UK High Court rules that derivative action against Shell plc’s Board in relation to its management of climate risk cannot proceed

Overview

The High Court has ruled that ClientEarth’s proposed derivative action against the Board of Shell plc (“Shell”) in relation to its management of climate risk will not be permitted to proceed on the basis that the NGO has failed to establish a prima facie case that Shell’s directors were not acting in the best interests of shareholders.

The decision has emphasised that the High Court is reluctant to interfere in relation to directors’ management and commercial decision-making. The Court will generally take the approach that it is for the directors themselves to determine how best to promote the success of the company. This is one of the first climate-related derivative actions against a Board of Directors under the Companies Act, and the first English case targeting corporate directors personally for a company’s energy transition strategy. However, as the decision was reached on the papers with no oral hearing, ClientEarth has asked for an oral hearing to request the High Court to reconsider its decision so the final outcome of this case is not yet known.

ClientEarth’s case against Shell’s Board

In March this year, ClientEarth (a private company, operating as an Environmental law NGO and a UK registered charity), as holder of 27 shares in Shell, sought permission to bring a derivative action against the Board of Directors of Shell. 

A derivative claim is one brought by members of a company, in the name of the company under the derivative claims procedure under Part 11 of the Companies Act 2006. To protect companies from speculative claims, derivative actions can only proceed to a full trial with the permission of the court.

ClientEarth’s claim alleged that Shell’s 11 directors are failing to manage material climate risks and are in breach of their statutory duties to: (i) promote the success of the company; and (ii) exercise reasonable care, skill and diligence.

In particular, ClientEarth argued that Shell’s energy transition strategy was flawed in that it failed to align with targets set out in the Paris agreement, putting shareholder value at risk, and that the directors had failed to comply with the May 2021 order made by the Hague District Court ordering Shell to reduce its global carbon emissions by 45% by 2030 compared with 2019 levels (the “Dutch Order”). (To read more about the Dutch Order, see our previous blog post.)

Under Part 11 of the Companies Act 2006, the Court is required to dismiss the application for permission to bring a derivative action if it appears that the application itself and the evidence filed in support of it do not disclose a prima facie case for giving permission. This assessment is required before an oral hearing of the case and it is determined on the papers. If there is a prima facie case, the claim can proceed with the directors and the company added as parties to a further stage to consider whether permission should be given substantively.

On 12 May 2023, the High Court dismissed the application for permission at the first stage (i.e. on the papers with no oral hearing), on the basis that neither the application nor the evidence disclose a prima facie case (see here for the full decision).

Why did the High Court refuse permission to proceed?

1. Directors’ duties under the Companies Act do not impose any more specific obligations

ClientEarth argued that the directors’ statutory duties under section 172 (the duty to promote the success of the company) and section 174 (the duty to exercise care, skill and diligence) of the Companies Act 2006 include incidental sub-duties, including a duty to accord proper weight to climate risk and a duty to ensure that Shell takes reasonable steps to comply with legal obligations.

The Court found that the law does not superimpose any more specific obligations on the duties under ss 172 and 174 of the Companies Act as to what is and is not reasonable in every circumstance. The question is whether the decision of the directors falls within a range of decisions reasonably available to the directors at the time, in line with the well-established principle that the law respects the autonomy of the Board’s decision-making on commercial issues and directors’ judgments as to how to achieve the results which are in the best interests of the shareholders.

2. Directors’ discretion to comply with the Dutch Order

ClientEarth also argued that Shell has failed to comply with the Dutch Order and, pursuant to the common law of England and Dutch law, a director who is aware of a court order is under a duty to take reasonable steps to ensure that the order is obeyed.

The Court found that, while a director of a company is under a legal obligation to take reasonable steps to ensure that an order made by an English court is obeyed, there is no recognised duty to ensure that they comply with orders of a foreign court. The Court referred to the Dutch Court’s findings that “Shell has total freedom to comply with its reduction obligation as it sees fit, and to shape the corporate policy of the Shell group at its own discretion”. Accordingly, even if there had been a duty (which there was not), Shell’s directors had total freedom as to how to comply with the Dutch Order.

3. Requirement to show no basis on which the Directors could reasonably conclude that the action they have taken has been in the interests of the company

The Court found that the impact of Shell’s operations on the community and the environment is a matter which the Directors are required to weigh in the balance but 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. In short, ClientEarth would need to have shown that there is no basis on which the Directors could reasonably have come to the conclusion that the action they have taken has been in the interests of Shell. 

Additional key takeaways

The relief sought: Court unlikely to grant a mandatory injunction (or a declaration) in a case of this nature 

ClientEarth sought a declaration that the Directors breached their duties and a mandatory injunction requiring the Directors: (i) to adopt and implement a strategy to manage climate risk in compliance with their statutory duties; and (ii) to comply immediately with the Dutch Order.

A court will not grant a mandatory injunction if constant supervision is required – and this is particularly the case if the relief sought is insufficiently precise. The Court in this case found that the mandatory orders requested by ClientEarth were indeed too imprecise to be suitable for enforcement.

In terms of the declaration sought, the Court observed that it was not its function to express views as to the Directors’ conduct which have no substantive effect, and which fulfil no legally relevant purpose. The proper forum for generating those types of views is by vote of the members in a general meeting, a remedy which ClientEarth is entitled to take steps to procure in its capacity as a shareholder.

The interests of the company and ClientEarth’s small shareholding in Shell 

The Court must assess whether the claimant would be acting in good faith in continuing the claim. A derivative claim will not have been brought in good faith where the primary purpose of it is an ulterior motive (e.g., in this case, to advance ClientEarth’s own policy agenda). In other words, but for that motive, would the claim have been brought at all?

The Court observed that the fact that ClientEarth was the holder of only 27 shares relative to the very considerable size, complexity and importance of the claim "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".

The Court also considered the previous level of support for Shell’s climate transition policies at its AGMs, which did not demonstrate a level of support in favour of the agenda that ClientEarth was seeking to pursue.

What is next for derivative actions?

This decision will come as a blow to claimants who have been tracking this case to see whether the derivative action can serve an effective vehicle for climate-related claims. Derivative actions are uncommon in that, as made plain by the Court in this case, they recognise an exception to the general rule that it is a matter for the company, not its shareholders, to determine whether or not to pursue a cause of action that may be available to it. This is why applicants in derivative actions need to seek the court’s permission first to proceed with the claim.

However, while derivative actions are unusual, they are not unheard of. In May 2022, the High Court refused to give permission for a derivative action to proceed in the case of McGaughey vs Universities Superannuation Scheme Limited [2022] EWHC 1233 (Ch) (“USS case”), where two members of a large UK private pension fund unsuccessfully alleged that the trustee directors of the scheme should be pursued for breaches of their statutory and fiduciary duties, which included an alleged failure to create a credible plan for disinvesting from fossil fuels. The Court of Appeal has granted permission for the claimants to appeal the High Court’s decision, and the appeal is listed for 13 June 2023.

Next steps

ClientEarth has requested an oral hearing asking the Court to reconsider its decision (see CE press release and CE FAQs). The hearing has been scheduled for 12 July 2023. 

Although the final outcome of this case is not yet known, the initial judgment was clear that there are fundamental reasons why neither the application, nor the evidence adduced in support of it, disclose a prima facie case for giving permission to continue the claim.

We will also have to see whether the Court of Appeal will give the applicants in the USS case permission to proceed with that action. The High Court dismissed that case on the papers and then allowed an oral hearing but the applicants were denied permission to proceed at the oral hearing.