In October last year, we considered the scope of directors' duties as regards a company's impact on the environment, in the context of Section 172(1) of the Companies Act.
At that time, we reported on a pre-action letter of claim that ClientEarth, a so-called activist shareholder, had sent to the directors of Shell in March 2022. ClientEarth alleged that Shell's board had failed to adopt and implement a climate strategy that aligned with the Paris Agreement. ClientEarth also called on other Shell shareholders to join them in their cause.
Fast-forward almost a year and ClientEarth has now issued a claim and sought permission from the English High Court to commence a derivative action. This is a particular type of litigation in which a shareholder seeks to bring a claim on the company's behalf and for the company's benefit, against its board of directors. As well as issuing a claim form, the shareholder must also apply to the Court for permission to proceed. As a preliminary step, the Court must be satisfied that there is a prima facie case, on the papers, and the shareholder must not take any further steps in relation to the claim until that has been determined.
If the Court decides that there is a prima facie case, then the permission application proceeds to a full hearing involving all parties.
If the Court finds that there is no prima facie case on the papers, then the shareholder may still get a second bite at the cherry by seeking an oral hearing to try and persuade the Court otherwise.
We will have to wait and see how ClientEarth's application is received. Based on what we know, however, several points of interest stand out:
- First, ClientEarth have successfully recruited a number of other institutional shareholders to publicly support the claim. These include pension funds and asset managers, based both in the UK and Europe.
- Secondly, the focus of ClientEarth's argument appears to be far broader than simply saying that Shell's directors have failed to properly consider the company's impact on the environment. Rather, they allege that Shell's strategy for achieving net-zero by 2050 is fatally flawed and that this will, in turn, jeopardise the long-term profitability and viability of the company. Thus, in the long-term, shareholder interests will not be protected. A director's duty to consider the likely consequences of a decision in the long term is also a requirement under section 172(1).
- Thirdly, ClientEarth point to Shell's failure to act upon the judgment of the Dutch Court from 2021 as further evidence that they are not adequately addressing the real risks posed to the company by climate change. In that case, the Dutch Court ordered Shell to reduce its emissions by 45% by 2030 but ClientEarth say that Shell's current business plans will not achieve this.
- Fourthly, Client Earth has, since sending its pre-action letter, undertaken expert analysis of Shell's corporate strategy which has, we presume, enabled them to now challenge those plans.
- Of course, when it comes to value, no-one can ignore the bumper profits that Shell and other energy companies have recently reported. Whether these profits are sustainable in the medium to long-term, and the tension between short-term profitability versus long-term sustainability, are questions that the Court will have to grapple with.
We will continue to watch with interest as this important case unfolds.