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In our insight “Personal Liability of Directors for Climate Strategy: Landmark Case against Energy Company Board,” we analyzed the claim filed in the English High Court by non-profit organization ClientEarth against the directors of Shell. The claim was one of the first known attempts to bring a derivative action—an action brought by a shareholder of a company in the shareholder’s own name, but on behalf of the company—seeking to hold directors personally liable for alleged harm to the company arising from purported mismanagement of climate risk.
On May 12, 2023, the application by ClientEarth for permission to bring the claim on behalf of Shell was dismissed. ClientEarth is challenging that decision.
To recall, the applicant before the High Court was ClientEarth, which has a token shareholding (27 shares) in Shell. ClientEarth was supported in bringing the claim by company members collectively holding 12.2 million shares (an ownership interest of approximately 0.17%).
The claim was brought against Shell Plc, along with the eleven members of Shell’s board in their personal capacity.
Further details of the claim have emerged with the publication of the High Court’s judgment.
The claim was brought under Part 11 of the U.K. Companies Act 2006 (the “Act”), which permits derivative claims seeking relief on behalf of a company in relation to a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company (Section 260(3)).
Breaches were alleged of the following provisions of the Act:
It was asserted that the Board had breached these duties in three respects:
ClientEarth sought a mandatory injunction requiring Shell to:
Additionally, ClientEarth sought a declaration that the directors had breached their statutory duties in the manner described.
Under Part 11 of the Act, a member of a company bringing a derivative claim must apply to the court for permission to continue it (Section 261(1)). If it appears to the court that the application and supporting evidence do not disclose a prima facie case for permission, the court must dismiss the application (Section 261(2)).
Permission must, moreover, be refused if the court is satisfied that:
The Act further lists several discretionary factors that the court must consider in deciding whether to grant the application, including:
The court must additionally have regard to any evidence before it as to the views of members of the company who have no personal interest in the matter (Section 263(4)).
In accordance with Part 19 of the Civil Procedure Rules, the company is not made a respondent to the permission application (CPR 19.15(3)). However, the company may volunteer a written submission (Practice Direction 19A, para. 2). In the present case, Shell presented a “lengthy” written submission to which the Court had regard in reaching its decision.
In his May 12, 2023, judgment, Trower J explained that the reason for requiring permission to continue a derivative claim is that such a claim is an exception to the fundamental principle that it is a matter for the company, acting through its constitutional organs, to determine whether or not to pursue a cause of action available to the company. As such, permission will be granted only in “limited and restricted circumstances.”
The Court concluded that notwithstanding the “voluminous” evidence submitted in support of ClientEarth’s application, ClientEarth had failed to present a prima facie case. Pursuant to Section 261(2) of the Act, this was fatal to the application for permission to continue the claim.
Specifically, the Court held that:
Next, the Court reasoned that in deciding whether ClientEarth had established a prima facie case, it was necessary to consider not only the breaches alleged, but also the relief requested. In this regard, the Court found that:
The Court therefore concluded that ClientEarth had not made out a prima facie case either on the basis that the directors were in breach of their duties, or on the basis that the Court should grant the requested relief. It followed that the Court was obliged to dismiss the application pursuant to Section 261(2) of the Act.
The Court was moreover satisfied that, in circumstances where there was no prima facie case on the merits, a person acting in accordance with the duty to promote the success of the company would not seek to continue the claim. This further mandated the rejection of the application under Section 263(2)(a) of the Act.
While not technically necessary, the Court decided that it was nonetheless appropriate to have regard to the other discretionary factors referred to in the Act. These reinforced the Court’s decision to reject the application, as follows:
In pleading its claim, ClientEarth argued that the directors’ statutory general duties incorporated several “incidental” climate-related duties, including:
The Court rejected these arguments, which revealed “an underlying misapprehension of what Shell would have to prove (and what ClientEarth therefore seeks to prove on its behalf) if the claim were to proceed.”
In particular, the Court found that the proposed duties sought to impose specific obligations on the directors concerning the management of the company, “notwithstanding 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.” This principle was long established under the common law and in the Court’s view remained unchanged by codification of the duty in Section 172 of the Act.
Further, the Court refused to superimpose on the general duty to exercise reasonable care, skill and diligence under Section 174 of the Act any “more specific obligations as to what is and is not reasonable in every circumstance.” Rather, the question was whether the directors’ approach fell outside the range of approaches reasonably available to them at the time.
Thus, the Court concluded that while the impact of Shell’s operations on the community and the environment was a matter to which the directors were required to have regard under Section 172(1)(d) of the Act, the directors’ response to climate risk was “part of the decision-making process by which [they] manage Shell’s business.” As such, it was subject to the well-established principle that:
“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.”
ClientEarth has exercised its right in accordance with CPR 19.15(10) to ask for an oral hearing to reconsider the decision to dismiss the permission application. Directions for that hearing (which remains a hearing before the High Court and is not an appeal) will be given in due course.
Meanwhile, a hearing is fixed for June 13, 2023, on an appeal from another High Court decision refusing to allow a claim alleging climate-related breaches of directors’ duties. In that case (Ewan McGaughey v. Universities Superannuation Scheme Limited), the claimants argued that the directors’ conduct in investing in fossil fuels without an adequate plan for divestment was prejudicial to the company’s success. In May 2022, the High Court dismissed the claim on the grounds, inter alia, that the claimants had not established a prima facie case on the merits. In October 2022, Lewison LJ in the Court of Appeal granted the claimants permission to appeal, noting that “the grounds of appeal raise important issues (some of which are novel) and have sufficient merit to warrant consideration by the full court.”
As the company in Ewan McGaughey v. Universities Superannuation Scheme Limited (a corporate trustee of a pension scheme) is a company limited by guarantee with no shareholders, the claim in that case is not a derivative action for the purposes of the Act. Rather, it is governed by common law rules—which are, however, largely analogous to the statutory rules, including as to the need to obtain permission to continue the claim. Accordingly, the judgment can be expected to shed some light on whether the Court of Appeal shares the same misgivings as Trower J with regard to holding directors personally to account for alleged climate-related breaches of duty.
Although the final outcome of the process is not yet known, the May 2023 decision of the High Court in ClientEarth v. Shell is likely to disappoint shareholder activists while being welcomed by company boards everywhere.
The decision shows that the English courts, at least, will be very reluctant to allow activist shareholders—particularly those with de minimis shareholdings—to use the derivative claim procedure to challenge management decisions on climate risk that are made in good faith. The fundamental principle underlying the High Court’s reasoning is that the courts will not interfere with good-faith business decisions (especially those involving complex matters of commercial judgment), and that the appropriate forum for shareholders to challenge directors’ strategy and decision making on climate matters is in general meeting. This principle is one of general application, and will make it difficult to bring claims similar to the one attempted by ClientEarth.
The decision moreover confirms that the directors’ general duties under the Act do not also include standalone duties relating specifically to climate risk. Rather, company board approaches to managing such risk fall to be examined within the general framework of directors’ duties, including the duty to consider a company’s environmental impact under Section 172(1)(d) of the Act.
Further, the decision makes clear that, to establish a breach of directors’ statutory duties in this context, it must be shown that the directors’ approach to managing climate risk has caused harm to the company, contrary either to:
Additionally, the decision indicates that even if a derivative claim is permitted to proceed, the English courts will refuse to order mandatory injunctive relief where constant judicial supervision will be required to enforce compliance with the relevant orders. Given the different pathways to NZ, it may well prove difficult to formulate orders with sufficient precision to overcome this hurdle.
Less than two weeks after the High Court’s decision was handed down, Shell held its 2023 AGM, at which a majority of the company’s members again rejected a climate resolution organized by a shareholder activist group. Regardless of the ultimate fate of ClientEarth’s application before the High Court, it is clear that shareholder activists will continue to use all means at their disposal to agitate on climate matters. Whether the derivative claim procedure is a viable tool for activists to challenge companies’ action on climate change, however, is now seriously open to question.
Shearman & Sterling’s Environmental, Social & Governance (ESG) team provides advice and advocacy to companies across multiple impact areas. The firm’s Mergers & Acquisitions practice also regularly advises companies, boards, senior management and shareholders on a broad range of governance matters, including directors’ duties, shareholder proposals, and shareholder and stakeholder engagement. We would be pleased to answer any questions or to provide further analysis.
This note provides a general overview of recent legal developments in the United Kingdom. The position is likely to be different in other jurisdictions.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch).
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 40.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 6.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 3.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 28.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 46.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 48.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 48.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 58.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 65.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 65.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 66.
 These included, in addition to the members holding 12.2 million shares who had backed the claim, members holding another 12.5 million shares who had written letters of support for ClientEarth. According to the Court, “[w]ith one exception, the letters which actually assert[ed] support for the claim, as opposed to expressing agreement with ClientEarth’s aspiration to procure a change of direction by Shell, [were] members of the Climate Action 100+ (CA100+) engagement initiative.” ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 69.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 69.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶¶ 16–17.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 17.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 19.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 20.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 20. See also id., ¶ 26 (the question was whether the directors’ approach “[fell] outside the range of reasonable responses to climate change risk.”).
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 25.
 ClientEarth v. Shell Plc & Ors  EWHC 1137 (Ch), ¶ 25, citing Lord Wilberforce in Howard Smith Ltd v. Ampol Ltd  AC 821 at 832E/F.
 ClientEarth Press Release, ClientEarth challenges Court’s permission decision on groundbreaking claim against Shell’s Board, May 19, 2022.
 Ewan McGaughey et al. v. Universities Superannuation Scheme Limited  EWHC 1233 (Ch).
 Ewan McGaughey et al. v. Universities Superannuation Scheme Limited  EWHC 1233 (Ch), ¶¶ 1, 20.
 The Guardian, Shell AGM disrupted by protests as investors reject new emissions targets, May 23, 2023.