The UK High Court has this week upheld its decision to not allow ClientEarth’s case against Shell directors to proceed, but the NGO has said it will be appealing the case.
In February this year the non-profit filed what it called a world-first lawsuit against directors for failing to manage the material and foreseeable risks posed to the company by climate change.
The lawsuit, filed in the High Court of England and Wales, alleged Shell’s 11 directors have breached their legal duties under the Companies Act by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement.
It was backed by institutional investors representing £4.5trn in assets under management including UK pension funds Nest and London CIV, Swedish national pension fund AP3, French asset manager Sanso IS, Degroof Petercam Asset Management in Belgium, as well as Danske Bank Asset Management and pension funds Danica Pension and AP Pension in Denmark.
In May a UK High Court judge ruled the case will not be permitted to proceed, which a Shell spokesperson said was “the right outcome” as the claim was “utterly misconceived and a clear misuse of the English courts”.
In his judgement, Mr Justice Trower said ClientEarth’s application and evidence “do not disclose a prima facie case for giving permission to continue the claim” and would therefore be dismissing it.
ClientEarth asked the court to reconsider and this week its hearing took place in which the decision not to proceed was upheld, with the judge dismissing the idea that the courts should have a say in how company directors act.
“The judge was not persuaded and the key point on which he confirmed his initial view was the wider picture on directors’ duties,” said Elaina Bailes, partner and commercial litigator at UK law firm Stewarts.
“He disliked ClientEarth’s attempt to re-cast the case as saying that even if the court can’t intervene in Shell’s directors’ commercial decision to implement its net-zero strategy, the court can give directions now that strategy has been adopted. The judge said this was illogical as this approach still had the effect of imposing specific obligations on the directors as to how to conduct Shell’s affairs.”
In a statement yesterday, ClientEarth said it would be appealing the decision. “The board’s refusal to take decisive action to prepare the company for the fast-advancing energy transition puts Shell’s future commercial viability at risk and, we maintain, is in breach of the board’s duties under English law,” said ClientEarth lawyer Paul Benson.
Shareholder impact
Bailes said although it is clear ClientEarth “will not go down without a fight”, this second judgement has potentially left it in a worse position.
In his original judgement, Mr Justice Trower highlighted the concern that ClientEarth had an ulterior motive as a pressure group and that as it holds a small number of shares, it is not necessarily acting in the interest of all members. This week’s judgement strengthened this point.
“That is potentially significance for the future use of shareholder claims alleging breach of directors duties, as it appears the court will have to assume the ulterior motive if the claimant is a climate activist group,” Bailes added.
But she said: “It may not be all bad, as the further expansion of the discussion around how the courts will assess similar claims will be helpful to future activists considering how to bring claims involving directors’ duties and boards’ approach to climate change with a better chance of success.”
Teja Pisk, senior associate at Stevens & Bolton, agreed, saying although this week’s decision was “disappointing” it “will not sound the death knell for shareholder ESG activism”.
“We can expect to see ClientEarth and activist investors in other companies continue to test the boundaries of current legislation, perhaps emboldened by the fact the English Courts seem willing to entertain a range of other ESG-related actions,” Pisk added.
“Companies and their directors would be well advised to remain mindful of the increasing risks of climate change litigation and other ESG issues and to take action now to avoid exposure to costly future claims.”