UK: ClientEarth fail to appeal ruling in Shell climate-related derivative action

The UK Court of Appeal has now definitively refused to allow ClientEarth to proceed with a proposed derivative action against the directors of Shell plc. This latest decision, given on 14 November 2023, confirms the earlier findings of the High Court and brings an extended period of attempted activism by the NGO to an end. 

The original decisions

In May this year, the High Court ruled that ClientEarth had failed to establish a prima facie case that Shell’s directors were not acting in the best interests of shareholders and 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. This judgment was confirmed in robust terms in July 2023, after ClientEarth exercised its right to an oral hearing. See our previous briefings here and here. ClientEarth then sought leave to appeal to the Court of Appeal.

The Court of Appeal’s procedures

Permission to appeal would have been given only where the Court considered that the appeal would have a real prospect of success; or there was some other compelling reason why the appeal should be heard. In this case, the Court of Appeal held that there was no real prospect of success and no compelling reason to hear the appeal.

Although ClientEarth was able to obtain an oral hearing after the first decision against it in the High Court, the Court of Appeal judgment notes that where permission to appeal has been refused on the papers, that decision is final and cannot be further reviewed or appealed.

Breach of directors’ duties not made out

The Court of Appeal affirmed the High Court’s findings that:

• ClientEarth had failed to advance a viable case that Shell’s directors had not acted in what the directors believed to be Shell’s best interests (in accordance with section 172 of the Companies Act 2006); and
• ClientEarth had failed to show a prima facie case in relation to the duty of care in section 174 of the Companies Act 2006 - i.e. ClientEarth had not shown that there was no basis on which Shell’s directors could reasonably have come to the conclusion that the actions they had taken had been in the interests of Shell.

The Court of Appeal also dismissed ClientEarth’s argument that the High Court had imposed a procedural barrier by requiring expert evidence and confirmed that the High Court’s view that expert evidence was needed because of the “very serious nature” of this particular case was justified.

No duty to comply with an earlier order of the Dutch Court

The High Court had found that there is no recognised English law duty that required Shell’s directors to comply with the order of a foreign court, specifically an order made by the Dutch Court for Shell to reduce its greenhouse gas emissions (see our previous briefing). In addition, the High Court attached significance to a passage from the Dutch judgment to the effect 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”.

The Court of Appeal found that ClientEarth had not provided solid grounds for considering this approach to have been mistaken.

Remedies sought by ClientEarth disruptive and ineffective

The Court of Appeal upheld the High Court’s views on the remedies ClientEarth sought because they “make good sense”. Specifically, the Court agreed that the mandatory relief sought by ClientEarth could not be granted because it would require constant supervision and disrupt Shell’s business to the detriment of the members as a whole. Further, the grant of a declaration against Shell’s directors would not fulfil any legitimate purpose. 

Promotion of the success of Shell

The Court of Appeal found that the High Court was “amply justified” in taking the view that a person acting to promote the success of the company (in accordance with section 172 of the Companies Act 2006) would not do anything other than decline to continue ClientEarth’s claim. This, therefore, provided a sufficient basis for dismissing the claim.

ClientEarth motivated by policy agenda

The Court of Appeal also found that the High Court was justified in concluding that ClientEarth had not adduced sufficient evidence to counter the inference of a collateral motive. The Court of Appeal’s judgment goes on to comment that there is every reason to think that ClientEarth had brought its claim to advance its policy agenda rather than to enhance or protect the value of its very small shareholding in Shell. Further, the Court of Appeal stated that, given ClientEarth’s objectives, it was hard to imagine that it holds its 27 shares for investment purposes at all.

Costs order

The Court of Appeal was clear that there was no likelihood that it would interfere with the earlier decisions as to costs as the High Court had given cogent reasons for the order made and not attempted to quantify the costs, nor to order a payment on account.

Key takeaways

The Court of Appeal’s decision puts an end to what was the first climate-related derivative action against a board of directors under the UK’s Companies Act, and the first English case targeting corporate directors personally for a company’s energy transition strategy.

The UK courts have made it abundantly clear that they are 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 a company, and that companies’ AGMs might be a more appropriate forum for disagreements over a company’s climate strategy.

As we have noted before, the bar for using the derivative action process in the UK to challenge a company’s climate strategy has been set very high, as confirmed by the Court of Appeal. This is consistent with the principle that derivative actions should be (and are) difficult to pursue and that it is for the company to decide whether to pursue a legal challenge against its directors, not the shareholders.

Having said that, it is worth noting that, even when environmental NGOs and climate activists are unsuccessful in litigating these issues, it still results in increased publicity and scrutiny of companies’ climate strategies – as well as being costly and time consuming for companies to deal with. 

And although the Court of Appeal’s decision may have put an end to attempts to use the derivative action process to challenge companies’ climate strategies, we can expect ClientEarth and other climate activists, whether in the UK or in other countries, to continue trying their hand at other forms of climate litigation. As ClientEarth commented in their latest press release: “We are undeterred by this decision, and will keep fighting for accountability from people in the driving seat of companies steering further into climate catastrophe”.