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ClientEarth-Shell: English Court Rejects Climate-Focused Shareholder Derivative Suit


Umakanth Varottil
Associate Professor at the Faculty of Law, National University of Singapore


Time to read

6 Minutes

In a closely watched litigation in the climate change space, ClientEarth, a non-profit environmental law organisation based in the United Kingdom, instituted a shareholder derivative suit against the directors of Shell plc. The claim is based on the allegation that the directors breached their duties under the Companies Act 2006 by not taking sufficient action by way of climate risk management, including implementation of energy transition measures consistent with the Paris Agreement and adherence to an order of a Dutch court that relates to reduction of Shell’s emissions in a time-bound manner.

While ClientEarth held only 27 shares of Shell, it received the support of shareholders holding 12.2 million shares representing approximately 0.17% shares. It also obtained letters from holders of another 12.5 million shares whose stated position is aligned with that of ClientEarth. However, in a decision rendered on 12 May 2023 involving the question of whether ClientEarth must be granted ‘permission’ to continue the action, an English court dismissed that claim on the ground that there was no prima facie case for the grant of such permission (in terms of section 261(2)(a) of the Companies Act 2006). In this post, I discuss three principal takeaways from the ruling based on the reasoning of Mr. Justice Trower who rendered the judgment.

(Implicit) Business Judgment Rule

The principal claim of ClientEarth rests on sections 172 and 174 of the Companies Act 2006. Section 172 contains the duty that requires directors to act in good faith to promote the success of the company for the benefit of its members as a whole. The statutory provision also recognizes that in doing so the directors can have regard to several other interests, including ‘the impact of the company’s operations on the community and the environment’. Section 174 encapsulates the directors’ duty of care, skill and diligence.

ClientEarth argued that these duties requires directors to act in a precise manner to address climate risk. However, the Court refused to accept that there were specific obligations on directors on how the company’s management and affairs ought to be conducted to address climate risk. Instead, it focused on ‘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’ (at para 19). In arriving at this conclusion, the Court relied on well-known English dicta in Re Smith & Fawcett Limited [1942] Ch 304 and Howard Smith v. Ampol Petroleum Ltd [1974] AC 821. The Court suggested that directors’ obligations to address climate risk are not uni-dimensional, as ClientEarth suggests, but that directors are required to account for several competing considerations and weigh them on balance. Courts would, therefore, be averse to dictating to corporate boards (either by themselves or based on prescriptions by shareholders) how they should perform their duties in reality. That is a matter for boards’ discretion to be exercised on a real-time basis.

Mr. Justice Trower observed that ‘the evidence does not support a prima facie case that there is a universally accepted methodology as to the means by which Shell might be able to achieve the targeted reductions’ (at para 47). Through this, the Court appears to impose a high onus on plaintiff shareholders to establish on the basis of the available evidence that the decision of the board ought to be one that no board member would consider to be in the interest of the company. In that sense, if several avenues are available to the board to consider the various interests and to promote the success of the company for the benefit of the members, the decision of the board would not be called into question merely because it went down one path rather than any other.

By deferring to the decision of the board to determine the manner of discharge of their duties to address climate change, the Court adopted the business judgment rule in substance. Although English company law does not incorporate a statutory business judgment rule (unlike jurisdictions such as Australia and Malaysia), courts have historically refrained from second-guessing boards on business matters relying upon decisions such as Smith & Fawcett and Howard Smith. This ruling too follows suit.

Efficacy of the Relief

The Court was also confronted with the issue of the nature of the relief sought by ClientEarth and the prospects that the Court would be able to grant such relief if the proceedings were to continue. It noted that ‘there is no doubt that a court will not grant mandatory injunctive relief if constant supervision is required, which will be particularly acute as a factor if the relief sought is insufficiently precise’ (at para 55). Here, the judge found that the nature of the mandatory injunction sought by ClientEarth fell afoul of the above basic principle.

For these reasons, the Court found that ClientEarth failed to make a prima facie case for the relief sought on the basis of a breach of directors’ duties. Hence, in terms of the provisions of the Companies Act 2006 relating to shareholder derivative suits, the judge had no option but to deny permission to ClientEarth to continue to pursue the claim against the directors on behalf of Shell.

Good (Bad) Faith

Although the decision of the Court rested solely on the finding that there is a lack of a prima facie case, the judge went on to make observations on the question of whether ClientEarth was acting in good faith when it brought a derivative claim, because that is one of the additional considerations in determining whether a plaintiff shareholder can be allowed to pursue such a claim (see section 263(3)(a) of the Companies Act 2006). To that extent, one may argue that this part of the ruling is obiter dicta.

The fact that ClientEarth held a small proportion of shares in Shell seemed to matter, as that would disentitle it from seeking relief on behalf of the company on a claim that is complex, time-consuming and expensive. Additional observations seem to impose an unduly high onus on climate-activist turned plaintiff shareholders while bringing such climate-related claims, as the Court found that ‘ClientEarth has adopted a single-minded focus on the imposition of its views and those of its supporters as to the right strategy for dealing with climate change risk’ (at para 65).

Even though ClientEarth also garnered the support of a large number of other shareholders, that appeared not to matter in legitimising its motivation. The Court found that nearly all the shareholders supporting ClientEarth were not only members of the Climate Action 100+ engagement initiative, but that they also signed their letters of support in a common template. Moreover, the fact that 88.4% votes were offered in support of Shell board’s climate plan at its annual general meeting on 18 May 2021 was considered to be a factor that the Court must have regard in determining the future of ClientEarth’s application.

Key Learnings: Way Forward

At the outset, ClientEarth’s derivative claim and the initial ruling of the Court speak to the purpose and impact of environmental activists initiating corporate litigation on climate risk. A recent working paper shows that in certain cases the mere fact of climate litigation initiated against a company (regardless of the success of the litigation) can impact the share price of the company. Based on a database of 108 climate change lawsuits initiated against listed corporations in the US and the EU, between 2005 and 2021, the paper notes that ‘a filing or an unfavourable court decision in a climate case reduced firm value by -0.41% on average, relative to expected values’. This demonstrates that investors perceive a loss of value through management distractions and reputational damage merely by the fact that climate lawsuits are initiated against corporations.

Returning to the Shell case more specifically, three points are noteworthy. First, the ruling makes clear that climate-related corporate decision-making is complex and requires a number of competing considerations to be carefully weighed by corporate boards. Courts will not impose their own views (or that of the shareholders) on how boards ought to address climate risk. In that sense, the controversy surrounding the Shell decision is not about whether climate risk affects corporations (which has been neither negated by Shell nor the Court), but about the precise manner in which boards are required to mitigate the risk. If the ruling stands, plaintiff shareholders may have to focus on companies or situations where the boards have adopted a stance (through actions or omissions) which no board would normally embrace in addressing climate risk. To that extent, the ability of plaintiff shareholders to call into question board decisions would be limited to the rather extreme or egregious cases of climate agnosticism on the part of corporate boards.

Second, the nature of the relief sought matters significantly. Plaintiff shareholders may be compelled to focus on reliefs that are not only precise in nature, but those that do not require constant monitoring by the courts.

Third, the observations of the Court on the element of ‘good faith’ dilutes the ability of environmental activist groups in acquiring shares in companies for the purpose initiating corporate climate litigation of the nature witnessed in the ClientEarth-Shell case. Such activists would necessarily have a ‘single-minded focus’ on strategies for addressing climate risk, an aspect that was considered to affect the bona fides of ClientEarth in the case at hand. The fact that the Court expected ClientEarth to adduce ‘sufficient evidence to counter the inference of collateral motive’ (at para 65) imposes an undue obligation on plaintiff shareholders to demonstrate good faith. However, given that the Court’s observations on matters of good faith are arguably obiter dicta, the extent to which they define the lay of the land for corporate climate litigation remains to be seen.

Despite the importance of the ruling on prima facie case, matters do not culminate here. The decision was a preliminary one rendered based on the parties’ written submissions. ClientEarth is entitled to seek within seven days of the judgment an oral hearing requesting the Court to reconsider its decision. ClientEarth has, unsurprisingly, exercised that right, and the matter now moves to the next stage of oral hearing. Climate activists and corporate boards alike would continue to watch the developments in this litigation very closely.

Umakanth Varottil is Associate Professor of Law at the National University of Singapore. The author thanks Param Pandya for comments on a previous version of this post.


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