This post has been contributed by Professor Christopher Riley, Module Convenor for Company law.
The High Court has rejected an attempt by ClientEarth, the environmental law pressure group, to bring a derivative claim against the directors of Shell Plc, the oil-giant. On 24th July 2023, Trower J refused ClientEarth permission to continue this claim (see ClientEarth v Shell Plc [2023] EWHC 1897 (Ch)).
ClientEarth’s case against Shell’s directors is that they have failed to put in place an appropriate corporate strategy for Shell to respond to the challenges of climate change. This failure, ClientEarth argued, means that the directors are in breach of their duties under the Companies Act 2006, and specifically under s172 (the duty to promote the success of the company for the benefit of its members) and s174 (the duty to act with reasonable care, skill and diligence).
The case brought by ClientEarth is interesting, and distinctive, for two reasons. First, the duties which ClientEarth alleges Shell’s directors have breached are usually understood as requiring directors to prioritise the interests of shareholders, not of other ‘stakeholders’ or environmental concerns. Nevertheless, ClientEarth has sought to frame the directors’ alleged environmental failures as likely to harm the company’s own prosperity, and thereby the financial interests of its shareholders. Second, the action has been brought as a derivative claim. Only members (shareholders) of the company have standing to bring such claims, but ClientEarth has sought to circumvent this restriction by the simple expedient of buying a handful of shares in Shell.
As noted, the High Court has not ruled on whether Shell’s directors have breached their duties, but only on whether ClientEarth should be given permission to continue its claim. However, in order to deal with the permission issue, the High Court must decide if ‘a hypothetical director’ would stop the claim. And one relevant factor in assessing that is whether the case against the directors seems to be a strong one. The court acknowledged the judicial reluctance to second guess directors’ business decisions, making it unlikely that a breach of duty will be found. The duty in s172, for example, is one of ‘good faith’; breach will be established only if directors did not themselves believe their environmental strategy will promote the success of the company for the benefit of its members. Similarly, in relation to the more objective duty of care and skill found in s174, the court also acknowledged the judicial reluctance to condemn directors’ business judgements. The right way for any company to respond to climate change so as to ensure its future prosperity would be a complex thing, involving balancing a range of different considerations. Directors would be better placed to do this than judges. Only if the directors’ responses were beyond the limits of what any reasonable director might do would a breach be likely to be found.
The court’s scepticism that the directors could be shown to have breached their duties meant that a hypothetical director would not continue the claim, requiring the refusal of permission. However, for good measure, the court noted two other ‘discretionary’ matters that also argued against the giving of permission. First, the court decided that the claimant had not demonstrated it was acting in good faith in pursuing the claim, in the sense that ClientEarth’s motive was to advance its own activist agenda, not to ensure that Shell was well run for the benefit of its shareholders. Second, ClientEarth’s action was supported by only a tiny fraction of Shell’s shareholders.
ClientEarth has indicated that it intends to try to appeal against the refusal of permission, so this blog may not be our last word on the case. But for the moment, the High Court’s judgement represents a decisive blow against activist stakeholders trying to use directors’ duties, and derivative claims, to challenge directors’ management of a company.