ClientEarth v. Shell’s Board of Directors

ClientEarth held shares in Shell Plc and was therefore a member of Shell. In that capacity it applied for permission to bring a derivative claim against Shell’s directors under section 260 of the Companies Act 2006. The claim concerned Shell’s climate change risk management strategy, as well as its response to the Milieudefensie v Royal Dutch Shell plc ruling. In respect of these, ClientEarth alleged the directors had breached their general duties to promote the success of Shell (section172) and to exercise reasonable care, skill and diligence (section 174), along with certain specific or ‘incidental’ duties formulated by ClientEarth (such as a duty to make judgements regarding climate risk that are based upon a reasonable consensus of scientific opinion). The various alleged breaches of these duties were grouped by the court under the following headings: failure to set an appropriate emissions target; failure of the strategy to manage climate risk to establish a reasonable basis for achieving the net zero target and align with the 1.5oC; and failure to comply with the Milieudefensie ruling. The court’s permission is required to continue a derivative claim of this nature. An application for permission cannot proceed if it appears to the court that it does not show a prima facie case for giving permission. On May 12, 2023, having reviewed the case papers, the High Court dismissed ClientEarth’s application on the basis no such prima facie case had been shown. ClientEarth exercised its right for that decision to be reconsidered at a hearing, following which the High Court re-affirmed its original decision, refusing permission and dismissing the claim. The court’s reasons are set out in its judgment of July 24, 2023. In summary: There were a number of fundamental reasons why the breaches alleged did not establish a prima facie case. Firstly, very little weight could be given to ClientEarth’s witness evidence, which did not amount to expert evidence. Secondly, that evidence did not support a prima facie case that there is a universally accepted methodology as to the means by which Shell might be able to achieve its reductions targets. This meant it was very difficult to treat what was said as providing a proper evidential basis for alleging no reasonable board of directors could properly conclude that the pathway to achievement is the one they adopted. Thirdly, ClientEarth accepted the directors do have policies and targets to achieve net zero. Its case ignored the fact that the management of a business of the size and complexity of that of Shell will require the directors to take into account a range of competing considerations, the proper balancing of which is classic management decision with which the court is ill-equipped to interfere. (Judgment paragraphs 46 to 48.) As to the Milieudefensie ruling, the Dutch court apparently accepted that Shell is not currently acting in an unlawful manner and recognised that it is a matter for Shell as to how it exercises its discretion to comply with reduction obligations imposed by Dutch law. There was no prima facie case that the directors had breached their duties in respect of the Dutch order. (Paragraphs 49 to 54.) As to the relief sought, ClientEarth had failed to make out a prima facie case that the court should grant this. A mandatory injunction was sought that Shell (a) adopt and implement a strategy to manage climate risk in compliance with its statutory duties and (b) comply immediately with the Dutch Order. This was too imprecise to be suitable for enforcement. A declaration was also sought - that the directors had breached their duties in the manner described. Whilst this did not suffer from imprecision, it was difficult to see what legitimate purpose it would fulfil. It was not the court’s function to express views as to the directors’ conduct which have no substantive effect and which fulfil no legally relevant purpose. The proper forum for generating those types of view as to the directors’ conduct was by vote of the members in general meeting. (Paragraphs 55 to 59.) It was appropriate also to have regard to certain discretionary factors in section 263 of the Act. These pointed towards there being no prima facie case for granting permission. (paragraphs 60 to 70.) In a costs judgment of August 31, 2023 the High Court confirmed its refusal of ClientEarth’s application for permission to appeal to the Court of Appeal. In November 2023 the Court of Appeal refused ClientEarth permission to appeal, bringing the litigation to an end.