Climate change and directors duties ClientEarth v the directors of Shell plc
19 May 2023
Our 6 key takeaways from the English High Court's approach to a claim against company directors for allegedly failing to discharge their duties in relation to climate change:
- Decisions on a company's strategy are a matter for directors, not the court
- Climate change risk must be considered by directors in the context of other considerations
- Courts are reluctant to prefer the opinions of claimants to the judgement of directors
- Injunctions and declarations affecting the board oversight of a company must be approached with caution
- The bar for permission to bring a derivative action under the UK Companies Act is high
- This may not be the end of the story…
On 12 May 2023, the English High Court rejected ClientEarth's application for permission to bring a derivative claim against the directors of Shell plc under the UK Companies Act 2006 ("the Act"). ClientEarth, which had acquired a small number of shares in Shell, had alleged breach of directors' duties relating to Shell's climate change risk management strategy.
We identify 6 takeaways from the judgment in this closely-watched litigation.
1. Decisions on a company's strategy are a matter for directors, not the court
ClientEarth brought its claims against Shell's directors on the basis of breach of s.172 and s.174 of the Act. S.172 imposes a duty to act in the way the director concerned considers in good faith would be most likely to promote the success of the company for the benefit of its members as a whole, having regard to a number of non-exhaustive factors (including the likely consequences of any decision in the long term and the impact of the company's operations on the community and the environment). This is a subjective test. S.174 obliges a director to exercise reasonable care, skill and diligence. This test has both subjective and objective elements to it.
ClientEarth pleaded six incidental duties on directors "when considering climate risk for a company such as Shell". These included to "accord appropriate weight to climate risk" and 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".
The High Court agreed with Shell that these duties were too vague to be enforceable, cut across the directors' right to determine the weight to be attached to particular considerations when assessing how best to promote the success of the company, and were an unnecessary and inappropriate elaboration of the duty to exercise reasonable care, skill and diligence.
The High Court noted that it was a 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", citing a previous judgment where the High Court had observed that weighing up the various factors referred to in s.172 is "essentially a commercial decision, which the court is ill-equipped to take, except in a clear case".
2. Climate change risk must be considered by directors in the context of other considerations
The High Court noted that directors are subject to many competing considerations as to how best to promote the success of a company for the benefit of its members as a whole. While s.172 of the Act refers specifically to the impact of the company's operations on the community and the environment as a factor to be considered, the High Court noted that the directors' response "to the business risks for Shell associated with climate change is part of the decision-making process by which the Directors manage Shell’s business and is subject to the well-established principle" that the court will not "act as a kind of supervisory board over decisions within the powers of management honestly arrived at". In the High Court's view there was 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 a classic management decision with which the court is ill-equipped to interfere".
3. Courts are reluctant to prefer the opinions of claimants to the judgement of directors
The specific breaches of duty pleaded by ClientEarth related to Shell's alleged failure to set an appropriate emissions target, put in place a strategy for the management of climate risk which established a reasonable basis for achieving net zero and was aligned with the 2015 Paris Climate Agreement, and comply with a previous Dutch court judgment requiring the company to reduce its emissions by 45% by the year 2030 (Milieudefensie v Royal Dutch Shell).
ClientEarth submitted evidence in support of these breaches, in the form of a witness statement from a ClientEarth lawyer. However, the High Court considered it could place very little weight on this evidence. ClientEarth was not able to give independent expert evidence on which the court could rely, and the court considered that, on a proper analysis, the evidence did not establish a case that the directors were managing Shell's business risks in a manner which was not open to a board of directors acting reasonably.
4. Injunctions and declarations affecting the board oversight of a company must be approached with caution
ClientEarth sought a declaration that the directors had breached their duties and a mandatory injunction requiring the directors both to adopt and implement a strategy to manage climate risk in compliance with their alleged duties and to comply with the Dutch court judgment.
The High Court was unconvinced that, even if ClientEarth's claims were well made, such relief was appropriate. This was because a court will not grant mandatory injunctive relief if constant supervision is required. The court considered that it was well-established that it will not grant injunctive relief if what the defendant has to do is insufficiently precise and the court would have to adjudicate on disputes over whether or not a business is being run in accordance with the injunction. Similarly, the High Court considered that the declaration sought would serve no legitimate purpose. The High Court noted that the proper forum for ClientEarth to seek to achieve the change it was pursuing was in the general meeting of Shell, as a shareholder.
In addressing the relief sought by ClientEarth in respect of Shell's compliance with the Dutch court judgment, the High Court made plain that no duty exists in English law (beyond those outlined in the Act) requiring a director to comply with an order of a foreign court.
5. The bar for permission to bring a derivative action under the Companies Act is high
S.261(2)(a) of the Act required the High Court to dismiss the application if it appeared to the court that the application itself and the evidence filed in support of it did not disclose a prima facie case for giving permission. S.236(2) of the Act states that permission must be refused if the court is satisfied that a person acting in accordance with his duty to promote the success of the company would not seek to continue the claim.
The court may also have regard to discretionary factors, including whether the shareholder is acting in good faith in seeking to continue the claim. In this regard, the court concluded that there was a clear inference that ClientEarth's real interest was not in how best to promote the success of Shell for the benefit of its members as a whole. In the High Court's view, "ClientEarth has adopted a single-minded focus on the imposition of its views and those of its supporters as to the right strategy for dealing with climate change risk, which points strongly towards a conclusion that its motivation in bringing the claim is ulterior to the purpose for which a claim could properly be continued."
Although ClientEarth had bolstered its claim before issuing it by lining up support from other shareholders, the High Court considered that these were "a very small proportion of the total shareholder constituency, and it is that constituency as a whole whose views should carry very considerable weight when determining how Shell can best manage the climate change risk with [which] these proceedings are concerned."
6. This may not be the end of the story
ClientEarth is entitled to seek an oral hearing to reconsider the High Court's decision within 7 days of the decision. On 19 May 2023 ClientEarth confirmed that they will ask the court to reconsider its decision.
The intersection of climate change risk and fiduciary duties is a hot topic. In a previous English judgment on the subject, McGaughey and another v Universities Superannuation Scheme Ltd and others, the High Court refused an application to pursue a common law derivative claim against directors for failing to create a credible plan to divest of fossil fuel investments. This case remains subject to appeal.
The decision in ClientEarth v the directors of Shell plc reflects the difficulties of bringing derivative claims challenging the good faith decision-making of boards of directors. The UK statutory scheme is designed to make court intervention a rarity and the courts have not sought to expand their role over the years. As noted by the court, climate change risk is one of a number of risks to be factored into decision-making and strategising by any board. Despite this decision (which the court will consider again in an oral hearing) we would expect further litigation and shareholder activism to arise in this area.
