Directors’ duties in the spotlight after attempt by shareholders to force Shell Directors to comply with climate change obligations dismissed by English High Court

The recent attempt by ClientEarth, as shareholder of energy giant Shell Plc, to force Shell’s directors to comply with the Paris Agreement has been given short shrift by the English High Court (ClientEarth v Shell plc & Ors [2023] EWHC 1137 (Ch)). Although the claim is not dead in the water, the judgment provides an interesting look at director’s duties under the Companies Act 2006 (the “Act”) and what shareholders need to prove to the court in this context. 

What is Client Earth and what does it intend to achieve by bringing the claim?

ClientEarth is a UK registered charity formed to effect change on climate action using the law. This novel approach has resulted in it holding a small number of shares (currently 27) in Shell Plc. This has enabled it to try to seek permission from the court to bring a derivative claim against Shell's directors (the "Directors") (the procedure for which is explained in more detail below). ClientEarth is seeking to obtain both a declaration that the Directors have breached their duties and a mandatory injunction requiring the Directors (a) to adopt and implement a strategy to manage climate risk in compliance with their statutory duties and (b) to comply immediately with an order made by the Hague District Court (the "Dutch Court") on 26 May 2021 in Milieudefensie v Royal Dutch Shell plc ECLI:NL:RBDHA:2021:5339 ("Milieudefensie ") when the Dutch Court held that Shell owed a duty of care to citizens to reduce its emissions and that Shell’s existing climate policy was not concrete enough and full of too many conditions. The Dutch Court ordered Shell to reduce its CO2 emissions by 2030 by 45%. Shell has appealed the decision and the appeal is on-going (“the Dutch Order”) .

What is a derivative claim?

English law provides a mechanism under s.260(1) of the Act to enable shareholders to apply to the High Court for permission to bring a claim against the directors of the company on behalf of the company. Any relief achieved will be on the company’s behalf. This is called a derivative claim. 

ClientEarth is only entitled to bring a derivative claim in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by one or more of the Directors of the company of which it is a member and it requires the court's permission to continue the claim. This is initially done by the judge considering written submissions from both parties and a decision is made on ‘the papers’, so without a hearing. 

A derivative claim is an exception to the general principle that it is a matter for a company, not any of its shareholders, to pursue a cause of action that may be available to it. In order to bring the claim ClientEarth must establish that the application and evidence show  a prima facie case for the grant of permission  to bring the claim as a derivative claim and if it cannot establish that evidential burden then the court must dismiss the application. If the court concludes that there is a prima facie case, then Shell and the Directors will be made Respondents to the permission application and directions for the permission hearing will then be given.

What are the statutory duties Shell’s Directors must comply with?

Client Earth sought to rely on two main statutory duties:  it alleges that the Directors had failed to comply with; the duty to promote the success of the Company ( s.172 of the Act ) and the duty to exercise reasonable care, skill and diligence ( s.174 of the Act).

ClientEarth also submitted that Shell had breached six further duties which were said to be “necessary incidents” of the statutory duties "when considering climate risk for a company such as Shell". These six necessary incidents are as follows:

1. a duty to make judgments regarding climate risk that are based upon a reasonable consensus of scientific opinion;
2. a duty to accord appropriate weight to climate risk;
3. 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");
4. a duty to adopt strategies which are reasonably likely to meet Shell's targets to mitigate climate risk;
5. a duty to ensure that the strategies adopted to manage climate risk are reasonably in the control of both existing and future directors; and
6. a duty to ensure that Shell takes reasonable steps to comply with applicable legal obligations

The Court’s response to the six necessary sub-duties

The court held it is well settled law that it is for directors themselves to determine how best to promote the success of a company for the benefit of its members as a whole. The six necessary sub-duties proposed by ClientEarth sought to impose specific obligations on the Directors as to how the management of Shell's business and affairs should be conducted. The Court agreed with Shell that it was for the directors to determine the weight given to the various factors that they must have account of when considering their duty to promote the success of the company and that the alleged imposition of specific duties was at odds with that principle. The weight given to these factors was not a matter for the Court.. Further, the Directors must exercise “reasonable care, skill and diligence” under s.174. The court held that the law does not superimpose on that duty more specific obligations as to what is and is not reasonable in every circumstance. 

With regard to the Dutch Order, the judge agreed with Shell’s submission that there is no recognised duty owed by directors to a company in which they hold office to ensure that they comply with the orders of a foreign court only whether their response to the Dutch Order resulted in breach of an English law duty by Shell. The court concluded that it did not. 

Did ClientEarth establish a prima facie case?

Overall, the court held that ClientEarth had not established a prima facie case and that permission  on the papers should be refused. Primarily the court said that ClientEarth's evidence did not establish a case that the Directors are managing Shell's business risks in a manner which is not open to a board of directors acting reasonably. Secondly, the evidence did not support a prima facie case that there is a universally accepted methodology as to the means by which Shell might be able to achieve the targeted reductions. This meant the evidence fell short of establishing a prima facie case that the way in which Shell's business is being managed by the Directors was not in the best interests of Shell's members as a whole. Thirdly, it was part of ClientEarth's own case that the Directors do have policies and targets to achieve Net Zero by 2050, but it is just that they are manifestly unreasonable. The court considered that this was a fundamental defect in ClientEarth's case because it ignored “the fact that the management of a business of the size and complexity 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”.

Additional Factors – ClientEarth’s agenda

Finally, for the sake of completeness the court  looked at the discretionary factors it must consider if the application for permission proceeds to a substantive hearing. This included whether ClientEarth was acting in good faith in bringing the application. Shell argued that ClientEarth was bringing the claim for its own ulterior motive to promote its own agenda and values, rather than those of the company. This appeared to be supported by its de minimis shareholding. The court had sympathy with this submission and that the claim was not being brought for the benefit of the members as a whole. It suggested that ClientEarth had not provided enough evidence to counter the ulterior motive claim. Shell, on the contrary, provided evidence to show that the majority of its members overwhelmingly supported its current strategy on climate change. 

For these reasons, together with those discussed above the court dismissed the application. 

Practical takeaways for Directors following this claim

The claim by ClientEarth is a creative use of the derivatives claim procedure and while initially unsuccessful it maybe the precursor of things to come as shareholder activists, NGO’s and others with specific interests use increasingly sophisticated methods to promote their agendas. These organisations will be studying this judgment and considering whether they can learn from this case for future claims.

As a result, directors increasingly have to be mindful not just of prevailing consumer attitudes but also the broad spectrum of members who make up their shareholders. Whilst the court was unimpressed by the size of ClientEarth’s shareholding and concluded that this was a factor in dismissing the claim, ClientEarth (and others) may seek to increase their holdings in the future or join forces with others who have similar concerns in order to increase their chances of success.
In its judgment the Court was unequivocal in stating that it will not get involved in company matters which are purely commercial, have been reasonably decided by the board of directors and which do not reflect the majority of members interests. It is therefore important for directors to collate and present good evidence to support these principles so that they are in a position to respond effectively to derivative claims. 

Although the High Court dismissed the claim,  ClientEarth had seven days from the judgment to ask for an oral hearing to reconsider the permission issue. ClientEarth have now been granted an oral hearing and  it will be interesting to see what approach the Court takes  at this hearing to the issues raised.