High Court Refuses Permission For Climate-change Activist Shareholder To Bring Derivative Action On Behalf Of Shell Plc Against Its Directors - Shareholders - UK

Gunnar Larson g at xny.io
Tue May 30 14:51:19 PDT 2023


In a significant decision for boards seeking to grapple with how to respond
to the impact of climate change on their company's business, the High Court
has refused permission for ClientEarth, a minority shareholder in Shell
plc, to continue a derivative action on behalf of the company against its
directors (the Directors) under s.261(1) of the Companies Act 2006 (CA
2006): ClientEarth v Shell plc & Ors [2023] EWHC 1137 (Ch).

The underlying claim brought by ClientEarth alleged that the Directors had
breached their statutory duties owed to Shell as a result of acts and
omissions relating to: (i) Shell's Energy Transition Strategy (ETS)
published and updated between April 2021-2022; and (ii) the Directors'
response to an order made by the Hague District Court (Dutch Order) on 26
May 2021 in Milieudefensie v Royal Dutch Shell plc CLI:NL:RBDHA:2021:5339.

As a shareholder seeking to bring a derivative claim in the name of the
company, ClientEarth was required to apply for permission to proceed with
the action. However, the court ruled that ClientEarth failed to meet the
initial threshold of establishing a prima facie case for granting
permission, and so dismissed the application in accordance with s.261(2)(a)
CA 2006.

The judgment provides comfort to boards that the court will be slow to
allow shareholders with small or de minimis shareholdings to use the
derivative claim procedure under CA 2006 as a way to challenge strategic or
long-term decisions made in good faith in relation to addressing the risks
posed by climate change. The top takeaways from the decision are as follows:

The court is extremely reluctant to interfere in company management
decisions. The decision suggests that it will be difficult for
environmental or other campaign groups to challenge directors' strategy and
decision making via a derivative action, since the court will generally
take the approach that it is for the directors themselves, and not the
court, to determine how best to promote the success of the company. This
underlying principle is woven into numerous aspects of the reasoning in
this decision, including the stringent test for permission to bring a
derivative action, which the court will only grant in "limited and
restricted" circumstances. The court noted that the management of a
business of the size and complexity of Shell will require the Directors to
take into account a range of competing considerations, the proper balancing
of which is a directors' management decision, which the court is
ill-equipped to interfere with. In the court's clear view, the proper forum
for ClientEarth to voice its concerns as to the Directors' conduct, is by
vote of the members in general meeting. However, it is important to
remember that a technical breach of statutory duty by a director could
satisfy the prima facie case threshold on other facts (for example, where a
directive shareholder-requisitioned resolution has been passed, a breach of
any part of that resolution could amount to a technical breach of
directors' duties).
The court rejected attempts to formulate new and absolute duties in respect
of climate change. The court was critical of the way in which ClientEarth
put its case, by seeking to impose new and absolute duties on the
Directors. These alleged new duties cut across the Directors' general
statutory duties under s.172 CA 2006, which require directors to have
regard to many competing considerations in determining how best to promote
the success of the company for the benefit of its members as a whole. The
law does not superimpose on the general statutory duties more specific
obligations as to what is and is not reasonable in every circumstance, and
the question is whether the decision falls outside the range of decisions
reasonably available to the Directors at the time (as per Sharp v Blank &
Ors [2019] EWHC 3096 (Ch)).
Relevance of a shareholder's motivation, good faith and the views of other
shareholders. Although the court was considering whether a prima facie case
for granting permission had been made out, it nevertheless reflected on the
test to be applied at a substantive hearing of an application for
permission to bring a derivative action. One of the discretionary factors
that the court must take into account under s.263(3)(a) CA 2006, is whether
the shareholder is acting in good faith in seeking to continue the claims.
In considering this factor, the decision suggests that the court will look
at the motivation behind the action and will be unlikely to grant
permission if it takes the view there is an ulterior motive and/or the
derivative mechanism is being used for a collateral purpose, such as to
publicise and advance the shareholder's own policy agenda, rather than to
secure the directors' compliance with their duties for the benefit of
members as a whole. The test for the substantive application for permission
also requires the court to consider the views of other members of the
company with no personal interest in the matter (s.263(4) CA 2006, a
provision which was incorporated into the legislation during the
parliamentary drafting process, as a result of efforts led by Herbert Smith
Freehills and other concerned parties). Interestingly, the court quoted
support for the ETS in votes cast by members at Shell's AGMs in 2021
(88.4%) and 2022 (80%) as evidence of the strength of the members' support
of the Directors' strategic approach to climate change risk.
The court is unlikely to grant mandatory injunctive relief in such cases
(even if the claim is successful). It is trite law that the court will not
grant mandatory injunctive relief if constant supervision is required to
enforce the relevant order. In the court's judgment, the mandatory orders
sought by ClientEarth in this case were too imprecise and would require
constant court supervision and adjudication on whether the business was
being run in accordance with their terms. This is likely to be a sticking
point for any campaign group seeking to compel a company to adopt a
different strategy.
It is important to note that the present judgment may not bring an
immediate end to these proceedings. The application was considered on the
papers, and ClientEarth is entitled to ask for an oral hearing to
reconsider the decision, provided that it makes a request in writing within
seven days of the judgment.

We discuss the decision in more detail below.

Background
ClientEarth is a non-profit environmental law charity and minority
shareholder in Shell plc (currently holding 27 shares). It sought to bring
a derivative claim on behalf of Shell against the Directors under s.260(1)
CA 2006, arising out of certain alleged acts and omissions by one or more
of the Directors. The alleged acts and omissions by the Directors related
to:

Shell's climate change risk management strategy (i.e. the ETS), published
and updated between April 2021-2022.
Breaches relating to the Directors' response to the Dutch Order.
ClientEarth sought a declaration that the Directors had breached their
duties (as discussed further below) and a mandatory injunction requiring
the Directors to (a) adopt and implement a strategy to manage climate risk
in compliance with their statutory duties, and (b) comply immediately with
the Dutch Order, with which it said that Shell had failed to comply.

Under s.261(1) CA 2006, a shareholder must obtain the court's permission to
bring a derivative claim and the present judgment considered ClientEarth's
application for permission to continue the claim.

Decision
The High Court (Trower J) refused ClientEarth permission to continue the
derivative claim and dismissed the application in accordance with
s.261(2)(a) CA 2006. The principal reasons for the court's decision are
discussed below.

Procedure to seek permission to bring a derivative action under CA 2006

The court explained that s.260(3) CA 2006 imposes an obligation on a
shareholder to obtain the court's permission to bring a derivative claim,
because such claims are an exception to the principle of company law that
the company itself, not its shareholders, must determine whether or not to
pursue a cause of action that may be available to the company. ClientEarth
was therefore required to 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 on behalf of Shell for breach of duty, were present.

The court confirmed that the procedure to seek permission to continue a
derivative action differs, depending on whether the claim has been brought
at common law or under the statutory regime. The procedure under the CA
2006 involves a two-stage process:

Prima facie case. The first stage requires the court to dismiss the
application, if the application itself and the evidence filed in support of
it do not disclose a prima facie case for giving permission (s.261(2)(a) CA
2006). The purpose of this stage of the process has been said to provide a
filter for "unmeritorious" or "clearly undeserving" cases and it imposes an
evidential burden on the applicant at the outset. In accordance with CPR
19.15, the court considers the matter on the papers in the first instance,
and the defendant parties are not made respondents to the application at
this stage. If the application is dismissed, the shareholders have a 7-day
window in which to request an oral hearing to reconsider the decision (CPR
19.15(10)).
Substantive application for permission. Provided the court concludes that a
prima facie case for giving permission has been established, the court will
then order the defendant parties to be made respondents to the permission
application, and give directions for a substantive hearing of that
application (CPR 19.15(12)).
The present judgment is concerned with the first stage of this process,
namely, whether ClientEarth established a prima facie case for giving
permission to continue the derivative claim.

The court confirmed that the approach to what amounts to a prima facie case
under CA 2006 is similar to the common law position, which was articulated
in Abouraya v Sigmund [2014] EWHC 277 (Ch) to be "a higher test than a
seriously arguable case". Having formulated the threshold for the
application, the court proceeded to consider the duties relied on by
ClientEarth, as discussed further below.

It is interesting to note that, although the company will not normally be
entitled to its cost of making a submission at this first stage, Shell
nevertheless chose to put in a lengthy written submission to the court. It
is apparent from the judgment that the court was persuaded by many of the
arguments advanced in this submission.

Duties owed by the Directors

In the view of the court, the evidence established a prima facie case that
each of the Directors was subject to the following duties during the period
in which the acts and omissions complained of occurred:

Duty to promote the success of the company (s.172 CA 2006): Duty to act in
the way the director concerned considers in good faith would be most likely
to promote the success of the company for the benefit of its members as a
whole, having regard, amongst other matters, to an identified list of
considerations, such as the likely consequences of any decision in the long
term, and the impact of the company's operations on the community and the
environment. It is well established that this is a subjective test.
Duty to exercise reasonable care, skill and diligence (s.174 CA 2006):
Requires a director to exercise the care, skill and diligence that would be
exercised by a reasonably diligent person with the general knowledge, skill
and experience that may reasonably be expected of a person carrying out the
functions they carry out, and the general skill and experience that
director actually has. This therefore includes both subjective and
objective elements.
The "incidental duties"

In addition to the statutory duties under the CA 2006, ClientEarth argued
that the Directors were subject to six "necessary incidents" of the
statutory duties, which applied "when considering climate risk for a
company such as Shell". These were said to include specific duties to:

Make judgements regarding climate risk that are based upon a reasonable
consensus of scientific opinion;
Accord appropriate weight to climate risk;
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;
Adopt strategies which are reasonably likely to meet Shell's targets to
mitigate climate risk;
Ensure that the strategies adopted to manage climate risk are reasonably in
the control of both existing and future directors; and
Ensure that Shell takes reasonable steps to comply with applicable legal
obligations.
The court agreed with Shell that these incidental duties were misconceived,
in particular because they sought to impose specific obligations on the
Directors as to how the management of Shell's business should be conducted.
In the court's view, this was contrary to the well-established principle
that it is for directors themselves to determine (acting in good faith) how
best to promote the success of a company for the benefit of its members as
a whole, not the court (confirmed by Re Smith & Fawcett Limited [1942] Ch
304 and Iesini v Westrip Holdings Limited [2009] EWHC 2526 (Ch)).

Further, the court did not think that the "incidental duties" pleaded were
reconcilable with the true nature of the duty to exercise reasonable care,
skill and diligence, to which the Directors were subject under s.174 CA
2006. In the court's view, the law does not superimpose more specific
obligations as to what is and is not reasonable in every circumstance.
Rather, the question is whether the decision falls outside the range of
decisions reasonably available to the Directors at the time, as per Sharp v
Blank & Ors [2019] EWHC 3096 (Ch) (this question is considered further in
the context of the case below).

The "further obligations"

The "further obligations" pleaded by ClientEarth were 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 was pleaded as a precursor to ClientEarth's
allegation that Shell has failed to comply with the Dutch Order.

The court agreed with Shell 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. It confirmed that the nature and
extent of the Directors' duties to Shell were governed by English law as
the law of Shell's incorporation, and that there was no separate
established English law duty, separate from the general duties owed to the
company under CA 2006, which required them to take steps to ensure that the
order of a foreign court was obeyed.

The court's concluding comments on duties owed by the Directors

The court commented that ClientEarth's approach to the formulation of the
"incidental duties" and "further obligations" demonstrated insufficient
regard to the way in which the legislature has formulated the general
duties under CA 2006.

The court was critical of the way in which ClientEarth put its case, by
seeking to impose absolute duties on the Directors which cut across their
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 a
whole. The court underlined that the impact of Shell's operations on the
community and the environment is a matter which the Directors are required
to weigh in the balance in that context (s.172(1)(d)), but, their response
to the business risks for Shell associated with climate change is part of
the decision making process by which the Directors manage Shell's business,
and is subject to the well-established principle explained by Lord
Wilberforce in Howard Smith Ltd v Ampol Ltd [1974] UKPC 3:

"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."

Alleged breach of duties owed by the Directors

The court said that ClientEarth would have to show a prima facie case that
there was no basis on which the Directors could reasonably have come to the
conclusion that the actions they had taken were in the interests of Shell
(as per TMO Renewables v Yeo and others [2021] EWHC 2033 (Ch) at 391)). The
alleged breaches of the Directors' duties relied upon by ClientEarth fell
into the following three categories:

Failure to set an appropriate emissions target.
Strategy as regards to the management of climate risk does not establish a
reasonable basis for achieving the Board's net zero (NZ) target by 2050;
and is not aligned with the global temperature objective of 5°C under the
Paris Agreement on Climate Change 2015.
Failure to comply with the Dutch Order.
(1) & (2) Alleged breaches relating to emissions target and strategy

ClientEarth's central allegation under the first two categories of alleged
breach was that, by adopting and pursuing an inadequate energy transition
strategy, the Directors were mismanaging the material and foreseeable risk
that climate change presents to Shell.

For the purpose of the application, the court concluded that ClientEarth
had established a prima facie case that Shell faces material and
foreseeable risks as a result of climate change which have or could have a
material effect on it. Shell did not disagree with that proposition in
broad terms, although it did not accept the way in which some of the risks
were explained and characterised in the evidence.

However, the court was clear that this did not demonstrate a prima facie
case for the grant of permission. It said the more important question was
the nature of Shell's response to those risks and the extent to which
ClientEarth had demonstrated a prima facie case of actionable breach of
duty by the Directors in their management of those risks.

The Directors' management of climate risk was addressed in the witness
evidence of Mr Benson, a senior lawyer at ClientEarth. The court noted that
this evidence contained an analysis of the alleged
inadequacies/deficiencies in the Directors' management of climate change
risk and the basis on which those inadequacies/deficiencies were alleged to
give rise to breaches of duty.

In the court's judgment, there were a number of fundamental reasons why
ClientEarth's allegations did not establish a prima facie case:

Evidential weight. The court could place very little weight on the opinions
expressed by Mr Benson. While the court accepted that the criticisms he
made reflected ClientEarth's opinions which were genuinely held, the court
emphasised that this was "plainly insufficient". Mr Benson's evidence did
not establish a case that the Directors were managing Shell's business
risks in a manner which was not open to a board of directors acting
reasonably. More importantly, as a lawyer focusing on policy relating to
climate change, he was not able to give expert evidence on which the court
could properly rely.
No universally accepted methodology. The court found that the evidence did
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 its
climate risk management and emission reduction targets, set out in its ETS.
It was therefore very difficult to treat what was said by Mr Benson as
providing a proper evidential basis for alleging that no reasonable board
of directors could properly conclude that the pathway to achievement was
the one they had adopted.
Competing considerations / balancing act by the Directors. In the court's
view, a fundamental defect in ClientEarth's case was that the evidence did
not engage with how the Directors allegedly struck the wrong balance when
weighing up the various factors relating to climate risk and other business
risks, so that no reasonable director could properly have adopted the same
approach. The evidence completely ignored the fact that the management of a
business of the size and complexity of that of Shell will require the
Directors 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.
(3) Alleged breach relating to the Dutch Order

The court reviewed the wording of the judgment in Milieudefensie, which
gave rise to the Dutch Order. It noted the Dutch Court's acceptance that
Shell is not currently acting in an unlawful manner, and recognised that it
is a matter for Shell as to how it exercises its discretion to comply with
emissions reduction obligations imposed by Dutch law. In fact, the Dutch
Court had refused to interfere with the means by which the Directors may
choose to ensure that Shell complies with its obligations.

This cut across the suggestion that the Dutch Court regards the Directors
as being under any duty to Shell to take steps towards compliance with the
Dutch Order in any manner other than through compliance with their duties
under s.172 CA 2006 (i.e. to do that which they consider in good faith
would be most likely promote the success of Shell for the benefit of its
members as a whole).

Nature of relief sought

The court confirmed that it was required to consider at this stage in the
process the precise nature of the relief sought and the prospects of the
court granting such relief if the proceedings continued.

As to the injunction, it noted that a court will not grant mandatory
injunctive relief if constant supervision is required, such as having to
adjudicate on disputes over whether or not a business is being run in
accordance with its terms. In the court's judgment, the mandatory orders
sought by ClientEarth would be too imprecise to be suitable for enforcement.

As to the declaratory relief sought, it was difficult for the court to see
what legitimate purpose this would fulfil. The court said that it must look
at the utility of the substantive relief sought, and it was not the court's
function to express views as to the Directors' conduct which have no
substantive effect and which fulfil no legally relevant purpose. It
concluded as follows:

"The proper forum for generating those types of views as to the Directors'
conduct is by vote of the members in general meeting, a remedy which
ClientEarth is entitled to take steps to procure in its capacity as a
shareholder."

Refusal of permission

Accordingly, the court ruled that ClientEarth failed to make out a prima
facie case for the relief sought either on the basis that the Directors
were in breach of their duties in the respects alleged, or on the basis
that the court should grant the relief sought. The court was therefore
required to dismiss the application in accordance with s.261(2)(a) CA 2006.

Notwithstanding its conclusion on the failure to make out a prima facie
case, the court reflected on the test for the substantive application (the
second part of the two-stage test discussed above), concluding that the
court would be bound to refuse ClientEarth permission to continue the
derivative action come what may. In the court's opinion, a person acting in
accordance with the duty to promote the success of the company would not
seek to continue the claim (s.263(2)(a) CA 2006).

The court also considered other elements of the applicable test, if the
case had proceeded to a substantive application for permission. Of
particular interest are the court's comments on (a) whether the member is
acting in good faith in seeking to continue the claim; and (b) any evidence
as to the views of other shareholders of the company with no interest in
the matter:

Good faith

Section 263(3)(a) CA 2006 makes provision for the court to take into
account whether the member concerned is acting in good faith in seeking to
continue the claim.

Shell submitted that there was good reason to conclude that the application
was an attempt by ClientEarth 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".

The court accepted 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".

Further, ClientEarth had adopted "a single-minded focus on the imposition
of its views and those of its supporters as to the right strategy for
dealing with climate change risk", which pointed strongly towards a
conclusion that its motivation in bringing the claim was ulterior to the
purpose for which a claim could properly be continued.

Views of other shareholders

Section 263(4) requires the court 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.

The court noted that, at Shell's AGM held on 18 May 2021, the support for
its ETS was 88.4% of the votes cast by members. This fell to 80% support at
the AGM held on 24 May 2022, when a progress report on the ETS was under
consideration.

The court concluded that "the level of member support for the ETS and its
progress would count strongly against the grant of permission,
notwithstanding the support of 30.47% and 20.29% of votes cast in favour of
resolutions proposed at the 2021 and 2022 AGMs by the activist shareholder
group 'Follow This'. While the voting in favour of these resolutions
demonstrated material minority support for more information to be provided
by Shell to its shareholders on the ETS and underlying policies for
reaching their targets, they would fall well short of demonstrating any
member support for action of the type contemplated by this application".

The court noted the support which ClientEarth has received for its claim
from members holding 12.2 million shares amounting to approximately 0.17%
of Shell's shares, with letters from another 12.5 million shares who have
stated that their position is aligned with the arguments made by
ClientEarth. However, the letters of support were largely common template
in form and were "in any event, a very small proportion of the total
shareholder constituency".


https://www.mondaq.com/uk/shareholders/1321062/high-court-refuses-permission-for-climate-change-activist-shareholder-to-bring-derivative-action-on-behalf-of-shell-plc-against-its-directors
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