The UK’s High Court (the Court) has denied the world’s first climate-related derivative action against a board of directors to hold them personally accountable over their alleged failure to properly prepare for the energy transition.
Background. On February 9, 2023, environmental law organization ClientEarth filed a derivative action, brought by shareholders on behalf of the company, seeking permission to bring a claim against Shell’s board of directors (the Board), alleging breaches of legal duties under the UK’s Companies Act 2006 (the Act). ClientEarth alleged that the Board was mismanaging material and foreseeable climate risks in breach of the Act and had failed to adopt and implement an energy transition strategy that aligns with the Paris Agreement. Specifically, ClientEarth alleged that the Board breached its duties under:
- s. 172 of the Act, which requires directors 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; and
- s. 174 of the Act, which requires directors to exercise reasonable care, skill and diligence in the discharge of their duties.
ClientEarth had requested that the Board be required to adopt a strategy to manage climate risk in line with its duties under the Act, and in compliance with the 2021 Dutch Court judgment requiring Shell to reduce CO2 emissions of the Shell group by net 45% in 2030, compared to 2019 levels, through the Shell group’s corporate policy (see our earlier bulletin here).
Judgment. Mr Justice Trower of the UK High Court denied permission to ClientEarth to bring its climate-related derivative action against the Board in the UK. In dismissing the lawsuit, the judge determined that ClientEarth’s action sought to “impose specific obligations on the directors as to how the management of Shell’s business and affairs should be conducted, notwithstanding 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.” The judge further noted that ClientEarth’s nominal 27 shares in Shell “gives rise to a very clear inference that its real interest is not in how best to promote the success of Shell for the benefit of its members as a whole.”
ClientEarth’s lawsuit was supported by institutional investors that collectively held over 12 million shares in the company, including, among others, UK pension funds Nest and London CIV, Swedish national pension fund AP3, French asset manager Sanso IS, Degroof Petercam Asset Management (DPAM) in Belgium, as well as Danske Bank Asset Management and pension funds Danica Pension and AP Pension in Denmark.
ClientEarth’s Senior Lawyer indicated that they were “surprised and disappointed” by the Court’s decision and that they were reviewing the judgment and considering next steps in the proceeding.
For further information or to discuss the contents of this bulletin, please contact Lisa DeMarco at lisa@resilientllp.com.
