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Legal case

High Court refuses permission for ClientEarth to continue action against Shell's directors

ClientEarth has been refused permission in the High Court to continue a derivative claim against the directors of Shell Plc.

The environmental law NGO brought the claim for what it described as breaches of the directors’ legal duties under the Companies Act, by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement. The case highlights the difficulty of successfully bringing derivative claims but also provides a glimpse of how climate activists may seek to challenge large corporates’ climate and possibly wider ESG policies through the courts in future.

A derivative claim is a claim brought by one or more shareholders in a company, seeking to bring a claim in the company’s name where the shareholders consider certain wrongs have been committed by the company directors. Such claims are a rare exception to the principle in company law that the company itself, not its shareholders, must decide whether or not to pursue a cause of action and for this reason shareholders who bring such a claim must obtain permission from the court to continue it, by showing that they have a prima facie case.

ClientEarth holds a small number of shares in Shell. The NGO brought a claim against Shell’s directors alleging that the directors had breached their statutory duties to act in a way which would be most likely to promote the success of the company and to exercise due care skill and diligence. ClientEarth sought an injunction requiring the directors to adopt and implement a strategy to manage climate risk in compliance with their statutory duties and to comply immediately with a Dutch court order, which imposed certain obligations on Shell to meet emissions targets. In formulating their case, ClientEarth broke down Shell’s directors’ statutory duties into six more focussed duties which placed specific obligations on Shell’s directors to properly assess and manage climate risk.

On 12 May 2023 the Honourable Mr Justice Trower, sitting in the High Court in London, refused ClientEarth’s application for permission to continue the derivative claim. The court showed reluctance to interfere in Shell’s directors’ decision-making or to impose new duties in respect of climate change which were more onerous than the directors’ existing statutory duties. The court also took the view that ClientEarth had an ulterior motive, of seeking to impose its views as to the right strategy for dealing with climate change risk, rather than bringing its claim solely in the best interests of Shell.

The decision in this case highlights the high bar facing shareholders who wish to bring a derivative claim and may bring some comfort to directors that the court will not readily interfere with their management decisions. For climate activists such as ClientEarth, the court will have regard to their overall strategy and goals outside of the litigation and they may have difficulty convincing the court that their claim is brought in good faith for the benefit of the company, and not to further their own agenda.

Whilst the claim was ultimately unsuccessful, this was a novel attempt to challenge and directly change a company’s climate change policies and may indicate a route which other activist entities and individuals will attempt to go down in due course. In this case, ClientEarth had the support of a small group of Shell’s shareholders. It would be interesting to see how this decision might have been different if the claimant had a larger shareholder representation.

For assistance in preparing sturdy ESG legal policies or advice on commercial dispute resolution, contact our team of expert solicitors.