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Directors' Duties: Derivative Actions Update

18 August 2023
In July 2023, the English courts handed down rulings on two derivative actions concerning climate risk. We provide an update on these cases and consider their implications for directors, officers and their insurers.

ClientEarth v Shell Plc [2023] EWHC 1897

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.

Earlier this year, we reported on a derivative action issued by environmental advocacy group ClientEarth against Shell plc's board of directors ("the Board"). The claim, levelled by ClientEarth in its capacity as a Shell shareholder, concerned the Board's alleged mismanagement of climate risk.

As a first hurdle, ClientEarth needed to secure the High Court's permission in order to proceed with its derivative claim. In May 2023, the High Court refused permission for ClientEarth to continue with its claim, holding that:

  • ClientEarth needed to show a prima facie case that there was no basis on which the Board could reasonably have come to the conclusion that their actions were in the interests of Shell. ClientEarth had failed to do so. Trower J held that "the law respects the autonomy of the decision making of the Directors on commercial issues and their judgments as to how best to achieve results which are in the best interests of their members as a whole."
  • Trower J also rejected ClientEarth's argument that the Board was subject to a number of specific duties said to be necessarily incidental to the Board's obligations under the Companies Act 2006 ("CA 2006") when considering climate risk. He observed that such duties would "cut across" the Board's "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 whole."
  • In the context of the CA 2006's good faith requirement, whilst clarifying the application of the requirement, Trower J additionally observed that the primary purpose of bringing the claim appeared to be the "ulterior motive" of "advancing ClientEarth's own policy agenda". He noted the size and complexity of ClientEarth's intended claim relative to its small shareholding (27 shares).

ClientEarth subsequently exercised its right to ask the High Court to reconsider its decision at an oral hearing. On 24 July 2023, Trower J reaffirmed his original decision.

Trower J underlined the fundamental proposition and confirmed earlier legal authorities which state that it is for the directors of a company themselves to determine, in good faith, how best to promote the success of the company for the benefit of its members as a whole. He also confirmed that good faith, not irrationality, is the cornerstone when considering the good faith requirement under s.172 CA 2006; an honest but unreasonable and mistaken belief that a particular course of action is in the company's best interests is not sufficient to amount to a breach of duty under this section.

The full judgment can be found here. ClientEarth has stated that it intends to appeal.

McGaughey v Universities Superannuation Scheme Limited [2023] EWCA Civ 873

Here, two members of Universities Superannuation Scheme Limited ("USSL"), a pension trustee company, sought to bring a derivative action against the company's directors and former directors. However, since the claimants in this action were not shareholders in the company, these claims were brought as a 'multiple derivative claim', which is governed by common law principles rather than the CA 2006.  The claimants alleged (among other things) that the directors had breached their general duties by failing to prepare a credible disinvestment plan for its fossil fuel investments.

In May 2022, the High Court refused permission for the claimants to pursue the derivative action. In a judgment handed down on 21 July 2023, the Court of Appeal upheld the High Court's decision.

The Court of Appeal considered that the claim could not be characterised as a derivative claim because there was no prima facie case that USSL had suffered loss or harm, such that there was nothing to pursue on behalf of USSL itself. Asplin LJ also described the claim as "an attempt to challenge the management and investment decisions of USSL… without any ground upon which to do so".


The cases above demonstrate that derivative actions are not the most straightforward means of holding directors personally liable for the perceived mismanagement of environmental issues. Both cases failed at the first hurdle, and the Court of Appeal in McGaughey emphasised that the derivative claim procedure is available only in "exceptional" circumstances.

These cases also reflect a pattern of judicial reluctance to interfere with the management and investment decisions of directors. It appears that the courts are unlikely to impose implied climate-related duties on directors, although there are a growing number of mandatory reporting requirements, whereby certain companies must make climate-related financial disclosures. Consequently, the risk of litigation and ongoing activist backed cases is likely to continue, although cases which rely on new implied duties and irrationality are unlikely to succeed.

The courts' decisions in these cases will give comfort to many corporations, especially those grappling with transition in non-renewable and more challenging industries, that they continue to have the flexibility to make their own decisions provided they do so in good faith and in compliance with the standard principles of the CA 2006.

The decisions above provide some freedom for boards to more freely consider and implement the steps their organisations should take in transition. However, a failure to take action or progress remains likely to render organisations liable to challenge. This in turn carries the risk of reputational damage, as well as the significant time and expense associated with defending these increasingly varied types of claims. The issue therefore remains high on the risk registers of companies, and in the minds of their directors and insurers.

A further consequence could also see the development of anti-greenwashing legislation in the UK, to address this upward trend in climate change-related litigation, backed by a growth in ESG litigation funding.


Please contact Tom Mungovan, Partner, and Emma Smith, Associate, with any queries relating to the issues discussed in this article. 

Further Reading