An attempt to make directors of an oil giant personally accountable for its environmental policies under the Companies Act has been comprehensively rejected by the High Court. In ClientEarth v Shell plc and Ors, The Honourable Mr Justice Trower ruled that courts are ‘ill equipped’ to take over management decisions involving competing considerations. He also rejected the assertion that the proceedings had been brought in good faith for the benefit of Shell shareholders, suggesting a ‘collateral motive’ on the part of the claimant.
Environmental legal charity ClientEarth said it would seek permission to appeal.
The action has 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 the alleged failings of the company’s climate change risk management strategy. It also alleged breaches of duty relating to the directors’ response to a landmark 2021 ruling by the Hague District Court, ordering Shell to reduce CO2 emissions.
Such actions under the 2006 act require a judge’s permission. This was refused in May; the latest judgment sets out the reasons for the decision following an oral hearing.
According to the judgment, ClientEarth had sought a declaration that the individual directors have breached their duties and a mandatory injunction requiring them to implement a strategy to manage climate risk and to comply immediately with the Dutch court order. Such relief, the judge said, would cut across the court’s normal reluctance to interfere with bona fide business decision-making. Meanwhile there was no established English law – beyond the general duties owed by directors – to require compliance to the Dutch order.
Meanwhile, ‘a court will not grant mandatory injunctive relief if constant supervision is required, which will be particularly acute as a factor if the relief sought is insufficiently precise’.
Overall, Trower said, ‘I do not consider that ClientEarth has made out a prima facie case that the directors are in breach of their duties in the respects alleged.’ ClientEarth’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, amongst the many other risks to which Shell’s business will inevitably be exposed, that no reasonable director could properly have adopted the approach that they have.
‘This is a fundamental defect in ClientEarth’s case because it ignores 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 a classic management decision with which the court is ill-equipped to interfere.’
On Shell’s claim that ClientEarth had an ulterior motive beyond its concern as a shareholder, the judge said that the evidence ‘points strongly towards a conclusion that [the] motivation in bringing the claim is ulterior to the purpose for which a claim could properly be continued. 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 some 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 and do not disclose the number of shares they hold.’ As such, they ‘would fall well short of demonstrating any member support for action of the type contemplated by this application’.
Commenting on the ruling, 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.’