Faculty of law blogs / UNIVERSITY OF OXFORD

No Real Prospect for Success: ClientEarth’s Derivative Litigation Against the Directors of Shell


David Gibbs-Kneller
Lecturer, University of East Anglia


Time to read

5 Minutes

ClientEarth has proposed to bring derivative litigation in the name of Royal Dutch Shell (‘Shell’) against its directors. The claim is novel as it seeks to put climate change at the centre of directors’ minds in formulating corporate strategies by alleging they have breached their duties to the company having ‘failed to properly prepare the company for the net-zero transition, putting the long-term value of the company at risk’ and mismanaged ‘the material and foreseeable climate risk facing the company’. If the claim is successful, derivative litigation could become a useful tool for activist shareholders looking to deter directors from failing to properly manage climate risks. It also poses a risk to insurers who would have to account for a potential increase in shareholder derivative litigation. However, drawing on the evidence from my article with C Ogbonnaya published in (2019) 19(2) Journal of Corporate Law Studies 303, this derivative litigation has no real prospect of success. For the court to give permission to ClientEarth, they require ClientEarth to establish their claims have sufficient legal merit and that they are the proper person to litigate in the company’s name. ClientEarth’s claim would fail on both points. As such, the derivative litigation will do little to deter directors from mismanaging climate risks and poses no increased litigation risk to them or insurers.

Whether the court will give permission to ClientEarth is now determined by the Companies Act 2006, part 11, which contains a mix of mandatory rules and judicial discretion. ClientEarth (i) must disclose a prima facie case on an ex parte application; (ii) the court must be satisfied there are no mandatory bars to the claim; and (iii) the court, at its discretion, considers in all circumstances the claim to be appropriate for the shareholder to continue with in the company’s name.

ClientEarth should have no problem disclosing a prima facie case. All it requires is for the claimant to submit evidence showing that their claim relates to a breach of duty vested in the company (Civil Procedure Rules, Pt 19.5; Seven Holdings [2011] EWHC 1893 (Ch) at [35], [62]). The claim does that. The general submissions are that Shell’s strategy on managing climate risks will not meet its 2050 net-zero target, which means they have failed to have regard of the long-term interests of the company, employees, and the environment, in breach of the CA 2006, s172, and this amounts to negligent mismanagement of the company, in breach of the CA 2006, s174.

Next, the claim must be dismissed if no director acting in accordance with section 172 would continue the claim (CA 2006, s 263(2)(a); Iesini [2009] EWHC 2526 (Ch) at [86]). While a director may consider a range of factors as to whether to litigation is in the company’s best interests, a court does not consider itself well placed to make that assessment (Iesini at [85]). Therefore, whether the claim should be dismissed for this mandatory bar proceeds upon a legal merits test. The court will ask itself whether ClientEarth’s claims are strong enough that some directors would continue with them.

The answer to that question is mostly likely ‘no’. It is unlikely the conduct complained of amounts to a breach of duty. Corporate strategy and management are typically matters of business judgement that the court will not challenge. As for section 172, a director must act in a way they consider, in good faith, will promote the success of company. In doing so, they must have regard to the wider interests ClientEarth reference. The duty means ‘decisions regarding the management of a company will be matters for the judgment of the directors of that company’ (People and Planet [2009] EWHC 3020 at [35]). If a director fails to have regard to the wider interests in the exercise of their judgement it is unlikely to amount to a breach of duty. The obiter statement from Charterbridge [1970] 2 Ch 62, 74 suggests the absence of any regard would only result in the court supplementing the directors’ strategy with what a reasonable director would have done in the circumstances, rather than considering there has been a breach of duty for a failure to do so. ClientEarth’s evidence that the strategy may impose increased risk to the company does not evidence they did not have regard to the wider interests of the company or the directors do not believe, in good faith, the strategy will promote the success of the company. In fact, it is implicit in Shell’s strategy to lower carbon emissions that they have considered those wider interests in discharging their duty to the company. No director would consider this claim to be in the company’s interests when the evidence, at best, appears to be speculative (Gibbs-Kneller and Ogbonnaya, 329-30).

As for the breach of section 174, proving the exercise of the directors’ business judgement in formulating their strategy was negligent is almost impossible in a corporate context because there is no objective criteria to assess that judgement against. They are not like medical professionals for whom there are established methods of practice to judge them against. Such litigation is not worth powder in shot (Gibbs-Kneller and Ogbonnaya, 329-30).

Suppose I am wrong. The court concludes that some directors would continue the claim. Next, ClientEarth would have to satisfy the court, at its discretion, that in considering all the circumstances it is appropriate for ClientEarth to be given permission. While the legislation guides the court to consider all the circumstances, the evidence of how the courts have exercised their discretion demonstrates that for permission to be given, a claim must satisfy two essential conditions (Gibbs-Kneller and Ogbonnaya, 323ff). ClientEarth’s claim is unlikely to satisfy either.

The first is that the court must conclude that a director acting in accordance with section 172 would attach weight to the claim. It is no longer enough that some directors would continue the claims, their legal merits must be strong. Permission has been refused where the legal merits did not disclose ‘obvious breaches of duty’ or the claim only disclosed an ‘arguable case’. Conversely, for those who have been successful, the court has noted that the claims have been ‘well arguable’, having ‘good prospects’ for success, a ‘strong case’, and ‘so powerful’ and ‘so sufficiently substantiated’ that permission should be granted (Gibbs-Kneller and Ogbonnaya, 324-25). If ClientEarth’s alleged breaches of duty are unlikely to constitute evidence that would pass the mandatory bar, they certainly do not disclose an ‘obvious breach of duty’ or the like.

The claim will also fail on the other condition. ClientEarth must be the proper person to litigate in the company’s name (Nurcombe [1985] 1 WLR 370, 376). Derivative litigation has its roots in equity and permission is a ‘matter of grace’ (Airey [2006] EWHC 2728 (Ch) at [72]). Therefore, while discretion as to whether permission will be given rests with the court, ‘the discretion must… be exercised in accordance with established principles’ (Cinematic Finance [2010] EWHC 3387 (Ch) at [14]). The relevant principle here will be the views of those directors independent of the claim (Airey at [53]). Shell has a board consisting of 9 independent non-executive directors. They are likely to conclude that the litigation is not in the company’s interests and the court is likely to accept that conclusion resulting in the claim being dismissed (Gibbs-Kneller and Gindis (2019) 30(6) European Business Law Review 909, 922-23). The decisions in Kleanthous [2011] EWHC 2287 (Ch) at [75] and Stainer [2010] EWHC 1539 (Ch) at [46] make clear that the board’s formal independence can be used to deny possible breaches of duty and the ‘subtler forms of steering the company in a particular direction or protecting the directors as peers fall between the cracks’ (Gibbs-Kneller and Gindis, 922-23). Unless the decision of Shell’s independent directors is brought about by improper means, the court will not second-guess its conclusions even if the alleged wrongdoing is ‘seriously abusive’ (Kleanthous at [75]).

While ClientEarth’s litigation may be novel, once it is appreciated how the court applies its discretion, it poses no additional litigation risk that directors and insurers should be concerned with. The only outcome this litigation is likely to bring is that ClientEarth will be liable for Shell’s and their own legal costs. They should heed the warning given by the court in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch. 204, 224: ‘Pioneering a method of controlling companies in the public interest without involving regulation by a statutory body … voluntary regulation of companies is a matter for the City. The compulsory regulation of companies is a matter for Parliament’.

David Gibbs-Kneller is a Lecturer at the University of East Anglia.


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