Background

In February, ClientEarth filed a shareholder derivative action, on behalf of Shell, alleging that Shell’s board of directors (“the Directors”) breached their duties under the Companies Act (i.e. duties to promote the success of the company and exercise reasonable skill and diligence.)

ClientEarth sought an injunction requiring the Directors to implement a strategy to manage climate risk, and a declaration that the Directors are in breach of their duties.

Before a derivative action can proceed, the shareholders bringing it must obtain the court’s permission by demonstrating both a prima facie case for permission, and a prima facie case against the directors. This is because derivative claims are an exception to company law; usually it is the company and not its shareholders that has the right to pursue claims against its directors. In line with CPR 19.15 (which deals with derivative claims), Mr Justice Trower made a decision on whether a prima facie case had been established based on evidence and submissions by ClientEarth and supplemental submissions by Shell.

Was there a prima facie case for permission?

In short, no. Mr Justice Trower definitively stated that “on the totality of ClientEarth’s own evidence, the court can be satisfied that a person acting in accordance [with duties under the Companies Act] would not seek to continue the [derivative shareholder] claim.”

Was there a prima face case against the Directors?

ClientEarth submitted that the Directors had breached two of the general statutory duties under the Companies Act. Section 172 imposes a duty to act to promote the success of the company (a subjective test), and section 174 requires the exercise of care, skill and diligence at both an objective and a subjective level. In addition, it was submitted that when considering climate risk for a company such as Shell, the Directors owed six necessary specific duties (“the incidental duties”). It was also alleged that the Directors had failed to comply with the order of the Hague District Court following the decision in Milieudefensie (“the Dutch Order”).

Handing down judgment, Mr Justice Trower agreed with Shell’s submissions that the incidental duties were misconceived (para 19). In particular, he pointed out that:

• The incidental duties were formulated with the aim of imposing specific obligations on the Directors “which cut across their general duty to have regard to the many competing considerations as to how best to promote the success of Shell for the benefit of its members as a whole” (para 25).
• It is a basic principle of company law that it is for the Directors themselves to determine the weight to be attached to the non-exhaustive list of factors referred to in section 172 to which each director must have regard in the performance of their duty to promote the success of the company (para 19).

• In complying with their duty to Shell under section 174, the law does not impose on the Directors more specific obligations as to what is and is not reasonable in every circumstance. As Shell submitted, “the question is whether the decision falls outside the range of decisions reasonably available to the Directors at the time” (para 20).

Regarding any duty in respect of the Dutch Order, Mr Justice Trower held that the Directors are governed by English law, which does not require them to take reasonable steps to ensure the order is obeyed. The relevant question was “whether their response to the Dutch Order rendered them in breach of an English law duty” (para 24).

Considering the above, in order for the application to succeed, ClientEarth was required to show that it had a prima facie case that the Directors’ current approach falls outside the range of reasonable responses to climate change risk, thus causing harm to Shell’s members. This could be summarised as a “prima facie case that there is no basis on which the Directors could reasonably have come to the conclusion that the actions they have taken have been in the interests of Shell” (para 26).

There was insufficient evidence to support this. Shell acknowledged that it faces material and foreseeable risks from climate change. However, this does not demonstrate a prima facie case for the grant of permission: a demonstrable “prima facie case of actionable breach of duty by the Directors in their management of those risks” was necessary (para 34).

Furthermore, ClientEarth could not demonstrate that the Directors were managing Shell’s risks in an unreasonable manner, nor provide a prima facie case that there is a universally accepted methodology to achieve the reductions identified in the Energy Transition Strategy (“ETS”). The existence of disagreements over how Shell could achieve targets in the ETS should not diminish the autonomy of the Directors to make decisions and judgments on “how best to achieve results which are in the best interests of their members as a whole” (para 47).

It was inconsistent to suggest that the Directors had not considered how to deal with climate risk for the benefit of members, while also acknowledging that there are in place at Shell policies and targets to achieve Net-Zero.

ClientEarth’s evidence offered no engagement on how the Directors’ alleged wrongful actions constituted an approach that no reasonable director could have adopted. This was a fundamental defect in the application as the Directors are required 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” (para 48).

Relief sought

The mandatory injunction sought by ClientEarth to implement a climate risk strategy was found to be “too imprecise to be suitable for enforcement” (para 57). The disruption caused by likely disputes over compliance with the injunction posed the possibility of a serious adverse effect on the success of Shell, thus affecting shareholders. This ran contrary to the argument that ClientEarth was advancing.

As to the declaration sought that the Directors had breached their obligations, it was found that served no legitimate purpose. The court’s function was not to express views on the Directors’ conduct. Statements of this nature should be put to a vote in during the annual general meeting, which was a power that ClientEarth held as a shareholder (para 58).

Good faith

The use of the shareholder derivative process compelled consideration of whether ClientEarth was acting in good faith by bringing the action. It would not be acting in good faith if its dominant purpose was other than to benefit the company.