Edward Davies KC and Jack Rivett of Erskine Chambers (who acted for Shell plc) consider the High Court's refusal of permission for ClientEarth to continue a derivative claim against the directors of Shell plc
In ClientEarth v Shell plc [2023] EWHC 1137 (Ch), the High Court refused permission for an environmental non-profit organisation to continue a derivative claim under Part 11 Companies Act 2006 brought against the directors of Shell plc (Directors) for alleged breaches of their statutory duties owed to Shell in relation to their management of the company's climate change risk. The court held that ClientEarth had not made out a prima facie case that the Directors had acted in breach of their duties or for the relief sought. The court went on to find that ClientEarth's permission application was not made in good faith, because it was made for the collateral purposes of advancing ClientEarth’s policy agenda on climate change.
Q&A references are to FromCounsel's Members' rights of action content and statutory references are to the Companies Act 2006.
Legal background – statutory derivative claims
The statutory derivative claim regime in Part 11 CA 2006 enables members in certain circumstances to bring proceedings in respect of a cause of action vested in the company and seeking relief on behalf of the company. Under s 260, the cause of action may be against a director or another person (or both), but must arise from an act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.
A member bringing a statutory derivative claim must apply to the court for permission to pursue the claim. This is a two-stage procedure.
At the first stage, the court is required to determine whether the application discloses a prima facie case for giving permission to continue the derivative claim. If it appears to the court that this test is not met, then the court must dismiss the application pursuant to s 261(2) (see Q&A here). This question is initially considered by the court on the papers (ie without a hearing), although if permission is refused on the papers the claimant may ask for a hearing to reconsider the decision to dismiss the permission application (see CPR 19.15(10)).
If the court is satisfied that the application does disclose a prima facie case for giving permission, the court may give directions for an inter partes permission hearing. At the permission hearing, the court will determine whether permission should be given for the derivative claim to continue.
The criteria by which the court determines whether or not to grant permission are set out in s 263. They comprise:
ClientEarth's derivative claim
The claim centred on an allegation that the Directors had mismanaged material and foreseeable risks to Shell resulting from climate change so as to give rise to an actionable breach of duty on Shell's behalf.
ClientEarth contended that the Directors' approach to managing climate change risk, as explained in Shell’s energy transition strategy (Strategy) and other corporate reports published in 2021 and 2022, was flawed and fell outside the range of reasonable responses to the risks identified by Shell. In particular, ClientEarth alleged the Directors had failed to ensure that Shell had a measurable and realistic pathway to achieving net zero by 2050 and that the Strategy was not aligned with the global temperature objective set out in the Paris Agreement on Climate Change. It argued that the inadequacies and deficiencies it had identified in the Strategy meant that the Directors were in breach of their s 172 duty and the duty under s 174 to exercise reasonable care, skill and diligence.
ClientEarth also contended that the Directors were in breach of a further six supplementary duties relating to climate risk that were alleged to be 'necessary incidents' to the general statutory duties for the directors of a company such as Shell. These additional duties addressed specific aspects of the risks associated with climate change, including an alleged duty to make judgments based on a reasonable consensus of scientific opinion and to give appropriate weight to climate risk.
In addition to a declaration that the Directors had breached their duties to Shell, ClientEarth sought a mandatory injunction requiring the Directors to adopt and implement a climate risk management strategy that complied with their statutory duties.
High Court decision
In accordance with the procedure summarised above, Trower J considered ClientEarth's application on the papers. He dismissed the application on the grounds that the application and the evidence filed in support of it by ClientEarth did not disclose a prima facie case for giving permission.
In particular, the judge held that ClientEarth had failed to demonstrate a prima facie case that there was no basis on which the Directors could reasonably have concluded that their actions in relation to climate change risk were in Shell's interests. On ClientEarth’s own evidence, Trower J was satisfied that a person acting in accordance with s 172 would not seek to continue the claim, which meant that the court was required under s 263(2) to refuse ClientEarth permission to do so.
The judge held that ClientEarth had failed to demonstrate that there is a universally accepted methodology as to the means by which Shell could achieve the emissions reductions described in its Strategy. He concluded that there was no evidence for the allegation that a reasonable board could not have decided that the pathway to net zero adopted by Shell was achievable. Noting the fundamental differences of opinion between ClientEarth and the Directors as to the right way to achieve Shell's net zero targets, Trower J observed that English law respected the Directors’ autonomy when making commercial decisions and their judgement as to the best way of achieving results in the best interests of Shell’s members as a whole. Nor did ClientEarth’s case address competing considerations that the Directors would have to consider when dealing with the risks to Shell resulting from climate change, "the proper balancing of which is a classic management decision with which the court is ill-equipped to interfere" (para 48).
The court also rejected ClientEarth's attempt to formulate additional duties and further obligations that it argued were necessary when considering Shell’s specific climate risk. Trower J agreed with Shell that these duties and obligations were not only inherently vague, but also were incompatible with the subjective nature of the s 172 duty and irreconcilable with the true nature of the duty to exercise reasonable care, skill and diligence under s 174. In his view, the pleaded duties represented an attempt to impose "specific obligations on the Directors as to how the management of Shell’s business and affairs should be conducted, notwithstanding the well-established principle that it is for the 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" (para 19).
Trower J rejected the nature of the relief sought by ClientEarth, holding that the terms of the mandatory injunction were too imprecise for enforcement by the court, which would be required to adjudicate any disputes over whether or not Shell's business was being carried on in accordance with its terms. The judge also considered that a declaration that the Directors were in breach of duty would not fulfil a legitimate purpose, and the appropriate forum for ClientEarth to garner support for its views was Shell’s AGM.
Although not necessary given his finding that ClientEarth had not established a prima facie case, Trower J went on to consider the discretionary grounds set out in s 263(3). Highlighting the incongruity between ClientEarth's very small shareholding and its proposal seeking relief on Shell’s behalf, he concluded that the organisation’s real interest was not in promoting Shell’s success for the benefit of its members as a whole, but rather in imposing its views on the right way to deal with climate change risk. The judge endorsed Shell’s assertion that the overall support of its members for the Directors’ strategic approach to climate change risk (with 80% voting in favour of the Strategy at the 2022 AGM) was a factor the court must take into account when considering a permission application.
ClientEarth has exercised its right for an oral hearing to reconsider the decision to dismiss the permission application.
Comment
This decision will be of interest not only to those considering the extent to which directors must take into account the risks associated with climate change in their decision-making, but also to those considering the scope and extent of directors' duties more generally.
It has long been recognised that the management of a company's business is a matter for the discretion of the directors, acting in good faith. In Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (Privy Council), Lord Wilberforce observed that "[t]here 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's case cut across this basic and longstanding principle of company law. Thus, it alleged that, as a necessary incident of their duties under ss 172 and 174, the Directors were obliged (for example) "to make judgments regarding climate risk that were based upon a reasonable consensus of scientific opinion" and "to implement reasonable measures to mitigate the risks to the long-term financial profitability and resilience of the company in the transition to a global energy system and economy aligned with" the global temperature objective set out in the Paris Agreement. In doing so, ClientEarth sought to prescribe a broad range of actions which the Directors were allegedly required to take in response to the risks posed by climate change.
In dismissing ClientEarth's application, the judge observed that it is for the Directors to determine the weight to be given to the various factors to which they are required to have regard in the discharge of their general duty to promote the success of the company. The impact of Shell’s operations on the community and the environment (s 172(1)(d)) is just one of a number of matters which the Directors are required to weigh in the balance.
The board of Shell had unquestionably taken into account climate-related issues in its decision-making (and had published strategies for dealing with the same and submitted those strategies to shareholders for an advisory vote). Accordingly, ClientEarth's complaint was not (and could not be) that the Directors had failed to take climate-related risks into account, but that they had adopted the wrong approach in responding to such risks. ClientEarth’s case thus amounted to an impermissible attempt to interfere with decisions taken by the Directors in good faith. That was something which, in keeping with orthodox principles of company law, the court was rightly not willing to entertain.