News focus: ClientEarth rebuff

Attempts to hold directors personally to account over their company’s impact on the environment appear dead in the water following a forthright High Court judgment this week. In ClientEarth v Shell plc and Ors, The Honourable Mr Justice Trower ruled that courts are ‘ill-equipped’ to take over corporate decision-making and that the place for disgruntled shareholders to exercise their rights is the company general meeting, not the courts.

He also rejected the assertion that the claimant, legal charity ClientEarth, had brought the action out of concern for shareholders rather than a ‘collateral motive’. ClientEarth said it would seek permission to appeal.

The action attracted widespread attention as the first derivative claim under the Companies Act 2006 to allege breaches of duty relating to a company’s environmental strategy. ClientEarth asserted that, as a holder of 27 shares in Shell plc, it is entitled to take action over alleged failings in the company’s climate change risk management policy. It also alleged breaches of duty by the directors over their response to a  2021 ruling by the Hague District Court for Shell to reduce CO2 emissions.

The judgment followed an oral hearing at which ClientEarth appealed an earlier refusal to approve the claim, as required by the 2006 act. In the action, ClientEarth had sought a mandatory injunction requiring named directors to implement a strategy to manage climate risk and to comply immediately with the Dutch court order. However, the judge said the court would not interfere with ‘bona fide business decision-making’. Meanwhile there was no established English law – beyond the general duties owed by directors – to enable the court to require compliance with the Dutch order.  

Overall, Trower said, ClientEarth had not made out a prima facie case that the directors are in breach of their duties. The claimant’s evidence ‘does not engage with the issue of how the directors are said to have gone so wrong in their balancing and weighing of the many factors which should go into their consideration of how to deal with climate risk... in that no reasonable director could properly have adopted the approach that they have.’

'This claim entirely ignores how directors of a business as large and complex as Shell must balance a range of competing considerations'

Shell spokesperson

A ‘fundamental defect’ in ClientEarth’s case is that it ignores the fact that the management of a business such as Shell requires directors to take into account a range of competing considerations, the judge said. These are management decisions ‘with which the court is ill-equipped to interfere’. 

On ClientEarth’s reason for bringing the claim, the judge said that the evidence ‘points strongly towards’ an ulterior motive. ‘In my view, ClientEarth has not adduced sufficient evidence to counter the inference of collateral motive.’

While ClientEarth received support for its claim from members holding 0.17% of Shell’s shares, the supportive letters appear to come from one source, the judge said. ‘With a single exception their letters of support all appear to be based on a detailed common template.’ Thus they fall ‘well short of demonstrating any member support for action of the type contemplated by this application’.

ClientEarth senior lawyer Paul Benson said: ‘The court has accepted that climate change poses significant and foreseeable risks to Shell. We firmly stand behind our claim that the board is currently neglecting to address those risks adequately, to the detriment of its shareholders.’

However, Silke Goldberg, partner and head of Herbert Smith Freehills’ environmental, social, and governance practice, said that the judgment shows that it will be difficult to challenge directors’ strategic decision-making via a derivative action. ‘This judgment confirms that the court is very reluctant to interfere in company management decisions, particularly where they require directors to balance competing considerations. The motive for challenging directors’ actions in court may also be relevant – it is clear that the court is unlikely to allow a derivative action to proceed if it considers that legal action has been brought for an ulterior purpose.’

A Shell spokesperson said: ‘This is the right outcome – the court has reaffirmed its decision that this claim is fundamentally flawed. We believe our directors have always complied with their duties and acted in the company’s best interest. This claim entirely ignores how directors of a business as large and complex as Shell must balance a range of competing considerations.

‘This claim is utterly misconceived and a clear misuse of the English courts.’

The judgment makes no mention of costs. Shell declined to comment on whether these would be pursued.