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Enhancing Public Accountability: Key Elements of the Public Office (Accountability) Bill 2025
Kirsty Cook
ClientEarth received a significant setback when, on 19 May 2023, the High Court dismissed its application for permission to bring a derivative claim on behalf of Shell plc against the company’s directors. The “first of its kind” high profile climate-litigation could be over before it’s even begun. The NGO must now convince the court to reconsider its decision in an oral hearing if it is to keep the claim alive.
What is the claim about?
In February 2023, ClientEarth brought a derivative action against Shell’s directors for “failing to manage the material and foreseeable risks posed to the company by climate change”. Reportedly supported by institutional investors, it sought an injunction requiring the Directors to (1) adopt and implement a strategy to manage climate risk that complies with their statutory duties and (2) comply with a previous order of the Hague District Court in Milieudefensive v Royal Dutch Shell plc (“the Dutch order”) to cut emissions by 45% by 2023.
The NGO argued that the directors breached their statutory duties to promote the success of the company and exercise reasonable care, skill and diligence (ss 172 and 174, Companies Act 2006). Specifically, by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement.
ClientEarth outlined six climate-related duties which they claimed were “necessary incidents” of these statutory duties:
- to make judgments regarding climate risk that are based upon a reasonable consensus of scientific opinion;
- to accord appropriate weight to climate risk;
- 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;
- to adopt strategies which are reasonably likely to meet Shell’s targets to mitigate climate risk;
- to ensure that the strategies adopted to manage climate risk are reasonably in the control of both existing and future directors; and
- to ensure that Shell takes reasonable steps to comply with applicable legal obligations.
As a shareholder seeking to bring a derivative claim in the name of the company, ClientEarth was required to apply for permission to proceed with the action. However, the court ruled that ClientEarth failed to meet the initial threshold of establishing a prima facie case for granting permission, and so dismissed the application in accordance with s.261(2)(a) CA 2006.
Why did the High Court dismiss the application?
In Mr Justice Trower’s judgment, ClientEarth failed to establish there was prima facie case for permission to continue the claim. In other words, the threshold to filter out “unmeritorious” or “clearly undeserving” claims was not met. These were the key findings:
- It is not for the court to impose new duties on directors or to influence decision-making on commercial strategy.
Mr Justice Trower was unconvinced by the six climate-related duties advocated by the NGO, agreeing with Shell’s submissions.
Not only were they “incapable” of enforcement and “incompatible” with the two statutory duties, they “cut across” the “well-established principle that it is for the directors themselves” to determine the weight given to the factors they must consider in discharging their duty to promote the success of the company [18].
In his view, the environmental impact of Shell’s operations must be regarded by the directors, but it has to be balanced against the other matters that directors are required to consider (s172 CA 2006).
It is for the directors, not the court, to determine Shell’s strategic response to the business risks associated with climate change; these are commercial decisions. By citing Lord Wilberforce in Howard Smith Ltd v Ampol Ltd [1974], Justice Trower firmly rooted his judgment within the well-established position of the court: “There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.”
In assessing whether the directors breached their duties, the court was not convinced that there was evidence of a universally accepted methodology Shell plc could follow to achieve the target reductions in its Energy Transition Strategy. Therefore, Mr Justice Trower could not find that the approach taken by the directors fell outside the range of reasonable responses.
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Shell’s directors are not under a duty to ensure compliance with the Dutch Order
In relation to the Dutch Order, the court held that there is no established English law duty (separate or distinct from the directors' general duties under the Companies Act 2006) which requires them to ensure compliance with the order of a foreign court.
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Mandatory injunctions are not appropriate when frequent court supervision is required
The relief sought by ClientEarth – an injunction to implement climate risk strategy and comply with the Dutch Order – was “too imprecise to be suitable for enforcement” and would be likely to lead to disputes over compliance.
It is a well-established principle that the court will not grant a mandatory injunction if doing so would require constant supervision by the court. This is especially so if the relief sought is insufficiently precise. The court held that the mandatory orders requiring Shell's directors to implement a strategy to manage climate risk and comply with the Dutch Order that had been sought by ClientEarth "fall foul of that basic principle".
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ClientEarth had not brought the claim in good faith
Mr Justice Trower was highly critical of the NGO’s motive when considering the discretionary factor that would have arisen in a substantive hearing (s.263(3)(a) CA 2006), stating: "Where the primary purpose of bringing the claim is an ulterior motive in the form of advancing ClientEarth’s own policy agenda with the consequence that, but for that purpose, the claim would not have been brought at all, it will not have been brought in good faith".
What’s next?
Whilst ClientEarth has demonstrated that Shell faces material and foreseeable risks as a result of climate change, the NGO has failed to convince the court that Shell’s directors breached their duty in managing those risks.
It is recognised that the Courts in England and Wales will only intervene in the running of a company if a decision is one that no reasonable director could have considered to be in the company's best interest. In short, the standard of conduct required of directors under s 172 is subjective, and the standard of review adopted by courts is rationality or plausibility. This is a high hurdle for would-be shareholder claimants to overcome; and so the Court’s decision in this case is not surprising.
The court's decision was taken on the basis of written submissions and ClientEarth has the option to request an oral hearing for the ruling to be reconsidered. However, with the judge seemingly imposing a high evidential threshold and finding the claim to be fundamentally flawed on a number of grounds, ClientEarth is likely to have an uphill battle to continue its claim. Regardless of the outcome, it’s clear the minority shareholder will not be deterred in its campaign and continues to galvanise investors in the wake of the recent high-profile AGM.
This article was first published in Solicitors Journal on 22 June 2023.
FURTHER INFORMATION
For further information on the issues raised in this blog, please contact Katie Allard in our Dispute Resolution team.
about the author
Katie Allard is an Associate in the Dispute Resolution Team. She has a wide-ranging commercial practice with particular interest and expertise in complex civil fraud and asset tracing investigations, boardroom and shareholder disputes, and breach of contract claims, acting for both claimants and defendants.
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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