High Court confirms refusal of permission for ClientEarth derivative action against Shell directors

The High Court yesterday handed down a judgment confirming its earlier decision to refuse climate-change activist ClientEarth's application for permission to continue a derivative action on behalf of Shell plc seeking to challenge its directors' response to the risks posed to Shell's business by climate change: ClientEarth v Shell plc [2023] EWHC 1897 (Ch).

Mr Justice Trower dismissed the application on the basis that, in both its written and oral submissions, ClientEarth has failed to establish a prima facie case for granting permission, as required by s.261(2) of the Companies Act 2006 (CA 2006). Like the court's initial decision (outlined in our previous blog post), the present judgment shows that it will be difficult for environmental and other campaign groups to use the derivative action procedure to challenge directors' strategic and long-term decision making. The court will not generally interfere in company management decisions, particularly where they require directors to balance competing considerations. Nor is the court likely to grant permission where it considers that the action has been brought for an ulterior purpose – which may be a ready inference where the applicant is a campaign group with a small shareholding.

The earlier decision refusing permission was made on the papers. ClientEarth then exercised its right under CPR 19.15 to ask the court to reconsider the decision at an oral hearing. The present judgment was given following the oral hearing. It consolidates the original judgment and therefore repeats it to a significant extent. In this post we do not repeat all of the messages from the original judgment but instead focus on the additional points of substance or emphasis in the most recent decision.

ClientEarth has announced that it will seek permission to appeal the decision.

Evidential burden on claimants

The court noted that the purpose of the prima facie stage has been described as providing a filter for “unmeritorious” or “clearly undeserving” cases. While this is a useful shorthand, however, the court must not lose sight of the fact that this requirement imposes an evidential burden on the claimant at the outset. If the test is not satisfied, the application must be dismissed.

Further, it would be wrong to suggest that the court must, at this stage, take the claimant's evidence at its highest. Instead, the court will take the evidence at its "reasonable highest", which means that the evidence must be sufficiently substantial, without more, to justify the grant of relief. The court will take a critical approach to evaluating the evidence and is not bound to assume that the facts alleged by the claimant are true.

Criteria to consider at prima facie stage

If the applicant establishes a prima facie case, the test for the substantive application is set out in s.263 of the CA 2006. Under s.263(2), the court must refuse the application if it is satisfied (inter alia) that a person acting in accordance with the directors' duty to under s.172 (to promote the success of the company) would not seek to continue the claim. Section 263(3) sets out discretionary factors which the court must take into account in considering whether to grant permission, including whether the applicant is acting in good faith in seeking to continue the claim.

The court disagreed with ClientEarth's apparent suggestion that the discretionary factors under s.263(3) were not relevant to the prima facie stage. Since the court had to take these factors into account in deciding whether to grant permission, they must also be taken into account in assessing whether the evidence established a prima facie case (though any conclusions on the merits of the discretionary factors at the prima facie stage would not tie the court's hands at the permission stage, when it would need to form its own view on the strength of the claim).

The same applied to the nature of the relief sought, which was as much a factor in the decision whether to grant permission as the nature of the breaches relied on. For the reasons set out in our previous post, the court was unlikely to grant the relief sought in this case (ie because the mandatory injunctive relief sought was too imprecise to be suitable for enforcement and would require constant court supervision, and the declaratory relief would serve no legitimate purpose).

Strategy vs implementation

ClientEarth originally argued that, when considering climate risk, the directors were subject to various "incidental duties" which arose necessarily from their statutory duties under the Companies Act 2006 (s.172 to promote the success of the company, and s.174 to exercise reasonable skill, care and diligence) - including for example to accord appropriate weight to climate risk and adopt strategies that were reasonably likely to meet Shell's targets to mitigate climate risk.

The court noted that, at the oral hearing, there was a "subtle but important shift" in emphasis in ClientEarth's case. It originally alleged that directors of companies "such as Shell" would be subject to these duties, but in oral argument its position was that the incidental duties arose logically once the directors had identified that Shell's climate strategy was a commercial objective which was most likely to promote the success of Shell. In other words, ClientEarth argued that, even if it would be wrong for the court to intervene in the directors' commercial decision to adopt Shell's climate strategy, there was no reason why the court should not intervene to give directions as to how that strategy should be implemented once adopted.

The court rejected that argument. It agreed with Shell that, if the court should not interfere with the commercial question of the strategy to be adopted, the same principle of restraint should be applied to the means by which that strategy was to be implemented. In either case, the attempt to impose absolute duties on the directors relating to climate change, in the form of the alleged incidental duties, was "inconsistent with 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" under s.172. It also could not be reconciled with the directors' duty to exercise reasonable skill, care and diligence under s.174, which required them to manage the business with an open mind and have regard to a range of competing considerations.

Subjective vs objective test

The court noted that, as is well established, the test for breach of s.172 is subjective and requires proof that a director has acted other than in good faith. There is no breach if a director honestly but unreasonably believes that a particular course of action is in the company’s best interests. The judge commented that a number of ClientEarth’s submissions conflated irrationality and lack of good faith. Irrationality may support an argument that the directors could not have been acting in good faith but, he said, there is no clear authority that it can stand as a ground of breach on its own, and anyway it would cut across the well-established principle that the courts will not act as a supervisory board over decisions honestly made by directors within their management powers.

For a breach of duty under s.174, the question is whether the decision falls outside the range of decisions reasonably available to the directors at the relevant time. It was not correct to say, however, that the general principle of subjectivity was qualified by the test of reasonableness (as ClientEarth's solicitors has suggested in correspondence). That formulation was apt to mislead. The true position was that ClientEarth "must show a prima facie case that there is no basis on which the directors could reasonably have come to the conclusion that the actions they have taken have been in the interests of Shell".

Relevance of expert evidence

As noted in our previous blog post, ClientEarth relied on evidence from one of its senior lawyers, Mr Benson, as to the alleged inadequacies in the directors’ management of climate change risk. The court held that it could place very little weight on Mr Benson's opinions, despite accepting that they were genuinely held. His evidence amounted to what Mr Benson considered to be an accurate reflection of a consensus of opinions relating to a very complex series of topics. Just because he said those views were not intended to be controversial, and he understood them to be widely accepted, did not mean that they could be presented as fact.

The court rejected ClientEarth's submission that it was unreasonable to require or expect it to adduce expert evidence at the prima facie stage. In alleging a breach of s.174, ClientEarth argued that Shells eleven directors acted irrationally or so unreasonably that their decision making fell outside the range of decisions reasonably available to them. As the judge put it:

"If it is not possible for ClientEarth to establish a prima facie case to the effect that the Directors’ approach to climate risk falls outside the range of reasonable responses open to the board of a company such as Shell without properly admissible expert evidence, that is simply a reflection of the very serious nature of the case it wishes to advance and the attendant difficulties which its pursuit entails. It is no reason to conclude that the normal rules on the admissibility of opinion evidence should not apply."

The upshot was that Mr Benson's evidence, unsupported by any expert analysis of why the directors got the s.174 balancing exercise so wrong as to be actionable, did not support a prima facie case.

Note: The Court of Appeal refused permission to appeal against this decision on 14 November 2023.