In ClientEarth v Shell Plc and others [2023] EWHC 1137 (Ch), the High Court considered an application to continue a derivative claim by non-profit environmental law organisation ClientEarth.
1. Background
Where a company has a legal claim against someone, it would ordinarily be the directors of that company who would decide whether to pursue that claim. However, there may be circumstances where the directors would be reluctant to pursue a claim e.g. where the claim is against the directors themselves in relation to breaches of directors' duties. The law therefore allows shareholders of a company to bring proceedings in respect of a cause of action vested in the company and seeking relief on behalf of the company. These types of claims are known as 'derivative claims' (section 260(1) Companies Act 2006 ("CA 2006")).
While any shareholder (regardless of the number of shares they hold) is free to issue a derivative claim, permission from the court must be sought to continue that claim. The aim of this is to ensure that only claims with some merit continue.
Section 261(2) CA 2006 states that the court must dismiss an application to continue a derivative claim if the evidence filed by the applicant does not disclose a prima facie case for giving permission. CA 2006 provides for other scenarios in which permission must be refused e.g. "if the court is satisfied that…..a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to continue the claim" (section 263(2)(a) CA 2006). The court can also take into account a number of other factors e.g. whether the applicant is acting in good faith (section 263(3)(a) CA 2006).
2. Facts
ClientEarth, a holder of 27 shares in Shell Plc ("Shell"), sought to bring a claim against Shell's directors in respect of alleged breaches of directors' duties arising from, among other things, acts and omissions relating to Shell's climate change risk management strategy. In particular, ClientEarth alleged that the directors had breached their duties in sections 172 CA 2006 (duty to promote the success of the company) and 174 CA 2006 (duty to exercise reasonable care, skill and diligence).
The relief sought by ClientEarth on behalf of Shell included a declaration that the directors had breached their duties and a mandatory injunction requiring the directors to adopt and implement a strategy to manage climate risk in compliance with their statutory duties.
3. Decision
The court dismissed the application. The reasons given included:
- the evidence presented was not sufficient to establish that the way in which the directors were managing the business "could not properly be regarded by them as in the best interests of Shell's members as a whole";
- the size and complexity of Shell's business required 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";
- the injunctions sought were "too imprecise to be suitable for enforcement";
- it was "difficult to see what legitimate purpose the grant of a declaration would fulfil";
- on the basis of the evidence provided the court could "be satisfied that a person acting in accordance with s.172 CA 2006 would not seek to continue the claim";
- ClientEarth had not produced enough evidence to counter Shell's claim that the reason for ClientEarth making the application was "to publicise and advance its own policy agenda, which is clearly a misuse of the derivative claim procedure and supports the conclusion that the application is not brought in good faith"; and
- in AGMs in 2021 and 2022 a majority of the shareholders had supported the directors' Energy Transition Strategy and this counted strongly against the application.
4. Comment
When the derivative claim procedure was introduced by CA 2006 there was significant concern that it would lead to a flood of applications by activist shareholders. That flood never emerged and this case highlights one of the possible reasons why, namely courts are reluctant to interfere with management decisions taken by directors of companies.
The case is also interesting given the high profile nature of both the company and the issue concerned. Had permission to continue the claim been granted it may have encouraged other such applications to be made against other high profile companies, particularly those in the oil and gas sector.
We understand that ClientEarth has exercised its right to ask for an oral hearing to reconsider the decision and it will be interesting to see how that plays out.
If you require any further information, or specific advice, please contact our expert team.
