On 12 May 2023, the High Court handed down its judgment in the case brought by ClientEarth, an environmental organisation, against the Directors of Shell Plc ("Shell").
ClientEarth sought a declaration of breach by the Directors of their duties to the company and a mandatory injunction requiring the Directors of Shell Plc (a) to adopt and implement a strategy compliant with certain climate-related goals and (b) to comply with an order from a Dutch Court to reduce emissions by 45% by 2030. The case relied on establishing the existence of six climate-related duties, incidental to the general statutory duties codified in Part 10, Chapter 2 of the Companies Act 2006, which Shell's Directors were said to have breached.
ClientEarth is a minority shareholder in Shell and brought the action by way of a derivative claim. Derivative claims under Section 260 Companies Act 2006 enable shareholders to bring proceedings against directors in respect of a cause of action vested in the company (for breach of duties owed by the directors to the company, for example). As an initial step, the court is required to determine whether the application discloses a prima facie case for the shareholders to proceed with a substantive application to pursue the derivative claim. The present application fell at this first hurdle; the judge held that the application did not establish a prima facie case for the alleged breach of duties by the directors.
The existence of climate-related Duties incidental to the statutory duties owed by Directors under the Companies Act 2006
Under Section 172 Companies Act 2006, directors owe a duty to the company to act in the way the director concerned considers in good faith would be most likely to promote the success of the company for the benefit of its members as a whole. The directors are required to have regard to a non-exhaustive list of matters.1 Under Section 174 Companies Act 2006, directors owe a duty to the company to exercise the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge skill and experience that may reasonably be expected of a person carrying out the functions they carry out, and the general skill and experience that director actually has.
ClientEarth pleaded the existence of six necessary incidents of the statutory duties "when considering climate risk for a company such as Shell": i) a duty to make judgments regarding climate risk that are based upon a reasonable consensus of scientific opinion; ii) a duty to accord appropriate weight to climate risk; iii) a duty to implement reasonable measures to mitigate the risks to the long-term financial profitability and resilience of Shell in the transition to a global energy system and economy aligned with the global temperature objective of 1.5°c under the Paris Agreement on Climate Change 2015; iv) a duty to adopt strategies which are reasonably likely to meet Shell’s targets to mitigate climate risk; v) a duty to ensure that the strategies adopted to manage climate risk are reasonably in the control of both existing and future directors; and (vi) a duty to ensure that Shell takes reasonable steps to comply with applicable legal obligations.
Mr Justice Trower considered that ClientEarth was seeking to impose specific management obligations on the Directors, "notwithstanding the well-established principle that it is for directors themselves to determine (acting in good faith) how best to promote the success of a company for the benefit of its members as a whole". It is not the court's place to impose management obligations: "[t]he weighing of all these considerations [as set out in s.172] is essentially a commercial decision, which the court is ill-equipped to take, except in a clear case". The Directors are required to display the care, skill and diligence according to the subjective and objective standards in Section 174 Companies Act 2006 but "[t]he law does not superimpose on that duty more specific obligations as to what is and is not reasonable in every circumstance".
As regards the Dutch Order, ClientEarth pleaded that a director who is aware of a court order is under a duty to take reasonable steps to ensure that the order is obeyed. The judge agreed with Shell that there is no recognised English law duty owed by directors to a company in which they hold office to ensure that they comply with the orders of a foreign court. A director is under a legal obligation to take reasonable steps to ensure that an order made by an English court is obeyed, but this is not a duty that the directors owe to the company, separate and distinct from the general duties codified in the Companies Act 2006.
Specific breaches alleged by ClientEarth
ClientEarth's claim for breach faced a high bar. The judge considered that ClientEarth was required to show a prima facie case that there is no basis on which the Directors could reasonably have come to the conclusion that the actions they have taken have been in the interests of Shell.
ClientEarth's central allegation was that by adopting and pursuing an inadequate energy transition strategy, the Directors are mismanaging the material and foreseeable risk that climate change presents to Shell. The specific breaches alleged by ClientEarth fall into three categories: (i) firstly, a failure to set an appropriate emissions target to be met before 2050 and a measurable and realistic pathway to meeting the net zero target consistent with the Paris Agreement on Climate Change 2015; (ii) secondly, a failure to establish a reasonable basis for achieving the net zero target;2 and, (iii) failure to comply with the Dutch Order.
The judge held that ClientEarth's allegations in relation to breaches by the directors do not establish a prima facie case.
The evidence did not support a prima facie case that there is a universally accepted methodology to achieve emission reduction targets. As a result, it was difficult to conclude that no reasonable board of Directors could properly conclude that the pathway to achievement is the one they have adopted. While the judge acknowledged the fundamental disagreements as to the right way to achieve net zero targets, he also noted that "the law respects the autonomy of the decision making of the Directors on commercial issues and their judgments as to how best to achieve results which are in the best interests of the members as a whole". ClientEarth had not established a prima facie case that the way in which Shell's business is being managed by the Directors could not properly be regarded by them as in the best interests of Shell's members as a whole.
It was accepted that the Directors did in fact have policies and targets to achieve net zero by 2050; ClientEarth's argument was that the policies and targets were manifestly unreasonable. However, the very fact that such policies and targets exist was inconsistent with any suggestion that the Directors had not considered what is in the best interests of Shell and its members as a whole when addressing climate risk. According to the judge, ClientEarth's allegations "completely ignore 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". ClientEarth's evidence did not engage with how the Directors' approach to climate risk was said to have gone so wrong, in the context of the many other risks to which the business will be exposed.
As regards the Dutch Order, although it is "in some respects results-based", the Dutch Court had accepted that Shell is not currently acting in an unlawful manner. Shell has discretion as to how to comply with its reduction obligation. This is consistent with the statutory duty of the Directors in the UK to do that which they consider in good faith would be most likely to promote the success of Shell for the benefit of the its members as a whole.
The judge also considered that the court would be most unlikely to make a mandatory injunction in the terms sought because it was too imprecise for suitable enforcement. The judge envisaged that disputes over compliance with the order would have a series adverse impact on Shell's success, the very thing that ClientEarth asserted the proceedings were designed to avoid. Although this reasoning did not apply to a declaration, "[i]t is 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 that type of view is the company's general meeting.
There are further discretionary factors that the court is required to take into account when considering an application for permission to bring a derivate action. Amongst these, the court is required to consider whether the member is acting in good faith in seeking to continue the claim (Section 263(3)(a) Companies Act 2006). The judge considered that there was substance in Shell's submission that ClientEarth's motivation was "driven by something quite different from a balanced consideration as to how best to enforce the multifarious factors which the Directors are bound to take into account when assessing what is in the best interests of Shell". ClientEarth had not adduced sufficient evidence to counter this inference.
Under Section 263(4) of the Companies Act 2006, "[i]n considering whether to give permission (or leave) the court shall have particular regard to any evidence before it as to the views of members of the company who have no personal interest, direct or indirect, in the matter". The Court referred to the Shell's AGM on 18 May 2021 at which support for its Energy Transition Strategy ("ETS") received 88.4% of the votes cast by members. At the AGM held on 24 May 2022, support fell to 80% when a progress report on the ETS was under consideration. ClientEarth, on the other hand, had received support for its claim from members holding 12.2 million shares amounting to approximately 0.17% of Shell's shares, with letters from another 12.5 million shares who have stated that their position is aligned with the arguments made by ClientEarth. The judge considered that the level of member support for the ETS would count strongly against the grant of permission to continue the claim and there had not been a demonstration of member support for action of the type contemplated by the application.
The judge found that application and evidence did not disclose a prima facie case for giving permission to continue the claim and so the court was required to dismiss the application. The court has since granted ClientEarth an oral hearing to reconsider the decision and that hearing is pending. ClientEarth's claim is a notable addition to recent ESG cases.
1Specifically, "(a) the likely consequences of any decision in the long term, (b) the interests of the company's employees, (c) the need to foster the company's business relationships with suppliers, customers and others, (d) the impact of the company's operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company."
2ClientEarth made specific criticisms of the directors: "In particular ClientEarth criticises (a) the Directors’ proposals to make significant new investments in fossil fuel projects, (b) their reliance on carbon capture and storage and nature based solutions which will not mitigate the economic risks to Shell’s underlying business model, (c) the proposed capital expenditure on renewable energy expenditure which is said to be opaque and insufficient and (d) the absence of measures sufficient to respond rapidly to changes to the legal, regulatory and financial conditions so as to ensure that their strategy is sufficiently robust."