell, to continue its derivative action against the directors for breach of duty were present. In a comprehensive judgment, Mr Justice Trower found (on the papers) that ClientEarth had not met that threshold.

The court is required by s.261(2)(a) of Companies Act 2006 (“CA 2006”) to dismiss a derivative application if it appears to the court that the application itself and the evidence filed in support of it, do not disclose a prima facie case for giving permission. Essentially, this means that the application must demonstrate, on its face, that sufficient evidence exists to support its case.

Mr Justice Trower accepted (as did Shell broadly) that ClientEarth had established a prime facie case to the effect that Shell faces material and foreseeable risks as a result of climate change which have or could have a material effect on it. That did not, however, demonstrate a prima facie case for the grant of permission to continue its claim, because the more important question was the nature of Shell’s response to those risks and the extent to which ClientEarth had demonstrated a prima facie case of actionable breach of duty by the directors in their management of those risks.

Mr Justice Trower outlined a number of fundamental reasons why ClientEarth’s allegations in relation to the breaches of duty did not establish a prima facie case.

• First, the court could place very little weight on the opinions expressed by ClientEarth’s witnesses. Those witnesses were not permitted to give expert evidence on which the court could rely and, even if that were not the case, their evidence did not establish that the directors are managing Shell’s business risks in a manner which is not open to a board of directors acting reasonably.
• Second, ClientEarth’s assertion that there were numerous specific obligations on the directors as to how the management of Shell’s business and affairs should be conducted, was 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. Mr Justice Trower considered the way in which ClientEarth had puts its case, by seeking to impose absolute duties on the directors, cut across the directors’ general duty to have regard to the many competing considerations as to how best to promote the success of Shell. The judge held that whilst the impact of Shell’s operations on the community and the environment was a matter which the directors are required to weigh in the balance and their response to the business risks for Shell associated with climate change is part of the decision making process by which the Directors manage Shell’s business, a court will not “act as a kind of supervisory board over decisions within the powers of management honestly arrived at.”
• Furthermore, in complying with their duty to Shell under s.174 CA 2006, namely to display care, skill and diligence, Mr Justice Trower confirmed that the law does not superimpose on that duty more specific obligations as to what is and is not reasonable in every circumstance. The key question was whether the decision falls outside the range of decisions reasonably available to the directors at the time.
• Turning to that question, Mr Justice Towers explained that this aspect exposed a fundamental defect in ClientEarth’s case. Their case ignored the fact that the management of a business of the size and complexity of that of Shell required the directors to take into account a range of competing considerations, “the proper balancing of which is classic management decision with which the court is ill-equipped to interfere.” At the same time, ClientEarth’s evidence did support a prima facie case that there is a universally accepted methodology as to the means by which Shell might be able to achieve the targeted reductions referred to in its energy transition strategy. There was therefore no proper evidential basis for alleging that no reasonable board of directors could properly conclude that the pathway to achievement is the one they have adopted.
• As for the claim that the directors had a duty to take steps to ensure the order of the Dutch Court in Milieudefensie et al. v Royal Dutch Shell plc was complied with, this was firmly dismissed by Mr Justice Trower. The judge explained that “[t]here is no established English law duty separate or distinct from the general duties owed by the Directors to Shell under CA 2006, which requires them to take reasonable steps to ensure that the order of a foreign court is obeyed, let alone to ensure compliance with that order.” The wording of the Dutch Judgment was also highly relevant, something that was omitted from ClientEarth’s evidence. Although recognising that the Dutch order is in some respects results-based, Mr Justice Trower noted that the Dutch Court accepted that Shell is not currently acting in an unlawful manner and recognised that it is a matter for Shell as to how it exercises its discretion to comply with reduction obligations imposed by Dutch law.

The High Court also considered the question of whether a person acting in accordance with his duty to promote the success of the company would not seek to continue the claim (in accordance with s.263(2) CA 2006), which is usually a consideration at the second stage of a derivative application. Notwithstanding this, Mr Justice Trower explained that want of good faith would be a material consideration against a conclusion that a prime facie case for permission to continue had been made out. Significantly, Mr Justice Trower found that:

“In my view, the fact that ClientEarth is the holder of only 27 shares in Shell, but is proposing that it should be entitled to seek relief on behalf of Shell in a claim which on any view is of very considerable size, complexity and importance (and will be exceptionally expensive and time-consuming to pursue), 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. In short, there is substance in Shell’s submission that ClientEarth’s motivation is driven by something quite different from a balanced consideration as to how best to enforce the multifarious factors which the Directors are bound to take into account when assessing what is in the best interests of Shell. It seems to me that ClientEarth has adopted a single-minded focus on the imposition of its views and those of its supporters as to the right strategy for dealing with climate change risk, which points strongly towards a conclusion that its motivation in bringing the claim is ulterior to the purpose for which a claim could properly be continued.” 

ClientEarth is entitled to ask for an oral hearing to reconsider the High Court’s decision so long as it makes a request in writing within 7 days. If it does not, the claim will be dismissed.

The court’s ruling here and in a similar breach of duty case against directors of the principal pension plan for UK higher education system employees decided in 2022 (but currently on appeal), illustrate that other claimants (and similarly situated NGOs) will likely face an uphill battle in successfully bringing derivative claims for alleged climate-related failures of boards. As Mr Justice Trower found in ClientEarth’s case, directors largely maintain wide discretion to determine how to respond to business risks that, in their view, is in the best interests of the company. The Court will not interfere or substitute its own view for that of the directors provided such decisions are reasonable, made on an informed basis and in good faith, and best promote the success of the company for the benefit of its members as a whole. Notwithstanding that wide discretion, directors cannot rest on their laurels. As we have previously advised in our earlier article, to avoid litigation exposure, boards need to continue to appropriately assess, manage and review climate-related risks and targets, and ensure that those risks and targets are communicated transparently and consistent with applicable disclosure requirements.

We expect to see more action from NGOs and other stakeholders in this area, so managing the risks posed to businesses by climate and wider ESG factors is key. The help of an ESG legal specialist such as Burges Salmon can make all the difference.

An oral hearing to reconsider the High Court's decision took place on 12 July 2023. Mr Justice Trower has since handed down his judgment as a result of that hearing. You can read about that decision in our further article.