ClientEarth v Shell PLC & Ors: No ‘prima facie’ case for derivative claim to proceed against Directors

On 9 February 2023 non-profit environmental law organisation ClientEarth issued a much publicised ‘world – first’ claim against the Board of directors of Shell PLC (Shell). On 12 May 2023, Judge Mr Justice Trower handed down Judgment refusing ClientEarth permission to bring a claim on behalf of Shell against its own board of directors.

In this article we revisit the grounds for the claim and the hurdles ClientEarth faced under the legal mechanism used (the derivative action regime) before discussing the decision of the court and any potential implications arising for ESG related impact litigation of this type.

The grounds for the claim and procedure

The Companies Act 2006 (CA 2006) sets out statutory duties in sections 171 to 177 which are owed by directors to their company (in this case, Shell).

ClientEarth contend that the Board of directors of Shell, in having responsibility for Shell’s climate change risk management strategy, have breached the following duties to Shell to act in its best interests:

• the duty to promote the success of the Company for the benefit of its members having regard to a multitude of factors including the impact of the company’s operations on the community and the environment (s.172 of CA 2006); and
• the duty to exercise reasonable care, skill and diligence (s.174 of CA 2006).

Given that the above legislation relates to duties owed to Shell, rather than the shareholders of Shell, ClientEarth have sought to use the derivative action mechanism found in s260 CA 2006. This provision allows shareholders of a company to bring a claim on behalf of that company in respect of an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company (s260 (3) CA 2006).

The shareholder(s) bringing a derivative claim must first apply to the court for permission (s261(1) CA 2006) and  prove that the company has a “prima facie” case against its directors to obtain such permission (s261 (2) CA 2006) i.e. in the absence of an answer from the directors of Shell, the company (acting via its shareholder ClientEarth) will be entitled to judgment against them.

The court’s Judgment of 12 May 2023 related to ClientEarth’s application for permission to bring a derivative claim and in particular, whether or not ClientEarth established a prima facie case.

The Court’s decision

The Judge (at paragraph 16 of his judgment) noted that ClientEarth asserted that “when considering climate risk for a company such as Shell” discharging the statutory duties of the directors of Shell (under s172 & 174 CA 2006 – as above) included:

i) a duty to make judgments regarding climate risk that are based upon a reasonable consensus of scientific opinion;

ii) a duty to accord appropriate weight to climate risk;

iii) a duty to implement reasonable measures to mitigate the risks to the long-term financial profitability and resilience of Shell in the transition to a global energy system and economy aligned with the global temperature objective of 1.5°c under the Paris Agreement on Climate Change 2015 (“GTO”);

iv) a duty to adopt strategies which are reasonably likely to meet Shell’s targets to mitigate climate risk;

v) a duty to ensure that the strategies adopted to manage climate risk are reasonably in the control of both existing and future directors; and

vi) a duty to ensure that Shell takes reasonable steps to comply with applicable legal obligations.

However, the Judge agreed with Shell’s submissions that its directors were not subject to the above “incidental duties” on the basis that:

1. they are inherently vague and incapable of constituting enforceable personal legal duties;
2. they contradict the wording of s172 CA 2006 and the principle of company law that it is for the Directors themselves to determine the weight to attach to the factors listed in s172 CA 2006 in coming to commercial decisions regarding the company;
3. they inappropriately expand and make specific the “reasonable” duties owed by directors pursuant to s174 CA 2006.

Having established that these “incidental duties” do not apply to the directors of Shell, the claim turned upon whether the decision of the directors (in arriving at Shell’s climate change risk management strategy) falls outside the range of decisions reasonably available to the directors at the time, with ClientEarth needing to establish a prima facie case that the directors of Shell’s decision making fell outside a reasonable response.

The Judge found that ClientEarth were unable to establish such a prima facie case that the decision making of the Directors did not constitute a reasonable response. Whilst we recommend reading the Judgment to understand the reasoning in full, we note that the Judge provided the following reasons:

• That the courts would place far greater evidential weight on independent expert evidence regarding climate risk, rather than the evidence of the parties or their advocates.
• ClientEarth’s evidence falls “some way short of establishing a prima facie case that the way in which Shell’s business is being managed by the directors could not properly be regarded by them as in the best interests of Shell’s members as a whole”.
• The evidence did not “engage with the issue of how the directors are said to have gone so wrong in their balancing and weighing of the many factors which should go into their consideration of how to deal with climate risk, amongst the many other risks to which Shell’s business will inevitable be exposed, that no reasonable director could properly have adopted the approach that they have. This is a fundamental defect in ClientEarth’s case because it completely 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 classic management decision with which the court is ill-equipped to interfere”.

Notably, the Judge in dismissing the application also made reference to 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”.

Implications

This decision emphasizes the difficulty of applicants succeeding in such types of claim. As the company itself is the proper claimant where it suffers loss, there are “limited and restricted circumstances” in which it is appropriate for the court in this case to authorise the shareholders of Shell to bring a derivative action on Shell’s behalf against its own directors.

Further, the ability of applicants to successfully establish breaches of director duties (under sections s172 and 174 CA 2006) is also difficult given the multi-factoral approach to decision making in a listed multinational company. The Judgment makes repeated reference to the fact that the considerations which Directors must weigh up pursuant to s172 CA 2006 is “essentially a commercial decision, which the court is ill-equipped to take, except in a clear case”.  It is a well-established principle of company law in England and Wales that the court will not interfere with company decisions absent extreme cases. In this regard we note that ClientEarth’s attempt to formulate specific “incidental duties” upon the directors of Shell failed.

More specifically, the Judgment also demonstrates the need for persuasive expert evidence. Given the subject matter of the issues in environmental disputes of this type, this will be an onerous and expensive evidential hurdle to overcome.

The reference to ClientEarth’s small shareholding in refusing permission to proceed with the derivative action is also significant. Given the nature of the derivative action (shareholders proceeding on behalf of a company) it may demonstrate that ‘activist shareholders’ taking small stakes in companies with the view to bringing derivative actions against the directors may face judicial scepticism and another hurdle to bringing a derivative claim successfully.

We have explored in previous articles the difficulty in establishing breaches of director duties relating to s172 CA 2006, absent an obligation in the company’s articles to prioritise environmental or social issues.  In that context, it is of note that the Judge found 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”. Whilst this case cannot be said to be encouraging for climate litigants, the case does not materially advance the issue as to how directors satisfy their duties under s172 and s.174 CA 2006 by reference to the environmental or social impact of the company’s operations.

ClientEarth have seven days from the handing down of Judgment to request an oral hearing for the Court to reconsider the matter.