In numerous recent posts, I have detailed how activist investors have been trying to use the courts to advance their ESG-related agenda, whether the groups’ goals are to advance or oppose ESG initiatives. For example, earlier this week I discussed the recent Delaware case in which activist investors sought to hold the Disney board liable for the company’s actions regarding Florida’s “Don’t Say Gay” legislation. A high-profile example of litigation from the other direction, in which activists seek to hold board accountable for the company’s alleged insufficient actions on ESG issues, is the claim brought in English courts earlier this year against the Board of Shell, alleging that the company’s actions to address climate change were insufficient.
As detailed in an excellent June 1, 2023, memo from the Shearman & Sterling law firm (here), earlier this year the High Court ruled that the plaintiff in the case against the Shell board had failed to state a prima facie case. Just like the Disney case I discussed earlier this week, the Court’s reasoning has significant implications for those who would seek to use the courts to advance ESG-related agendas.
As detailed in a guest post on this site by my friend Francis Kean, in February 2023, the climate advocacy group Client Earth, which as a small Shell shareholder (holding what the law firm memo characterized as a “token shareholding”) filed an action in the English High Court alleging that the board of Shell had breached their duties under the U.K. Companies Act. The complaint alleged that the board had violated Section 172 of the Act, requiring corporate boards to act in a way “most likely to promote the success of the company for the benefit of the members as a whole; and Section 174, requiring directors to exercise reasonable care, skill and diligence in the discharge of their duties.
The claimant asserted that the Shell board had violated these duties in three ways: First, by failing to adopt a measurable and realistic pathway to meeting the absolute net zero (NZ) emissions reductions target by 2050 in Shell’s energy transition strategy; second, by failing to properly manage climate risk, including commercial, regulatory, and stranded-asset risk; and third, by allegedly failing to comply with the May 2021 ruling of a Dutch court ordering Shell to reduce its worldwide aggregate CO2 emissions by 45% compared to 2019 levels by the end of 2030. By way of relief, ClientEarth sought a mandatory injunction to require the company to adopt and implement a strategy to manage climate risk; and to comply immediately with the Dutch court order. ClientEarth also sought a declaration that the Shell board had sought a declaration that the Shell directors had breached their statutory duty.
Under the procedures in the Companies Act, in order to be able to pursue its derivative claim under the Companies Act, ClientEarth was required to apply to the court for permission to continue. Under the Act, if it appears to the court that the application and supporting evidence do not disclose a prima facie case for permission, the Court must dismiss the application. Permission must also be refused if a person acting in the best interests of the company would not seek to continue the claim. The Act also lists several discretionary factors courts must consider, including whether the applicant is acting in good faith in seeking to continue the claim; and the importance that a person acting in accordance with best interests of the company would attach to continuing the claim.
The May 12, 2023, Judgment
In his May 12, 2023, judgment, Mr. Justice William Trower entered judgment in the prima facie case, holding that the claimant, ClientEarth, had failed to present a prima facie case. A copy of the judgment can be found here.
In entering the judgment, Mr. Justice Trower first stated the reason for requiring permission to continue a derivative claim, in that such a claim is an exception to the fundamental principle that it is a matter for the company itself to consider and determine whether or not to pursue a cause of action available to the company. As such, Mr. Justice Trower said, permission to proceed will be granted only in “limited and restricted circumstances.”
In concluding that the claimant had not made out a prima facie case, Mr. Justice Trower addressed each of the claimant’s three claims separately.
First, with respect to the claimants claim that the defendants had breached their duties concerning the company’s alleged failure to alight with the 2050 net zero target, Mr. Justice Trower said that while the claimant’s views were genuinely held, they did not constitute reliable expert evidence. In the absence of any universally accepted methodology for Shell to achieve the NZ target, it was not possible to conclude that the approach adopted by the board was unreasonable.
Second, with respect to the claim that the company was failing to properly manage climate risk, it was a “fundamental defect” of the claimants claim that it failed to account for the multitude of risks that a company of Shell faces, all of which require the board to “take into account a range of competing considerations, the proper balancing of which is a classic management decision with which the court is ill-equipped to interfere.”
Third, with respect to the claim based on the Dutch court order, Mr. Justice Trower said that there is no duty recognized under English law, separate and distinct from the general duties imposed under the Act, to ensure compliance with the orders of a foreign court. Moreover, the Dutch court had given the company total freedom to achieve its obligations as the company itself saw fit.
Mr. Justice Trower then went on to address the remedies that ClientEarth sought. He said that the orders the claimant sought by way of mandatory injunctive relief were insufficiently precise and ran afoul of the principle that a court will not grant such relief if constant judicial supervision is required. Moreover, it was not the court’s role to express views on the directors’ conduct “which have no substantive effect and which fulfill no legally relevant purpose.” The claimant, Mr. Justice Trower, had failed to make out a prima facie case both on the basis that the directors were in breach of their duties and on the basis that the Court could grant the requested relief.
Mr. Justice Trower also concluded, upon review of the discretionary factors identified in the Act, that there were additional reasons to reject the application. First, with respect to the question of whether ClientEarth was acting in good faith, Mr. Justice Trower said that the claimant’s de minimis shareholding coupled with the very considerable size and complexity of the action (which would be expensive and time consuming to defend) gave rise to the “very clear inference” that ClimateEarth’s ultimate objective was not to promote the success of the Company, but rather, that the ultimate objective was the imposition of ClientEarth’s views and of supporters as to the right way to deal with climate change. In those circumstances, it could not be said that the claim had been brought in good faith.
With respect to the discretionary factor for the court to consider whether a person concerned only with the best interests of the company would seek to continue the claim, Mr. Justice Trower said that a person acting consistently with this duty “would attach little if any importance to continuing the claim.”
Mr. Justice Trower also considered that in pleading its claim, ClientEarth had argued that the directors’ general statutory duties incorporated several climate-related duties, including giving appropriate weight to climate risks based on reasonable consensus of scientific opinion; to implement reasonable measures to mitigate climate risk; and to adopt strategies for the company to meet its climate-related targets. Mr. Justice Trower rejected these arguments, saying that these proposed duties sought to impose specific obligations on the board, “notwithstanding the well-established principle that it is for the directors themselves to determine (acting in good faith) how best to promote the success of the company.” Moreover, the court refused to superimpose on the general duty to exercise reasonable care, skill, and diligence “any more specific obligations as to what is and is not reasonable in every circumstance.”
As for the questions of the impact on the community and the environment which the board must consider, the directors response to these concerns a part of the decision-making process by which they manage the company; as such their decisions are subject to the well-established principle that “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 with the powers of management honestly arrived at.”
ClientEarth has, according to the law firm memo, exercised its right to seek an oral hearing to reconsider the decision to dismiss the permission application.
Mr. Justice Trower’s rulings in this case, like the rulings of Vice Chancellor Will in the Disney case I discussed in a blog post earlier this week, both revealed a fundamental judicial reluctance for courts to pass judgments on board decisions on how to operate the company that were made in good faith. Both courts also reflect a distaste for issue-driven litigation brought by litigants seeking to use the courts to advance their agendas.
The law firm memo says of Mr. Justice Trower’s decision in the Shell case that the decision is “likely to disappoint shareholder activists while being welcomed by boards everywhere.” The decision, the law firm memo says, shows that the English courts “will be very reluctant to allow activist shareholders – particularly those with de minimis shareholdings – to use the derivative claim procedure to challenge management decisions on climate risk that are made in good faith.”
Moreover, the decision confirms that directors general duties “do not also include standalone duties relating specifically to climate risk.” In order for a claimant to establish a breach of directors’ statutory duties in this context, the claimant must show that the directors acted contrary either to the duty to promote the company’s success under Section 172 of the Act; or to exercise reasonable care, skill, and diligence under Section 174 of the Act.
I think the court’s decision in the Shell case is also important in the context of the apprehension in the insurance community that companies generally face the threat of significant litigation arising from climate change. There may well be more successful litigation in the future in which companies that are facing clear physical or operational impacts from climate change fail to act appropriately to protect the interests of the company and its shareholders, But in the meantime, it is worth saying now that litigation initiated by claimants primarily interested in advancing their own agendas has not fared particularly well. It is also clear that courts, applying what we in the U.S. call the business judgment rule, are not going to second-guess decisions made by company officials made in good faith – which is an important consideration that prospective litigants must take into account in deciding whether to pursue these kinds of claims.