There has been much discussion in the last few years about an increase in climate change related disputes and claims.
This includes claims against corporates in order to push for change, to ensure recovery on investments, and potentially to influence a company's future direction. Amidst these discussions, ClientEarth has recently taken steps to commence an action against Shell's Board of Directors. ClientEarth's aim is to encourage or compel Shell's board to take action in respect of the potential climate change risk facing the company.
Why is ClientEarth able to bring this claim against Shell's Board of Directors?
ClientEarth has been a shareholder in Shell since 2016. It became a shareholder for the purposes of gaining investor information and voting rights in the company. As a shareholder it now intends to bring a derivative action against Shell's Board of Directors in the English High Court, i.e. a claim brought by a shareholder of a company, on behalf of the company, in relation to a breach of duty by a company director.
What steps has ClientEarth taken so far?
In anticipation of its derivative action, ClientEarth has sent a pre-action letter to Shell claiming that the board's mismanagement of climate risk puts the directors in breach of their duties under sections 172 and 174 of the UK Companies Act. ClientEarth has set out various criticisms of Shell's climate strategy alleging that the board has failed to properly manage climate risk and failed to adopt and implement a climate strategy that aligns with the Paris Agreement goal in limiting the rise in average global temperature to 1.5°C. ClientEarth alleges that Shell's directors have failed to act in a way that promotes Shell's success for the benefit of its shareholders as a whole and that the board has failed to exercise reasonable care, skill and diligence in the discharge of its duties, which puts Shell's long-term commercial viability at risk.
Why is this claim significant?
This is one of the first times we have seen an action attempting to hold a company's board of directors liable for failing to properly prepare for the net zero transition. In terms of next steps, it is likely that ClientEarth will wait and consider any response from Shell's board to the letter before action. If ClientEarth is not satisfied with the response received, it is likely that ClientEarth will seek the High Court's permission to bring the derivative claim under the UK Companies Act.
Will the English High Court allow the claim to proceed?
The permission stage is likely to represent a difficult procedural obstacle for ClientEarth to overcome. The English High Court will refuse permission for the derivative action to continue if Shell's board can show that a director acting in accordance with the general duty to promote the success of the company would not seek to continue the claim, or alternatively if it can be shown that Shell's climate strategy has been authorised or ratified by the company.
What impact could this have on businesses and their climate change strategies?
If ClientEarth is able to obtain the court's permission and is successful in its derivative claim, it is foreseeable that the High Court could order Shell's board to take steps to properly align Shell's strategy with the goals of the Paris Agreement. Success for ClientEarth could encourage and open the way for others to bring similar claims against companies who are under pressure in relation to their climate change strategies.
Legal Director, Commercial Disputes
Managing Associate, Litigation