UK High Court confirms that climate-related derivative action against Shell cannot proceed

Two separate UK court judgments in recent days have rejected claims that directors had failed in their duties because of their handling of climate risks.

The first action was commenced in 2021 by two beneficiaries of the Universities Superannuation Scheme (USS) pension fund against the trustee directors of the pension fund company. The second case, against the directors of Shell plc, was brought by ClientEarth, an environmental NGO. Both actions were attempted “derivative” claims.

This blog post focuses on the latest High Court decision in the ClientEarth action. We will be publishing a separate blog post on the Court of Appeal decision in the USS case.

Key takeaways 

• This was the first climate-related derivative action against a board of directors under the UK Companies Act, and the first English case targeting corporate directors personally for a company’s energy transition strategy.
• The High Court has confirmed that it is reluctant to interfere in directors’ management and commercial decision-making, that it is for the directors themselves to determine how best to promote the success of the company, and that companies’ AGMs might be a more appropriate forum for disagreements over a company’s climate strategy.
• As things currently stand, the bar for using the derivative action process to challenge a company’s climate strategy has been set very high. This is consistent with the orthodoxy that derivative actions should be (and are) difficult to pursue as an exception to the rule that it is for the company to decide whether to pursue a legal challenge against its directors not the shareholders.
• Having said that, even when environmental NGOs and climate activists are unsuccessful in litigating these issues, it still results in increased publicity and public scrutiny of companies’ climate strategies – as well as being costly and time consuming for companies to deal with.
• ClientEarth have indicated that they intend to appeal the High Court’s decision so the final outcome of this case is not yet known.
• It is worth taking a step back to see the wider picture beyond the UK courts - according to the Grantham Research Institute’s latest report on global trends in climate change litigation, although the growth rate in climate change litigation is slowing, the diversity in cases is still expanding, with an increasing number of cases filed against corporates based on a more complex and novel range of legal arguments.

First principles – why did the court need to decide whether ClientEarth’s action could proceed?

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, such actions can only proceed with the permission of the court. 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 is determined on the papers.

Quick recap of the High Court’s initial decision 

Details of ClientEarth’s case and the initial High Court decision from May this year can be found in our previous blog post.

In summary:

• ClientEarth alleged that the actions of the directors were in breach of their statutory duties under the Companies Act to promote the long-term success of the company and to act with due skill, care 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 jeopardising the company’s future commercial success, and that the directors had failed to comply with a decision of a Dutch court in May 2021 ordering Shell to reduce its global carbon emissions by 45% by 2030 compared with 2019 levels.
• In May this year, Judge Trower reached a decision on the case without an oral hearing, finding that ClientEarth had not established a prima facie case to show that the handling of climate risks by Shell’s directors is not in the best interests of the company’s shareholders as a whole. He therefore did not allow the claim to proceed.

Second bite at the cherry

Judge Trower reconsidered the case following the initial judgment after ClientEarth exercised its right to request an oral hearing (in accordance with the procedural rules). However, his final decision, issued this month, remains as before.

The judgment emphasises (perhaps even more forcefully than his previous judgment) that it is for the directors and not the courts, or a minority of the shareholders, to make decisions on complex commercial issues, and that ClientEarth had failed to establish a prima facie case that the directors had behaved so unreasonably or irrationally in their consideration of climate issues that no reasonable director would have behaved in the same way.

The latest judgment cited many of the reasons given in the previous judgment for the refusal of permission, importantly:

• The “business judgment” rule – The Judge confirmed that the directors, and not the courts, should determine how to promote the success of a company because “the law respects the autonomy of the decision making of the Directors on commercial issues and their judgments as to how best to achieve results which are in the best interests of their members as a whole.”                                                                                                                                     ClientEarth had failed to identify how the directors have gone wrong in balancing competing considerations sufficient to establish a prima facie breach of duty: “[The claim] ignores the fact that the management of a business of the size and complexity of that of Shell will require the Directors to take into account a range of competing considerations, the proper balancing of which is a classic management decision with which the court is ill-equipped to interfere.”            
• Evidence on climate issues insufficient – ClientEarth failed to establish that Shell’s current approach falls outside the range of reasonable responses to climate risks - i.e. that “no reasonable director” would have taken the actions that Shell’s board did. Whilst it was plain that there are fundamental disagreements between ClientEarth and Shell as to how to achieve the targets that Shell has set itself, the High Court could not rely on ClientEarth’s opinions, however genuinely held.                                                         
• Evidence on climate issues was a matter for experts – The Court was critical of the nature of the evidence provided by ClientEarth in support of its claim. Whilst purporting to be witness evidence, ClientEarth gave evidence on the scientific impact of climate change and the alleged inadequacy of Shell’s energy transition strategy in meeting global targets. The Judge noted that this should have properly been given as expert evidence in accordance with the procedural rules. The Judge was similarly critical of the foreign law evidence provided by ClientEarth that also did not meet the requisite requirements for expert evidence. In response, ClientEarth argued that given the preliminary nature of the hearing, its evidence should be taken at its “reasonable highest” (and that therefore such defects should be ignored). The Court disagreed. The Judge noted that the fact that this was a preliminary hearing did not mean that the Court was not required to take an uncritical and passive approach to the evidence provided.
• No incidental duties – ClientEarth argued that the duties to promote the success of the company and to exercise reasonable care, skill and diligence (sections 172 and 174 of the Companies Act 2006) impose incidental obligations when considering climate risk for a company such as Shell. The Court noted that there was a shift in how this was presented at the oral hearing, however, the Court did not agree with either positioning of the duties and opined that ClientEarth was seeking to impose specific duties on the directors regarding how to manage the business, which cut across the well-established principle that it is for directors to determine how best to promote the success of the company having regard to many competing considerations.
• Foreign court orders – As part of the application, ClientEarth alleged that Shell’s directors were in breach of their duties because they had failed to comply with an order of the Dutch Court to reduce greenhouse gas emissions (following a claim in 2019 brought by another environmental NGO, Milieudefensie, see our previous blog post). The Court clarified that there is no English law duty that requires Shell’s directors to obey the order of a foreign court. Further, the Judge found that the Dutch Court recognises that it is for Shell to determine how it exercises its discretion to comply with the reduction obligations imposed by Dutch law.
• Good faith – One of the considerations for giving permission for a derivative claim to proceed is whether the claimant is acting in good faith. The Court considered not only whether ClientEarth honestly believed that its claim was in the long-term best interests of Shell, but also whether the proceedings were in fact brought for an ulterior purpose (i.e. to further ClientEarth’s own agenda). The Court found that the proposal that ClientEarth, with a very small shareholding (only 27 shares) and support from a small pool of other shareholders (0.17% of shares), should be entitled to seek relief on behalf of Shell in a claim “of very considerable size, complexity and importance” gave rise to a clear inference that ClientEarth’s real interest was not to promote the company’s success for the benefit of the members as a whole, but rather to advance ClientEarth’s policy agenda.
• Shareholder support – In the absence of authorisation or ratification (which are typically considered in giving permission for a derivative claim), the Court also considered as a proxy the levels of support for the climate transition policies put forward by the directors at preceding Shell AGMs, compared to votes in favour of climate-related shareholder requisitioned resolutions. The Court found that these figures counted strongly against giving ClientEarth permission to proceed.
• Relief inappropriate – The Court highlighted that the nature of the relief sought is a key factor to be considered. A mandatory injunction that Shell adopt and implement a climate risk strategy and comply immediately with the Dutch Court order would be most unlikely to be granted because it would be too imprecise, require constant supervision by the court and would potentially lead to disruptive disputes over compliance and have a serious adverse impact on Shell’s business. Likewise, declaratory relief would have no utility as it is not the Court’s function to opine on the directors’ conduct where this would have no substantive effect and fulfil no legally relevant purpose. A vote in a general meeting was put forward instead as the proper forum for shareholders to express their views on the proceedings of the directors.

See here for the full judgment.

Next steps 

Currently, the claim is not permitted to proceed. However, the final outcome of this case is not yet settled as ClientEarth has stated that it intends to seek permission to appeal (see CE press release).

If you would like to discuss any aspect of this case, please reach out to the contacts on this post or your usual Linklaters contact.