Suing directors for environmental mismanagement

This post has been contributed by Professor Christopher Riley, Module Convenor for Company law.

Can a company’s stakeholders sue its directors for failing to give sufficient weight to their interests – for example, by failing to avoid environmental damage the company is causing?

A picture containing smoke, outdoor, sky, nature

We touched on this in an earlier blog, noting how company law generally struggles with protecting stakeholder, including environmental, interests. When it comes to suing directors for breach of duty, two difficulties arise:

  • As our earlier blog emphasised, although the duty that seems most relevant here – in s.172 Companies Act 2006 – does tell directors to consider the company’s environmental impacts, nevertheless directors must still put shareholders first.
  • Stakeholders have no standing to enforce any breach of directors’ duties. Only shareholders, for example, can bring a derivative claim.

Interestingly, however, an impending derivative claim against the directors of energy giant Royal Dutch Shell plc is attempting to side-step both these difficulties. The claimant is Client Earth, an environmental NGO, and more information about its action is available here.

Regarding the first difficulty, Client Earth will argue that Royal Dutch Shell’s environmental policies are harming not only the environment, but shareholders’ financial interests too. Given how directors’ legal duties prioritise shareholder interests, this is how stakeholder-focused claims need to be ‘repackaged’: as also harmful to the company’s own profitability, and therefore to shareholders’ wealth.

The claim will allege breaches of both s.172 and also s.174, the duty of ‘care and skill’. This also makes good tactical sense. The duty in s.172 is ‘subjective’. Even if the directors’ environmental decisions are incompetent, and harm the company’s own commercial performance, the directors will still not be liable under s.172, provided they believe their decisions will be good for shareholders. But such beliefs will not avoid liability under s.174.

Regarding the second difficulty, Client Earth has effectively given itself standing to bring a derivative claim simply by acquiring some shares in Royal Dutch Shell plc. For listed companies, it is easy to do this. Were Royal Dutch Shell not listed, side-stepping the limitation on who can enforce a breach would remain much more difficult.

But will the claim be allowed to continue?

However, whilst Client Earth has given itself standing to sue, it remains to be seen how the court will view this strategy when Client Earth seeks (as all derivative claimants must do) permission to continue the claim. In deciding whether to give permission, the following may all be relevant:

  • how a ‘hypothetical director’, trying to promote the company’s success, would feel about continuing the claim
  • the claimant’s own ‘good faith’ (or lack of it)
  • the views of other disinterested shareholders
  • the likelihood that shareholders would ratify the alleged breaches of duty
A group of people holding a sign.

If the judge feels that the claimant is really pursuing the case in order to protect the environment, and merely dressing this up as a concern for the company’s own commercial success, then securing permission to continue might prove challenging. And this will be yet more likely if the court believes the majority of Shell’s shareholders do not support this environmental challenge.

One comment

  1. It appears that there is need to reform the Companies Act 2006 to include a section that creates a duty for company directors to operate in an environmentally friendly manner and standing, in case of an action for breach of said duty, should not be limited to shareholders. I realise that this may clog the court system with unsubstantiated claims but the question is, in this era of the threat of climate change, which of the two is a greater threat to our society?, clogged court systems or seemingly unchecked environmental degradation by corporations.

Leave a Reply to Joel Zulu Cancel reply