Court takes ‘hard line’ against ClientEarth strategy in Shell case

ClientEarth had alleged that Shell’s energy transition strategy “fundamentally mismanages” risks posed by climate change that are material to its business. It claimed that the “flawed” strategy, drawn up by Shell’s directors, puts the company’s long-term commercial viability at risk and breaches its duties under the 2006 Companies Act.

Section 172 of that Act requires company directors to assess, disclose and manage material risks to the companies they manage, and to act in a way that they consider will best promote the success of the company for the benefit of its members as a whole. In doing so, directors are required to have regard to a range of factors that includes the likely consequences of any decision in the long term, and the impact of the company’s operations on the community and environment. Section 174 of the Act also requires company directors to exercise reasonable care, skill and diligence in the discharge of their duties.

But last week the High Court of England and Wales refused permission for ClientEarth’s lawsuit to proceed. Mr Justice Trower said the campaign group did not explain how Shell’s directors had failed to appropriately balance climate risk against the other risks to which the business is exposed. In addition, he said the group did not demonstrate that no reasonable director would have adopted the approach that Shell’s directors took. ClientEarth has been granted a hearing at the High Court to request it reconsiders the dismissal.

Climate litigation expert Michael Fenn of Pinsent Masons said: “ClientEarth raised this derivative action in its capacity as shareholder of Shell, with a shareholding of just 27 directly-held shares. The court is, however, taking a hard-line stance against such creative and tactical litigation strategies.”

Fenn said the court placed emphasis on the good faith requirement as one of the discretionary factors under the 2006 Companies Act. “The court concluded that test was not met here given the ulterior motives of ClientEarth and that the exceptional procedure was not being used for its intended purpose. While ClientEarth has applied for a reconsideration of the dismissal it seems unlikely that this derivative action route is going to provide an avenue for successful activist litigation, at least in the near future,” he added.

ClientEarth had sought a mandatory injunction forcing Shell to adopt and implement a strategy to manage climate risk in compliance with its statutory duties. ClientEarth also sought to force Shell to comply immediately with a landmark 2021 order made by the Hague District Court, which Shell is currently appealing. The Dutch order required Shell to cut its carbon emissions by 45% by 2030.

But the court ruled that a judge would be highly unlikely to issue such an injunction because it was too imprecise to be enforceable, requiring constant supervision by the court that issued it.

Mr Justice Trower said ClientEarth’s position failed to reflect the fact that Shell’s directors had “to take into account a range of competing considerations” when creating the company’s energy transition. He added that the court was “ill-equipped to interfere” with a “classic management decision”.

Fenn said the ruling reaffirmed “the reluctance of the courts to interfere with considered management decisions of businesses” in the context of directors’ duties under sections 172 and 174 of the Companies Act – especially those decisions that are generally supported by its members. The fact that there was majority support by Shell members for the directors’ strategic approach was also taken into account, he added.

Franziska Graf of Pinsent Masons said: “The decision to dismiss ClientEarth's lawsuit against Shell is not particularly surprising. Nevertheless, companies should continue to closely monitor what next steps ClientEarth will take, as the past has shown that negative decisions in climate actions usually do not lead to the plaintiffs giving up, but instead they tend to exhaust all legal means in order to achieve their goals.”

Alessandro Capone of Pinsent Masons added: “As this case exemplifies, we are witnessing a current trend where climate actions are facing significant headwind. Another pending lawsuit, challenging the ‘carbon neutral’ claims on bottles of Evian spring water, is sure to be hotly contested by both sides. While we are certainly seeing an increase in climate actions, it is well worth monitoring which of these actions will ultimately be successful.”