ClientEarth v Shell Plc: a landmark case on climate change risk management and directors’ duties

Introduction and background

ClientEarth is a UK non-profit environmental organisation and a minority shareholder of Shell Plc[1] ('Shell'). This case concerns ClientEarth's derivative action[2] against Shell's board of directors ('Directors') under section 260 of the UK Companies Act 2006 (the 'CA 2006'). According to section 260.3 of CA 2006, a shareholder is only entitled to bring a derivative claim 'in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company'. A shareholder is also required to apply to the court for permission to continue the claim (section 261.1 of CA 2006). The court will dismiss the application if it does not establish a prima facie case.

ClientEarth alleged that the Directors had breached their duties towards Shell under section 170 of CA 2006. More specifically, the duty to act in good faith to promote the success of the company for the benefit of its members as a whole (CA 2006, section 172) and the duty to exercise reasonable care, skill and diligence (CA 2006, section 174).

According to ClientEarth, the Directors had failed:

1. to adopt and implement a strategy to manage climate risk in compliance with their statutory duties; and
2. to immediately comply with an order (the 'Dutch Order') issued by the Hague District Court ('Dutch Court') on 26 May 2021 in Milieudefensie v Royal Dutch Shell Plc.[3]

ClientEarth sought two forms of relief from the court: (i) a declaration that the Directors had breached their statutory duties (the 'Declaratory Relief') and (ii) an order requiring the Directors to comply with the obligations described in (a)  and (b) above (the 'Injunctive Relief').

The case was brought before the Business and Property Courts of England and Wales of the High Court of Justice ('High Court'), which rendered three decisions. The first decision, dated 12 May 2023[4], was rendered without a hearing and dismissed the application for permission to continue the claim on the basis that it did not show a prima facie case ('May Decision'). The second decision, dated 24 July 2023[5], was issued after a hearing —held on 12 July 2023—requested by ClientEarth in order to reconsider the May Decision, which was upheld and further developed ('July Decision'). Finally, the third decision, dated 31 August 2023, dealt with the costs of the proceedings and ordered ClientEarth to pay them ('Decision on Costs').

The first round: May Decision on the prima facie case

The High Court had to consider whether ClientEarth's application established a prima facie case and devoted many paragraphs to explaining the prima facie analysis. For instance, reference to Iesini v Westrip Holdings Limited [2010] BCC 420[6] was made:

The prima facie case to which s.261(1) refers is a prima facie case “for giving permission". This necessarily entails a decision that there is a prima facie case both that the company has a good cause of action and that the cause of action arises out of a directors' default, breach of duty (etc.).

The Court also referred to the judgment in Abouraya v Sigmund[7] in the context of a double derivative action governed by the common law rules:

A prima facie case is a higher test than a seriously arguable case and I take it to mean a case that, in the absence of an answer by the defendant, would entitle the claimant to judgment.

The May Decision concluded that '[t]he question for the court on the present application is whether, on the face of the case advanced by the ClientEarth, and in the absence of an answer by Shell, ClientEarth will obtain the permission it seeks'[8]. Therefore, this was the starting point for the Court to assess whether ClientEarth's application disclosed a prima facie case.

When presenting its case and in connection with the duties that ClientEarth considered had been breached (i.e. the promotion of Shell's success and the exercise reasonable care, skill and diligence), ClientEarth contended that:

1. the Directors had failed to ensure that Shell implemented a measurable policy to meet a net zero emissions target aligned with the Paris Agreement on climate change; and
2. the Directors' strategy for the management of climate risk did not establish a reasonable basis for achieving that target.

Moreover, ClientEarth pleaded six 'necessary incidents' of the statutory duties under sections 172 and 174 of CA 2006 'when considering climate risk for a company such as Shell', which were the following:[9]

1. a duty to make judgments regarding climate risk that are based upon a reasonable consensus of scientific opinion;
2. a duty to accord appropriate weight to climate risk;
3. 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;
4. a duty to adopt strategies which are reasonably likely to meet Shell's targets to mitigate climate risk;
5. a duty to ensure that the strategies adopted to manage climate risk are reasonably in the control of both existing and future directors; and
6. a duty to ensure that Shell takes reasonable steps to comply with applicable legal obligations.

According to the Civil Procedure Rules ('CPR'), Shell was not to be made a respondent at that stage and the Court could have considered the matter taking only into account ClientEarth's application. However, Shell presented a submission which, according to the May Decision, the High Court took into account when reaching its conclusions.[10]

The Court ended up dismissing the application, finding that ClientEarth's allegations did not establish a prima facie case, and refusing permission to proceed with the claim.

In relation with the incidental duties alleged by ClientEarth, the High Court established that they sought to impose specific obligations on the Directors as to how the management of Shell's business and affairs should be conducted, when it is for the Directors themselves to determine, in good faith, how best to promote the success of a company for the benefit of its members as a whole.[11]

As per the general duty to exercise reasonable care, skill and diligence (s.174 of CA 2006), the High Court acknowledged that 'each of the Directors is required to display the care, skill and diligence that would be exercised by a reasonably diligent person with both (i) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the Director in relation to that company and (ii) the general knowledge, skill and experience that the Director has'.[12] In this regard, the Court concluded that the decisions taken by the Directors did not fall outside the range of decisions reasonably available to them at the time.

Furthermore, with reference to the Dutch Order, the Court found that there was no separate duty on the Directors to ensure or take reasonable steps to ensure that Shell complied with an order of a foreign court.

Finally, the Court also stated that there was strong evidence that indicated that ClientEarth's primary purpose of bringing the claim against Shell was not to promote the success of the company for the benefit of its members, but rather to advance and publicize its own policy agenda, particularly taking into account that it is a minority shareholder holding only 27 shares.

All in all, the High Court concluded that ClientEarth had not demonstrated that a person acting in accordance with the duty to promote the success of the company would seek to continue the claim. The Court also considered the discretionary factors under the CA 2006 and found that they weighed against granting permission, in particular the lack of good faith, the imprecise and disruptive nature of the relief sought, and the strong support of the shareholders —more than 80%— for the Directors' strategy regarding environmental plans. The Court also found that the Injunctive Relief sought by ClientEarth was too imprecise to be enforceable and that the Declaratory Relief sought would not serve a legally relevant purpose. 

Upholding of the May Decision: July Decision on the prima facie case, made following a permission hearing, and Decision on Costs

The CA 2006 provides that if a court concludes that a prima facie case for giving permission has not been established, the application must be dismissed. However, under CPR 19.15(10) the applicant is entitled to ask for a hearing to reconsider the decision provided it makes a written request within seven days of the court's decision.

ClientEarth requested the High Court to reconsider the May Decision at a hearing, which was granted.

The July Decision essentially repeated the previous one, but made additional remarks on the points on which reconsideration was sought, in particular with regard to court intervention powers and the management of private companies.

Specifically, the High Court added that:

1. It was not well-equipped to interfere with the Directors' assessment of how best to proceed as the decisions taken did not fall outside the range of decisions reasonably available; and
2. The evidence submitted in support of the alleged breaches largely rested on a witness statement made by a ClientEarth policy specialist on climate change, Mr Benson, which, in the Court's view, could only amount to a mere reflection of a consensus of opinions. Indeed, the High Court expressed that 'merely because Mr Benson says that those views are not intended to be controversial, and merely because he understands them to be widely accepted and endorsed by governments and financial markets worldwide, does not mean that those opinions can be presented as fact'.[13]

The July Decision reiterates that ClientEarth was unable to further explain that the Directors were in breach of their duties.

Following the July Decision, the High Court ordered ClientEarth to cover the costs of the proceedings. Shell sought an order against ClientEarth to pay Shell's costs of the proceedings, while ClientEarth argued that Shell should not be entitled to the costs of making its submissions and attending the hearing at the prima facie stage, as this contravened the standard rule outlined in the CPR. However, in its Decision on Costs the High Court held that the standard rule did not apply in this case.

This departure was justified by several factors: the seriousness of the allegations, the publicity of the claim, the unusual nature of the relief sought, ClientEarth's minor shareholding in Shell, and the strong likelihood that the High Court would have invited Shell to participate in the prima facie stage in the event that it had not voluntarily made its submissions. The High Court explicitly stated that Shell's submissions were material in helping the Court reach its conclusion and that it was appropriate and proportionate for Shell to attend and make submissions at both stages of the prima facie phase.

Implications of the case regarding climate change risk management and directors' duties

ClientEarth v Shell Plc is a landmark case in the field of climate change litigation and directors responsibility. The case raises important questions about the role and responsibility of corporations and their directors in addressing the climate crisis risks and the potential and limits of legal action to hold directors accountable.

From a broad perspective, the case highlights the increasing importance of environmental concerns in corporate governance. While the High Court noted that the Directors had a wide discretion in balancing various factors regarding the company's management, it recognized that environmental concerns are relevant to the directors' duties and to the company's success. Moreover, the case illustrates the rise of shareholder activism, where minority shareholders use derivative claims to challenge directors' conduct, especially on environmental issues.

It is noteworthy that even unsubstantiated claims (or those that fail to meet the prima facie threshold in derivative claims) can influence directors' conduct and the company's strategy to climate change risk management. Such claims can also detrimentally impact the company's reputation, with media coverage playing a pivotal role in shaping public perception in this regard.

This reflection may provide an incentive for more shareholder activism in the domain of climate change risk management within corporate entities, even if, as anticipated, the merits are insufficient to be granted a favourable judgment. However, it may also have the opposite result, as the ClientEarth v Shell case could potentially have a 'chilling' effect on future shareholder activism, particularly as regards underfunded non-governmental organisations. The Decision on Costs has in fact introduced a strong deterrent, discouraging the pursuit of future derivative claims in this field, due to the substantial financial burden involved in paying the costs of Shell's application.

This case also illustrates the high threshold for establishing a prima facie case for a directors' breach of duty and the deference given by the Court to the business judgment rule of company directors. Both the May Decision and the July Decision have made it clear: the Court should not interfere with the directors' business judgment unless there is clear evidence of bad faith and irrationality or breach of duty.[14] The High Court's interpretation of the Directors' duties under CA 2006 is consistent with the existing case law and the business judgment rule, which recognises that the directors are best placed to make decisions for a company.[15] Considering the wide variety of risks that a big and complex company such as Shell must face, respect for this business judgement rule leads to conclude that section 172 of the CA raises no specific duty for directors in connection with climate change.

The case at hand also reflects on the importance of the role of expert evidence in derivative claims, especially in complex areas such as climate change risk management. The High Court criticized the lack of expert evidence to support ClientEarth's assertion that the directors acted irrationally or unreasonably in their approach to climate change risk. The July Decision explicitly stated that '[t]he starting point is that the court can place very little weight on the opinions expressed by Mr Benson'[16] and the Court disagreed on ClientEarth's opinion that it was unreasonable to require or expect it to adduce expert evidence at that prima facie stage.[17] While it can be argued that at a prima facie stage of the case the court should not impose on the claimant such a burden of proof that it is unjustified, it is also true that the evidence produced must be of substantial nature in order to grant the forms of reliefs sought. This was the position taken by the Court in the July Decision, particularly in account of (i) the nature of the case and its difficulties; and (ii) the similar status of the Directors to that of professionals.[18] As a result, and according to the quoted case-law, only when there has been an alleged breach of a duty owed by a professional, it will be required to support said allegation with expert evidence.

The Court also showed reluctance to grant a mandatory injunction or a declaration that would interfere with the company's strategy or compliance with foreign law (i.e. the Dutch Order). The latter is of particular importance in the governance of multinational companies, taking into consideration the increasing globalisation of litigation and the trend towards cross-border climate targets.

What this case certainly demonstrates is that a claim like ClientEarth's is not trivial, can have a major impact on the company at hand and therefore requires a high level of substantiation, as well as a concrete, determined and enforceable plea.
 ______________________

[1] Formerly Royal Dutch Shell Plc.

[2] A derivative claim is a type of claim that allows a shareholder to bring a claim, on behalf of the company, against its directors, in case they have acted in a way that harms the company's interests. See also Legal Information Institute, definition of 'derivative action' <https://www.law.cornell.edu/wex/derivative_action> accessed 21 June 2024.

[3] According to ClientEarth, the Dutch Court ordered Shell to reduce its group-wide emissions of carbon dioxide by net 45% by the end of 2030, relative to 2019 levels. See also IAO Article Landmark Climate Change Decision in Milieudefensie et al v Royal Dutch Shell Plc and its aftermath.

[4] See May Decision, Citation Number: [2023] EWHC 1137 (Ch) (12 May 2023) <https://climatecasechart.com/wp-content/uploads/non-us-case-documents/2023/20230512_2023-EWHC-1137-Ch-2023-EWHC-1897-Ch-2023-EWHC-2182-Ch-_judgment-1.pdf> accessed 21 June 2024.

[5] See July Decision, Citation Number: [2023] EWHC 1897 (Ch) (24 July 2023) See online < https://climatecasechart.com/wp-content/uploads/non-us-case-documents/2023/20230724_2023-EWHC-1137-Ch-2023-EWHC-1897-Ch-2023-EWHC-2182-Ch-_judgment-1.pdf> accessed 1 July 2024.

[6] May Decision, at para. 8. With reference to Iesini v Westrip Holdings Limited [2010] BCC 420 at [78].

[7] Citation Number [2014] EWHC 277 (Ch); [2015] BCC 503 (13/02/2014), para 53 <https://www.serlecourt.co.uk/images/uploads/documents/Abouraya_v_Sigmund__2014__EWHC_277_%28Ch%29.pdf> accessed 1 July 2024.  

[8] May Decision, Citation Number: [2023] EWHC 1137 (Ch) (12 May 2023) <https://climatecasechart.com/wp-content/uploads/non-us-case-documents/2023/20230512_2023-EWHC-1137-Ch-2023-EWHC-1897-Ch-2023-EWHC-2182-Ch-_judgment-1.pdf> para. 10 in fine, accessed 21 June 2024.

[9] May Decision, Citation Number: [2023] EWHC 1137 (Ch) (12 May 2023) <https://climatecasechart.com/wp-content/uploads/non-us-case-documents/2023/20230512_2023-EWHC-1137-Ch-2023-EWHC-1897-Ch-2023-EWHC-2182-Ch-_judgment-1.pdf> para. 16, accessed 21 June 2024.

[10] May Decision, Citation Number: [2023] EWHC 1137 (Ch) (12 May 2023) <https://climatecasechart.com/wp-content/uploads/non-us-case-documents/2023/20230512_2023-EWHC-1137-Ch-2023-EWHC-1897-Ch-2023-EWHC-2182-Ch-_judgment-1.pdf> para. 6, accessed 21 June 2024.

[11] May Decision, May Decision, Citation Number: [2023] EWHC 1137 (Ch) (12 May 2023) See online <https://climatecasechart.com/wp-content/uploads/non-us-case-documents/2023/20230512_2023-EWHC-1137-Ch-2023-EWHC-1897-Ch-2023-EWHC-2182-Ch-_judgment-1.pdf> para. 19, accessed 21 June 2024.

[12] May Decision, May Decision, Citation Number: [2023] EWHC 1137 (Ch) (12 May 2023) See online <https://climatecasechart.com/wp-content/uploads/non-us-case-documents/2023/20230512_2023-EWHC-1137-Ch-2023-EWHC-1897-Ch-2023-EWHC-2182-Ch-_judgment-1.pdf> para. 20, accessed 21 June 2024.

[13] July Decision, Citation Number: [2023] EWHC 1897 (Ch) (24 July 2023) See online <https://climatecasechart.com/wp-content/uploads/non-us-case-documents/2023/20230724_2023-EWHC-1137-Ch-2023-EWHC-1897-Ch-2023-EWHC-2182-Ch-_judgment-1.pdf> para 61, accessed 1 July 2024.

[14] See July Decision at [64] regarding the so-called “universally accepted methodology": 'although it is said that the goals set out in the ETS [Energy Transition Strategy] are objectively measurable, the evidence does 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 the targeted reductions referred to in it'. Citation Number: [2023] EWHC 1897 (Ch) (24 July 2023). accessed 1 July 2024

[15] See also McGaughey & Anor v Universities Superannuation Scheme Ltd, EWCA Civ 873.

[16] July Decision, Citation Number: [2023] EWHC 1897 (Ch) (24 July 2023). para 59, accessed 1 July 2024.

[17] July Decision, Citation Number: [2023] EWHC 1897 (Ch) (24 July 2023). para 62, accessed 1 July 2024.

[18] July Decision, Citation Number: [2023] EWHC 1897 (Ch) (24 July 2023).https://climatecasechart.com/wp-content/uploads/non-us-case-documents/2023/20230724_2023-EWHC-1137-Ch-2023-EWHC-1897-Ch-2023-EWHC-2182-Ch-_judgment-1.pdf para 63, accessed 1 July 2024. With reference to Whessoe Oil and Gas Ltd and Another v William Jon Dale [2012] EWHC 1788 (TCC).