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We comment below on the implications of this judgment for potential claims against directors.
Climate litigation – an increasingly complex global landscape
The UK High Court has dismissed a “world-first” derivative action case brought by environmental charity ClientEarth against Shell’s board of 11 directors for breach of alleged duties to manage climate-related risks1.
The judgment confirms that courts will be slow to interfere with directors’ broad discretion to make decisions in the best interests of the company. The court rejected ClientEarth’s formulation of additional specific requirements on directors in relation to climate risk on top of the directors’ general statutory duties.
ClientEarth v Shell – background to the claim
In February 2023, environmental NGO ClientEarth applied to the Court for permission to bring derivative action proceedings against the directors of Shell under UK court procedures. The case followed the novel 2021 Dutch case of Milieudefensie v Shell in which the Hague District Court ordered Shell to reduce its CO2 emissions by 45% within 10 years (currently under appeal).
ClientEarth alleged that the Board’s energy transition strategy was flawed – and a failure to implement the Dutch court order – put the company’s long-term commercial viability at risk. ClientEarth asserted breaches of sections 172 (duty to promote the success of company) and 174 (duty to exercise reasonable skill, care and diligence) of the UK Companies Act 20062.
ClientEarth sought the UK High Court’s permission to sue eleven directors personally over Shell’s climate strategy. Its proposed proceeding asked for a mandatory injunction requiring Shell’s Board to adopt a transition strategy to manage climate risk aligned with the Paris Agreement and a declaration that the directors had breached their duties. The claim was publicly supported by some institutional investors including the UK’s largest workplace pension scheme.
UK High Court decision
The Court refused to allow the derivative action against Shell’s directors to proceed. The decision indicates that Courts will be slow to interfere with director decision making where there has been good faith consideration of the competing issues involved in managing climate risk.
In dismissing the claim, the Court rejected ClientEarth’s argument that directors were subject to additional “climate risk” duties on top of statutory duties. The Court upheld the traditional view that it is for directors to determine how they achieve the company’s best interests and weigh competing considerations,3 and that this is not an area in which the Courts should interfere. Mr Justice Tower said: 4
While it is plain that there are fundamental disagreements between ClientEarth and the Directors as to the right way to achieve the [net zero] 2050 targets that Shell has set itself, the law respects the autonomy of the decision making of the Directors on commercial issues and their judgments as to how best to achieve results which are in the best interests of their members as a whole.
The Court also recognised that that there is no universally accepted methodology as to how Shell might achieve the targeted emission reductions5 and expressed concerns that the relief sought was not appropriate given the need for ongoing Court supervision.6
The Court also criticised the ClientEarth strategy, stating that, due to ClientEarth’s small stake in Shell of only 27 shares, “its real interest is not in how best to promote the success of Shell for the benefit of its members as a whole”, and that it was instead taking a “single-minded” approach to what was the right strategy for dealing with climate change risk.7
ClientEarth has been granted an oral hearing at the High Court to seek a reconsideration of the decision, and, if refused, may appeal the decision.
Chapman Tripp comment on the New Zealand position
The UK statutory provisions and associated court procedures for granting permission to take a derivative action are significantly different from the NZ statutory provisions and court processes, so the decision has limited relevance from a process perspective.
In New Zealand, before granting leave to take a derivative claim, a New Zealand court must be satisfied that it is in the interests of the company that the matter isn’t left to the directors or the shareholders as a whole.8
The Court must also consider the likelihood of the proceeding succeeding, the costs of the proceeding relative to the relief sought, and the actions and interest of the company.9
Section 131(1) of the New Zealand Companies Act 1993 relevantly provides:
….. a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.
In Debut Homes v Cooper, the Supreme Court said10:
The [s 131] test is subjective. This follows from the wording of s 131 (expressed subjectively) and the legislative history (the fact that the Law Commission’s reasonableness requirement was not enacted). This aligns with the common law test and policy considerations. Courts are not well equipped, even with the benefit of expert evidence, to second-guess the business decisions made by directors in what they honestly believed to be in the best interests of the company.
Derivative actions taken in New Zealand particularly lend themselves to situations where directors have personally benefited from a decision, or breached their duty to ensure the company complies with the Companies Act 1993 or the company’s constitution, which may be easier to objectively establish than matters of commercial judgment.
In New Zealand activist shareholders merely seeking to argue directors could have made a different business judgment are likely to encounter similar substantive difficulties as ClientEarth did in the UK. It is likely that a claimant in the New Zealand courts would need to show that the company’s directors have completely neglected their decision-making duties or reached a decision that no reasonable board of directors could have reached, in order for a court to consider intervening in their commercial decision-making.
While directors can take significant comfort from the court’s recognition of their business judgement, this does not excuse a failure to make proper enquiries.11 Directors of companies affected by climate-related financial risk should prudently: identify that risk; periodically assess the nature and extent of the risk to the company, including by seeking and critically evaluating advice as necessary; and decide whether, and if so, how to take action in response, taking into account the likelihood of the risk occurring and possible resulting harm.
Accordingly, directors who balance foreseeable risk of harm against the cost of mitigation, and who act (or decline to act) based upon a rational and informed assessment, are unlikely to be found in breach of their director duties.
1. ClientEarth v Shell plc [2023] EWHC 1137 (Ch) (ClientEarth Judgment). Available here.
2. New Zealand law has a different formulation of the nearest equivalent duties in ss 131 and 137 of the Companies Act 1993
3. ClientEarth Judgment at [19].
4. ClientEarth Judgment at [47].
5. ClientEarth Judgment at [29].
6. ClientEarth Judgment at [55]-[58].
7. ClientEarth Judgment at [65].
8. Companies Act 1993, s 165(3).
9. Companies Act 1993, s 165(2).
10. Vivien Judith Madsen-Ries and Henry David Levin as liquidators of Debut Homes Limited (in liquidation) v Leonard Wayne Cooper [2020] NZSC 100 at [112]. Available here.
11. Helen Winkelmann, Susan Glazebrook and Ellen France “Climate Change and the Law” (paper prepared for Asia Pacific Judicial Colloquium, Singapore, May 2019, at [117].
