Client Earth v Shell – New developments concerning director duties in the context of climate change objectives for corporates

Client Earth v Shell – New developments concerning director duties in the context of climate change objectives for corporates

There is a growing global context within which the board of directors of large corporates are starting to be challenged, both in boardrooms and in the courts, concerning company policy and execution surrounding climate change related objectives.

More particularly, the most recent high-profile example is that of activist minority shareholder Client Earth having sued oil & gas giant Shell in the UK. Client Earth issued a company law claim for derivative proceedings on the basis that Shell`s board of directors are alleged to have breached their statutory director duties of good faith; best interest of the company; and reasonable care, in so far as it concerned the formulation, development and execution of company policy on climate change.

As part of Client Earth`s claim and under section 260 of the Companies Act 2006, the High Court in England was required to consider whether Client Earth should be allowed to continue its proposed derivative claim on behalf of Shell against its directors. A derivate claim is a claim ‘derived from’ a company and brought by relevant other in its name and on its behalf. The test that the court applied, at this ‘statutory screening stage’ so to speak, was whether Client Earth could satisfy the court that it had a prima facie arguable case that Shell`s board of directors breached their duties to the company within the alleged climate change policy context.

In other words, on the initial pleadings and evidence (prior to a full trial hearing), and in the procedural absence of evidence from the directors of Shell, Client Earth needed to persuade the court that the case it advanced was more than seriously arguable and would, hypothetically speaking and absent any further evidence, entitle Client Earth to judgment against the directors of Shell.

On 12 May 2023, in a judgment of Trower J cited as ClientEarth v Shell Plc & Ors (Re Prima Facie Case) [2023] EWHC 1137 (Ch), the court found that the pleaded case and initial evidence presented by Client Earth failed to advance a sufficiently serious and arguable case against the directors of Shell.

The court accordingly dismissed Client Earth`s application to continue its issued derivative proceedings, subject to the proviso that Client Earth could seek a reconsideration of Trower J`s decision through the means of an oral hearing (see para 71 of judgment).

In our view, the following relevant observations can be made regarding the judgment:

• To successfully pursue derivative proceedings under English law, dissatisfied shareholders would need to show that (i) the approach of directors fall outside the range of reasonable responses to climate change risk and will cause harm to the company`s members; and (ii) that there is no basis on which the directors could reasonably have come to the conclusion that their actions had been in the best interests of the company.
• Absent expert evidence on climate science, macro-economics, industry related price forecasting, accounting, carbon pricing, carbon markets or related fields, it would be difficult for a court to question and substitute its` own judgment for that of the directors.
• An allegation that a company does not have any policies and strategies to achieve net-zero objectives, should be distinguished from an allegation that existing policies and targets to achieve net-zero objectives are manifestly unreasonable, the latter of which, is inconsistent with any suggestion that the directors have not in fact considered what is in the best interests of the company.
• When dissatisfied shareholders consider derivative proceedings against directors for the purpose of addressing climate change related concerns, they should bear in mind that a court will not grant mandatory injunctive relief if constant supervision is required. For instance, a mandatory injunction that a company ‘adopt and implement a strategy to manage climate risk in compliance with its statutory duties’ is too imprecise to be suitable for enforcement, and for that reason alone, is an order which a court would be most unlikely to make.

From a Bermudian point of view, climate-related risks impact the underwriting activities, operations and investments of large corporate insurers and can have a direct impact on their ability to satisfy policyholder obligations.

This judgment under English law is sure to be of great interest to the insurance industry in Bermuda. More recently, the Bermuda Monetary Authority published guidance notes (March 2023) aimed at commercial insurers and outlined expectations concerning the management and reporting of climate change risks, and more specifically, expectations involving corporate governance and risk management practices.

MJM Limited`s Dispute Resolution & Corporate departments have expert knowledge and are very well positioned to advise on all issues dealt with in this blog post.