The High Court of England and Wales has refused permission for climate law firm ClientEarth to proceed with its "first of its kind" derivative claim against the directors of Shell plc (Shell). The claim alleged that the directors of Shell breached their directors' duties by (broadly) adopting and pursuing an inadequate energy transition strategy and by failing to implement an order by the Hague District Court requiring Shell to reduce its emissions by 45% by 2030 (in Millieudefensie v Royal Dutch Shell, see our update here).
While the decision was made "on the papers" and will be subject to further consideration at an oral hearing, if the reasoning is upheld it presents a potentially significant hurdle for minority shareholders wishing to bring claims against directors in relation to alleged failures to act on climate change under UK companies law.
So, what does the decision mean for Boards in Aotearoa New Zealand (NZ)?
Whether or not a derivative action of this nature could succeed in NZ will depend on the NZ courts' consideration of the ambit of directors' duties in this context, and the applicable threshold tests for derivative actions in NZ. We would accordingly caution directors against viewing the decision as providing "comfort" in relation to climate change litigation against directors where similar issues are (as yet) untested in NZ and each case will turn on the particular facts. That said, claims against directors of companies in NZ for breaches of directors' duties are generally difficult to establish, provided the directors have acted in good faith in making decisions and have made genuine efforts to inform themselves of the company's business. In addition, trends in NZ climate litigation tend to follow international trends, with the result that this case could well influence the likelihood of similar claims being advanced here.
The decision contains a number of observations of general principle that may have broader relevance outside of the UK, and may accordingly be of interest to directors in NZ. Key takeaways include:
The Court refused to impose specific duties on directors in relation to climate change:
ClientEarth alleged that the directors of Shell had breached their duties under the Companies Act 2006 to promote the success of the company (s 172) and to exercise reasonable care, skill and diligence (s 174). ClientEarth alleged that these duties imposed a number of incidental duties on the directors, for example to accord appropriate weight to climate risk, and to implement reasonable measures to mitigate the risks to the long-term financial profitability and resilience of Shell in the transition to a Paris-aligned global energy system. The Court rejected the imposition of these "absolute" duties, noting that they were inconsistent with the general nature of the statutory duties described above.
The Court considered that ClientEarth's case asked the Court to intervene in business decisions for which it is ill-equipped:
ClientEarth alleged that the directors had breached their duties in connection with Shell's transition plans in a number of respects, including (for example) because its targets and policies to achieve "net zero" by 2050 were inadequate. The Court considered that the claimant had ignored "the fact that the management of a business of the size and complexity of Shell will require the Directors to take into account a range of competing considerations, the proper balancing of which is classic management decision with which the court is ill-equipped to interfere."
The Court considered that mandatory injunctive relief was not available:
The relief sought by ClientEarth included a mandatory injunction requiring Shell to adopt and implement a strategy to manage climate risk in compliance with its statutory duties and comply immediately with the Dutch Order. The Court considered that this relief was too imprecise to be suitable for enforcement, noting that the disruptive impact of disputes over compliance with the injunction could itself have serious adverse consequences on the success of Shell for the benefit of its members.
The case highlights interest in the veracity of "net zero" targets:
As part of its claim that the Shell directors breached their directors' duties, ClientEarth questioned the extent to which Shell's "net zero" targets can be said to be supported by credible interim targets and transition plans. Outside of the directors' duties context, "net zero" claims or pledges that cannot be supported by credible plans to achieve them risk being subject to allegations of greenwashing (see our earlier update here), and this case is an example of the increased scrutiny being applied to "net zero" commitments by interested parties globally.
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