Following its initial dismissal of ClientEarth’s claim against Shell in May, the High Court has now repeated its refusal of permission for the climate activist group to bring legal proceedings alleging that Shell’s directors were breaching their duties by failing to adopt a reasonable net zero strategy.

Commercial Litigation partner Elaina Bailes spoke to The Guardian following the judge’s ruling. Elaina and associate Matthew Caples here further explain the decision and what it could mean for future climate-related claims.

How did ClientEarth appeal, and why was it rejected?

ClientEarth, a not-for-profit environmental organisation, brought a derivative claim as a shareholder of Shell against its directors alleging breach of their duties under s172 and s174 of the Companies Act 2006.

Section 172 requires directors to act in a manner that the directors consider in good faith would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so, the directors should have regard (amongst other matters) to the likely consequences of any decision in the long term and the impact of the company’s operations on the community and environment. Section 174 requires a director to exercise reasonable care, skill and diligence.

To deter spurious claims by aggrieved shareholders, a claimant must receive the permission of the court to proceed with the claim. The court can dismiss it if it does not appear that the application and supporting evidence create a prima facie case for providing permission.

In this case, the High Court initially refused permission on 12 May 2023 on the papers, but ClientEarth were allowed to request an oral hearing and make further submissions.

This second judgment has potentially left ClientEarth in a worse position. During the hearing they attempted to rebut some of the judge’s criticism in the original judgment of both their expert evidence alleging that Shell’s board’s action plan would fail to achieve net zero, and Shell’s accusation they had an ulterior motive for the claim. They also shifted the focus of their arguments around directors duties towards saying Shell’s board had failed to act rationally, presumably as a reaction to the judge’s view that the court cannot interfere in directors’ decisions.

However, in his second judgment of 24 July 2023, the judge stood by his earlier position and refused ClientEarth permission to continue the claim. ClientEarth’s appeal proposed that even if the court cannot intervene in the directors’ commercial decisions around implementing its net zero strategy, it can give directions now that strategy has been adopted. The judge said this was illogical as this approach would still impose specific obligations on the directors as to how to conduct Shell’s affairs, which was inconsistent with the principle that directors must themselves determine (in good faith) how to promote the success of a company for the benefit of all shareholders.

The key point on which the judge confirmed his initial view was when considering the wider picture on directors’ duties: “The way in which ClientEarth puts its case seeks to impose absolute duties on the Directors which cut across their general duty to have regard to the many competing considerations as to how best to promote the success of Shell for the benefit of its members as a whole.”

What does this mean for future climate cases?

The most significant development in these proceedings was Shell jumping on the judge’s remarks in the first judgment that ClientEarth had ulterior motives as a pressure group, and the defendant criticised the claimant for shifting away from their pleaded case.

The judge agreed and went further than in his original judgment, confirming his view that because ClientEarth is an activist organisation with only a very small number of shares, there is a clear inference that its real interest in bringing the claim is not for all members. That is potentially significant for the future of shareholder claims alleging breach of directors duties, as it appears the court will have to assume an ulterior motive if the claimant is a climate activist group.

There are undoubtedly negatives to be drawn for shareholder activists from this judgment, most notably as to ulterior motive in pursuing litigation against companies, which the Court evidently did not like. The backdrop to this point is the relatively unique nature of derivative claims where this is a more significant consideration than in other types of claim. That said, the application appeared to at least partially fail on evidential grounds, which ought to be capable of correction and so others may not be put off.

This claim was brought before loss had been suffered, which limits the avenues that might be used by prospective claimants. It will be interesting to see how this episode might feature in any future litigation which is brought if losses are suffered by shareholders in Shell for reasons posited by ClientEarth in this claim. Will Shell’s successful and vehement defence of its current actions weaken its position if they later prove to have been ill thought out?

It may not be all bad news for potential claimants. The expanding discussion around how the courts will assess similar claims will be helpful to future activists, as they consider how to bring claims involving directors’ duties and boards’ approaches to climate change with a better chance of success. There are also interesting comments in the judgment regarding there being no duty for English company directors to ensure they obey a foreign court order. This could impact activists’ ability to allege an English company’s climate strategy breaches foreign law.

ClientEarth have already indicated that they anticipate appealing this latest decision, so this is by no means over. Given the limited case law surrounding s.172 of the Companies Act, any decision of the Court of Appeal is likely to be seen as creating a precedent to be followed in respect of that part of the Companies Act.

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