The (legal) press has, in recent years, reported on a number of claims related to climate change. ClientEarth’s derivative action against the Board of Directors of Shell (the “Board”) is one of the latest instances of strategic litigation in the climate arena.

Derivative actions are brought by the shareholders of a company, usually against its Board (although they can be brought against officers or other third parties). Put differently, shareholders ‘derive’ their ability to bring the action from the company’s right to do the same. They are accordingly required to apply to the court for permission to continue a claim on the company’s behalf. They must show that they have a prima facie case.

The action

ClientEarth sought permission from the Court to continue a claim against the Board in its capacity as a shareholder of Shell. It sought to show a prima facie case that there was no basis on which the Board could reasonably have come to the conclusion that the actions it had taken were in the interests of Shell. ClientEarth’s main allegation against the Board was that by adopting and pursuing an inadequate energy transition strategy, the Board was mismanaging the material and foreseeable risks that climate change presented to the company, in breach of its legal duties to the company. That strategy was as described in Shell’s corporate documentation published in April 2021, October 2021 and April 2022.

ClientEarth principally alleged breaches of duty by the Board under sections 172 and 174 of the Companies Act 2006 (on which see further below). ClientEarth also alleged breaches relating to the Board’s response to an order made by the Hague District Court on 26 May 2021 in Milieudefensie v Royal Dutch Shell plc (the “Dutch Order”). The Dutch Order required Shell to reduce its group-wide emissions of carbon dioxide by net 45% by the end of 2023, relative to 2019 levels. Although Shell is currently appealing the Dutch Order, ClientEarth’s allegations were based on the fact that it was not stayed pending appeal, so Shell was required to comply immediately.

The High Court (Mr Justice Trower) did not grant ClientEarth permission to continue the derivation action on the papers ([2023] EWHC 1137 (Ch)) nor at the subsequent oral reconsideration hearing ([2023] EWHC 1897 (Ch)). He did not consider that ClientEarth had established a prima facie case against the Board. Lord Justice Newey then refused ClientEarth permission to appeal that decision on the grounds that it would have no real prospect of success and there was no other compelling reason for the Court of Appeal to hear it.  

Of particular interest to practitioners is the question of what is required by sections 172 and 174 of the Companies Act 2006. Sections 172 and 174 of that Act provide, respectively and in summary, as follows:

• Section 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 Shell for the benefit of its members as a whole, having regard, amongst other matters, to an identified list of considerations, such as the likely consequences of any decision in the long term and the impact of the company’s operations on the community and environment.

• Section 174 requires a director to exercise the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions they carry out, and the general skill and experience that director actually has. This therefore includes both subjective and objective elements.

ClientEarth, in short, submitted that there were ‘incidental duties’ arising out of these general statutory duties when a company such as Shell is considering climate risk. These included, for example, a duty to adopt strategies which are reasonably likely to meet Shell’s targets to mitigate climate risk, a duty to accord appropriate weight to climate risk, and 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.

Mr Justice Trower held that the formulation of these incidental duties was inconsistent with the well-established principle that it was for the Board to determine (acting in good faith) how best to promote the success of a company for the benefit of its members as a whole. He considered that the formulation of the incidental duties “ma[de] plain” that they sought to impose specific duties on the Board as to how Shell should be run. The Court of Appeal considered that he was justified in taking that view.

Mr Justice Trower separately determined that (i) ClientEarth’s evidence fell short of establishing that the Board was mismanaging its risk arising out of climate change (and that it was not unreasonable to suggest that ClientEarth might have to adduce expert evidence at the prima facie stage given the very serious nature of the case that it was advancing), and (ii) there was no separate duty on directors under English law to take reasonable steps to ensure that the order of a foreign court was obeyed or complied with, and that any such duty under Dutch law would have been irrelevant to the claims made. In any event, the terms of the Dutch Order gave the Board “total freedom” to determine how to comply with its requirements.

Comment

ClientEarth’s derivative action against the Board has reached the end of the road. NGOs and others bringing derivative claims in their capacity as a shareholder will need to be wary of any indication that they are acting out of their own policy aims rather than in good faith. Mr Justice Trower’s view was that ClientEarth would not have continued with the claim if it had been seeking to promote the success of Shell for the benefit of its members as a whole, in circumstances where the Board’s climate strategy had received majority support from shareholders at AGMs.

If read alone, the ClientEarth judgments may also have a chilling effect on those considering such claims from a costs perspective. Mr Justice Trower made an adverse costs order against ClientEarth ([2023] EWHC 2182 (Ch)), which is unusual at this stage of a derivative action. However, he considered that ClientEarth’s application was “far from the norm for many reasons”. Given both the nature and extent of allegations by ClientEarth, together with the wider publicity the proceedings garnered, he considered that it had been proportionate for the Board to engage with the proceedings as it had done. He also refused ClientEarth permission to appeal that costs decision. Moreover, Mr Justice Trower’s observation that it may be appropriate to adduce expert evidence at this stage of proceedings has the potential to increase the complexity and costs of bringing such claims.

However, the decisions are very far from the end for strategic climate litigation, or indeed even derivative actions such as this. Lord Carnwath, a retired Supreme Court Justice, has since stated in a paper published by the LSE Granthan Research Institute on Climate Change and the Environment that these proceedings were a “missed opportunity” and that the first instance judge’s reasons for dismissing ClientEarth’s case were “unpersuasive”.^[1] He considered it unfortunate and surprising that he had been “drawn into lengthy discussion” about the incidental duties said to arise out of the Companies Act 2006, and that he had dismissed the non-expert evidence adduced by ClientEarth at this stage.

ClientEarth’s action is novel in the United Kingdom insofar as it seeks to hold the directors of a company personally liable for climate related issues. As climate concerns become increasingly glaring and urgent, we can expect to see more innovative claims. This is happening already. In a seminal decision handed down on 7 February 2024, New Zealand’s Supreme Court allowed a private law case brought by Iwi leader Michael Smith to proceed against seven of New Zealand’s biggest companies which, by virtue of their industry, emit significant greenhouse gases. Many around the globe will continue to observe those proceedings with interest.

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[1] https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2024/02/ClientEarth-v-Shell-what-future-for-derivative-claims.pdf

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