High Court Dismisses ClientEarth's Application to Initiate Proceedings Against Shell's Directors

Introduction

On July 24, 2023, the High Court dismissed ClientEarth's application for permission to bring a shareholder derivative claim against Shell's directors (the "Board") for breach of directors' duties under the UK Companies Act 2006 (the "Claim"). This decision reiterated the Court's original findings on the papers as handed down in May 2023. The Claim—which if permitted, would have been among the first climate-related claims to be brought against a company's directors in the United Kingdom—was premised on a unique application of UK legislation concerning directors' duties. 

The Court's refusal to grant ClientEarth permission to bring the Claim indicates judicial opposition to the use of novel claims brought under existing legislation. It also casts doubt over the viability of actions brought by non-governmental organizations ("NGOs") that have purchased minor stakes in order to bring derivative claims as a form of shareholder activism. 

The Claim and Court Ruling

In February 2023, ClientEarth, an environmental NGO and minority shareholder of Shell, sought permission to bring the Claim as a derivative action against the Board in their personal capacity. ClientEarth had standing to do so through its holding of 27 shares in Shell. The action was reportedly supported by institutional investor groups.

ClientEarth's application was brought in the wider context of NGOs increasingly looking to the courts to put pressure on corporates and seeking to influence their ESG policies. This phenomenon is not limited to England alone, with similar actions (based, naturally, on different legal principles) being brought across Europe, the United States, and elsewhere. 

A derivative action allows a shareholder (such as ClientEarth) to "step into the shoes" of the company in order to bring a claim on its behalf against its directors. The claim can only proceed if the English court consents, and this generally requires a claimant to demonstrate a prima facia case of wrongdoing by the directors that is not being pursued due to the directors' control of the company. ClientEarth has said it was seeking a judgment to "compel Shell's Board to strengthen its climate transition plans, in the best interests of the company in the long-term."

The Claim was to be brought under Section 172 of the Companies Act 2006, which requires company directors to act in a manner that they consider would "promote the success of the company for the benefit of its members as a whole," having regard to factors, including the impact of the company's operations on the community and the environment. ClientEarth argued that, on the basis of Shell's published "Energy Transition Strategy" which, ClientEarth claims, forecasts a 4.4% increase in Shell's net emissions by 2030, the Board is "fundamentally mismanaging [climate] risks, leaving the company ill-prepared for the net zero transition. That not only threatens global climate goals, it puts the company's long-term commercial viability—and therefore its investors' capital, including people's pension funds—at risk… ."

The High Court judgment, handed down by Justice Trower on July 24, 2023, confirmed Justice Trower's earlier assessment of the application on the papers (i.e., without a contested hearing). That decision had been decisively against ClientEarth, finding that ClientEarth "did not disclose a prima facie case for giving permission to continue the claim." In particular, Justice Trower's earlier judgment noted that the Claim 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." The High Court further noted that ClientEarth's negligible stake in Shell, with the NGO holding only 27 shares, gave "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."

Justice Trower's July judgment additionally referred to the paucity of ClientEarth's evidence, noting that it presented opinion as fact and otherwise failed to provide any expert evidence to substantiate ClientEarth's allegations that no reasonable board of directors could "properly conclude that the pathway to [achieving Shell's net-zero targets] is the one they have adopted."

Such a finding suggests the courts may take a dim view of attempted derivative actions initiated by NGO shareholders. This is likely to be the case even where, as in the Claim against Shell, the shareholder action enjoyed wider support; as set out in the judgment, ClientEarth was supported by shareholders holding a further 12.2 million shares (approximately 0.17% of Shell's shares), as well as indications of support from holders of a further 12.5 million shares (ClientEarth's claim was also widely reported to have been supported by a number of institutional investors, including UK pension funds Nest and London CIV). 

ClientEarth is entitled to seek permission to appeal the decision, a route that it has indicated to news outlets it intends to pursue.

The judgment comes days after a similar case, McGaughey & Ors v Universities Superannuation Scheme Limited [2023] EWCA Civ 873, where the Court of Appeal upheld the dismissal of an application for permission to continue derivative proceedings. These proceedings were initiated by members of a pension scheme against the scheme's current and former directors arising out of, among other issues, the scheme's investments in the fossil fuel industry. 

The Court of Appeal noted the importance of damage having been suffered directly by the company in relation to which a derivative claim was being brought. The dismissal, in part, was due to the fact that the claimants had failed to demonstrate that there was evidence of damage having been suffered by the scheme as a consequence of the alleged breaches. This ruling would have been sustained even if the directors had been found to have breached their duties in relation to decisions made relating to climate-related risks.

In any event, no prima facie case establishing a breach of duty was established, leading Asplin LJ to reflect that "the Fossil Fuels Claim is an attempt to challenge the management and investment decisions of [the directors] as trustee without any grounds to do so. There is nothing in the pleading or the evidence to suggest that [the directors] exercised powers in an improper fashion."

Key Takeaways

• While environmental groups continue to develop new ways to use litigation as a tool to push energy companies to increase their commitments to tackling climate change and emission levels, the English court has so far showed reluctance to entertain these novel formulations. 
• The obligation to have regard to the impact of a company's operations on, among other things, the environment is expressly set out in the codified duties of UK company directors. However, the English court has maintained that it is up to directors, acting in good faith, to determine how best to weigh such issues when assessing how best to promote the success of a company for the benefit of its members as a whole. 
• In assessing the merits of an application to bring a derivative action, the English court will consider whether the directors are acting to promote the success of the company for the benefit of all of its members, not just the minority of shareholders bringing the action.
• This case reflects a wider trend in ESG litigation, and we anticipate this will continue to grow, particularly given the EU's potential approach to directors' duties. While current drafts of the EU Corporate Sustainability Due Diligence Directive ("CS3D") defer to individual member state law regarding directors' duties and their potential liability, prior drafts (i) proposed a controversial new directors' duty of care, (ii) proposed a new requirement to adapt a firm's corporate strategy to take into account adverse impacts, and (iii) adopted due diligence measures. Directors of in-scope companies will therefore be interested to read the final CS3D text (possibly due later in 2023) to understand whether CS3D heralds new additional duties and, therefore, potential sources of liability.