Uupdate 30 01 2024 the Court of Appeal has refused permission to appeal and Client Earth have posted a legal briefing on the issues here.
Update 24 07 2023 the judge has repeated his refusal in judgment [ [2023] EWHC 1897 (Ch)] following CE’s right to have a hearing on the same issue. CE are now seeking permission to appeal.
A late note on ClientEarth v Shell Plc & Ors (Re Prima Facie Case) [2023] EWHC 1137 (Ch) in which Trower J refused to give permission to Client Earth (qualitate qua Shell shareholders) to bring a derivative claim in lieu of Shell, against the corporation’s directors.
The breaches alleged in ClientEarth’s claim are said to arise out of the Directors’ acts and omissions relating to Shell’s climate change risk management strategy as described in relevant corporate documentation. It also alleges breaches relating to the Directors’ response to the order made by the Hague District Court in Milieudefensie v Royal Dutch Shell plc which I reviewed here.
[3]:
The reason the legislation imposes an obligation on a shareholder to obtain permission to bring a derivative claim is that such a claim is an exception to one of the most basic principles of company law: it is a matter for a company, acting through its proper constitutional organs, not any one or more of its shareholders, to determine whether or not to pursue a cause of action that may be available to it. ClientEarth must therefore show that the limited and restricted circumstances in which it is appropriate for the court to authorise it, as a shareholder of Shell, to continue a derivative action against the Directors for breach of duty are present.
Current stage of the process is said to provide a filter for “unmeritorious” or “clearly undeserving” cases, with importantly [5] the applicant having to show that its application establishes a prima facie case before a substantive hearing is held. The substantive application for permission is set out in s.263 of CA 2006, as to which:
i) s.263(2) provides that an application for permission must be refused if the court is satisfied (a) that a person acting in accordance with his duty to promote the success of the company would not seek to continue the claim or (b) / (c) that any act or omission from which the cause of action arises has been authorised or ratified by the company before or since it occurred;
ii) s.263(3) makes provisions for a number of discretionary factors which the court must take into account in reaching its decision – they are (a) whether the member concerned is acting in good faith in seeking to continue the claim, (b) the importance which a person acting in accordance with his duty to promote the success of the company would attach to continuing it, (c) / (d) whether any act or omission from which the cause of action arises would be likely to be authorised or ratified by the company, (e) whether the company has decided not to pursue the claim and (f) whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company; and
iii) the court is also required by section 263(4) of CA 2006 to have particular regard to any evidence before it as to the views of members of the company who have no personal interest, direct or indirect, in the matter.
[14] The duties relied on by ClientEarth include two of the statutory general duties owed by the Directors to the Company pursuant to s.170 of CA 2006: the duty to promote the success of the Company (s.172 of CA 2006) and the duty to exercise reasonable care, skill and diligence (s.174 of CA 2006s).
[16] The duties owed by the Directors are also said to include what are pleaded as six necessary incidents of the statutory duties “when considering climate risk for a company such as Shell”. These are said by ClientEarth to be:
i) a duty to make judgments regarding climate risk that are based upon a reasonable consensus of scientific opinion;
ii) a duty to accord appropriate weight to climate risk;
iii) a duty to implement reasonable measures to mitigate the risks to the long-term financial profitability and resilience of Shell in the transition to a global energy system and economy aligned with the global temperature objective of 1.5°c under the Paris Agreement on Climate Change 2015 (“GTO”);
iv) a duty to adopt strategies which are reasonably likely to meet Shell’s targets to mitigate climate risk;
v) a duty to ensure that the strategies adopted to manage climate risk are reasonably in the control of both existing and future directors; and
vi) a duty to ensure that Shell takes reasonable steps to comply with applicable legal obligations.
[21] ClientEarth is not proposing any specific strategy which it requires the Board to adopt. Instead, it alleges that the Board’s current approach falls outside the range of reasonable responses to climate change risk. [26] ClientEarth needs to show that that the Directors’ current approach falls outside the range of reasonable responses to climate change risk and will cause harm to Shell’s members.
Conflicts lawyers will be interested in the two additional duties which are referred to as the further obligations [22]. They are that, pursuant to the common law of England and Dutch law respectively, a director who is aware of a court order is under a duty to take reasonable steps to ensure that the order is obeyed. This is pleaded as a precursor to ClientEarth’s allegation that Shell has failed to comply with the Dutch Order. Shell argue that there is no recognised duty owed by directors to a company in which they hold office to ensure that they comply with the orders of a foreign court and Trower J agrees there is no such authority: [23] he holds that
while a director of a company is under a legal obligation to take reasonable steps to ensure that an order made by an English court is obeyed, the case on which ClientEarth relied (Attorney-General for Tuvalu v Philatelic Distribution Corpn [1990] 1 WLR 926 at 936E-F) is not authority for the proposition that there is any such duty owed by the directors to the company itself, which is separate or distinct from the duties they owe to the company as codified in Part 10 Chapter 2 of CA 2006.
and [24]
the nature and extent of the Directors’ duties to Shell are governed by English law as the law of Shell’s incorporation, as to which the underlying point is the same. There is no established English law duty separate or distinct from the general duties owed by the Directors to Shell under CA 2006, which requires them to take reasonable steps to ensure that the order of a foreign court is obeyed, let alone to ensure compliance with that order. It follows that, even if as a matter of Dutch law, the Directors were to owe duties to Shell to take reasonable steps to ensure that the Dutch Order is obeyed, that would be irrelevant to the claims sought to be made in these proceedings, governed as they are by English law. So far as Shell’s potential claims against the Directors are concerned, the only question is whether their response to the Dutch Order rendered them in breach of an English law duty.
No reference here to anything like mutual trust such as by the Dutch courts in Heirs to the Sultan of Sulu v Malaysia.
[25] the judge refers to Lord Wilberforce in Howard Smith Ltd v Ampol Ltd [1974] AC 821 at 832E/F: “There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.” A classic reminder of merits review v judicial review, in other words.
Then follows a discussion of the evidence (I do not think CPR would have allowed expert evidence at this stage nb so the evidence is provided by in-house-experts) put to the court by ClientEarth and the long and the short of it is the judge’s finding [47] that
“the evidence does not support a prima facie case that there is a universally accepted methodology as to the means by which Shell might be able to achieve the targeted reductions referred to in the ETS. This means that it is very difficult to treat what is said as providing a proper evidential basis for alleging that no reasonable board of Directors could properly conclude that the pathway to achievement is the one they have adopted.”
In the light of Shell’s effective abandonment of climate engagement beyond greenwashing (I realise I am not mincing my words here yet the company’s climate reversal under its new CEO is marketed purposely to attract investors), this is imho a wrong approach to the test. It also underscores the tragedy of climate change’s multi-facetted challenges: because of the extent of the challenge, no singular approach is singlehandedly either efficient or sufficient, yet the opponents of climate action use that as a smokescreen to bedazzle judges with a labyrinth of inaction. Industry’s Merchants of Doubt approach has clearly worked here.
As for the Dutch judgment, the judge is not convinced of the nature of what the judgment really orders, and here, too, CPR rules on evidence seem to have put a spanner in the works (prof Toon van Mierlo’s Opinion not being addressed to the court etc: [53]).
[63] the judge adds obiter that in light of the de minimis extent of ClientEarth’s shareholder interest in Shell, some doubt must be cast on its ulterior rather than derivative interest in the claim. [64]
“it seems to me that where the primary purpose of bringing the claim is an ulterior motive in the form of advancing ClientEarth’s own policy agenda with the consequence that, but for that purpose, the claim would not have been brought at all, it will not have been brought in good faith. The reason for this is that it will be clear to ClientEarth that it is using an exceptional procedure in the form of a derivative action, for a purpose other than the purpose for which the legislation has made it available. If, on the evidence adduced by the applicant, that remains an open and unanswered question irrespective of what Shell might say at the substantive hearing, the court cannot be satisfied that ClientEarth is acting in good faith, a situation which will count strongly against a conclusion that it has established a prima facie case for permission.”
I.a. the judge’s approach [65] of the collateral motive of the shareholder I imagine must be appealable as a point of law.
Geert.
gavc law - geert van calster 