Under English law, a derivative action is a mechanism by which a shareholder can bring a claim against a company's directors and officers for wrongs committed against that company.
In February 2023, ClientEarth lodged a derivative action against Shell's eleven directors ("the Board"). ClientEarth is an environmental advocacy group with a shareholding in Shell. It is said to have the backing of institutional shareholders with over 12 million shares. Its claim concerns the Board's alleged mismanagement of climate risk and seeks to compel the Board to strengthen Shell's climate plan.
ClientEarth alleges that Shell's 'Energy Transition Strategy', which seeks to reduce certain emissions by 50% by 2030, is inadequate. Although the formal pleadings are not publicly available, information released by ClientEarth online outlines its claim that the Board have failed to prepare Shell for the low-carbon transition, putting the company at risk.
ClientEarth argues that these alleged failures are increasing Shell's exposure to the risk of legal action and reputational damage, and damaging the company's long-term commercial viability. It asserts that the Board breached their statutory duties under the Companies Act 2006 by not taking adequate measures to address these risks.
The following duties are specified:
- Section 172, which requires directors to promote the success of the company for the benefit of its members as a whole.
- Section 174, which obliges directors to exercise reasonable skill, care and diligence in the discharge of their duties.
The case is currently in the early procedural stages; to continue with its claim, ClientEarth will need to secure the High Court's permission to bring its claim against Shell's directors. The Board have indicated that they will defend their position robustly.
Climate related litigation is on the rise globally. Shareholders, and particularly activist shareholders, are increasingly acquiring shares in perceived 'bad actors' and subsequently looking to the courts to hold directors personally liable for the perceived mismanagement of environmental issues.
Recent cases include:
- A class action by US shareholders against a number of executives and directors at vegan milk alternative producer Oatly under the Securities Exchange Act 1934, alleging greenwashing.
- A derivative claim in the UK against the directors of the University Superannuation Scheme Limited in relation to their investment in fossil fuels which, whilst unsuccessful at first stage, is on appeal and listed for June 2023 (McGaughey v USSL ).
There are jurisdictional differences in the actions being brought; for example, other than in certain competition cases, the UK does not have the same 'opt-out' class action mechanisms that are commonly utilised in the US, where all holders of a security fall within a class and are automatically included in a claim, unless they opt out. Instead, multi-party actions, such as securities claims, are generally managed through Group Litigation Orders, which are an 'opt-in' procedure. However, the actions of organisations and those who lead them are subject to increased litigation risk across the globe.
The level of support from institutional investors garnered by ClientEarth is significant, and signals a growing investor appetite for similar future claims, particularly if the High Court grants ClientEarth permission to proceed with the claim.
Alongside shareholder litigation, there is a growing regulatory focus on climate issues, and on disclosures required by organisations. Reporting under the Task Force on Climate-related Financial Disclosures (TCFD), as well as the U.S. Securities and Exchange Commission's plans to enhance climate-related disclosures for investors, reflects the increasing focus businesses need to have in understanding the impact of climate on their business and the requirement to demonstrate the account that has been taken on the risk climate poses and how it should be managed.
Directors and their brokers therefore need to actively consider environmental risks when reviewing their policy wordings. The scope of coverage may need to be assessed and revised to ensure that climate related claims are specifically addressed. There is likely to be an emergence of bespoke products designed specifically to cover litigation, regulatory and reputational risks arising from environmental issues.
At the underwriting stage, D&O insurers may start seeking additional information on the identity and nature of a policyholder's shareholders (for instance, are any of the shareholders environmental activists and the difficulty in assessing this) More generally, underwriters will need to assess how policyholders are managing and mitigating environmental risks, and how they are recording and reporting emission related data, across their supply chains. Corporate policyholders are likely to face more extensive disclosure requirements to reflect these enhanced risks.
Please contact Tom Mungovan, Partner, and Emma Smith, Associate, with any queries relating to the issues discussed in this article.