ClientEarth v Shell: Permission Denied
In a ruling on Friday 12th May that “surprised and disappointed” ClientEarth, the High Court dismissed ClientEarth’s claim against Shell’s Board of Directors.
Back in March 2022, environmental charity and activist shareholder, ClientEarth, commenced legal action against Shell’s Board by issuing a letter before action criticising Shell’s Energy Transition Strategy. Then, in February of this year, it announced that it had made its next move in the legal action by filing its claim in the High Court. It sought a declaration that Shell’s Directors were in breach of their duties to promote the success of the company and exercise reasonable care, skill and diligence by failing to adopt an energy strategy that aligned with the compulsory transition to net-zero. [Read our February 2023 update here]
The exception to the general rule that the company itself is the appropriate entity to bring a claim against a perceived wrongdoer is provided for in the Companies Act 2006. Under the Act, a company’s shareholder may pursue a claim on the company’s behalf, by way of what is known as a “derivative action”, but it must first obtain the court’s permission to do so.
On Friday, however, Mr Justice Trower denied ClientEarth’s request for permission to bring the derivative action against Shell’s Board, finding that the duties alleged by ClientEarth to have been breached by Shell’s Directors amounted to “an unnecessary and inappropriate elaboration of the statutory duty of care”. He also held that ClientEarth’s 27 share stake in Shell gave rise to “a very clear inference that its real interest is not in how best to promote the success of Shell for the benefit of its members as a whole”.
We doubt that this will be the last we hear on ClientEarth’s case against Shell. ClientEarth may yet ask the Court to reconsider its ruling. In a statement provided to Indemnity Legal, ClientEarth’s Senior Lawyer, Paul Benson, confirmed “We are currently reviewing the terms of the Court’s judgment in full, and considering our next steps in the proceedings accordingly”. We understand that ClientEarth has seven days to request that the Court reconsiders its decision.
Regardless of the ruling, ClientEarth’s action has shone a light on the increasing scrutiny to which companies and their directors will be subject when it comes to climate risk management and ESG strategies generally and, we suspect, paved the way for future similar shareholder actions. It is therefore important, now more than ever, that directors check with their broker and insurers that this very real exposure to ESG-related risk is covered by their current D&O programme. Where there is coverage on the face of policies, it is similarly important that companies (as with any other area of risk) do not overlook the resilience of those risk transfer arrangements, whether that is:
- ensuring the recoverability of future fees incurred by trusted advisors when they are called upon;
- the dissemination and oversight of reporting mechanisms to ensure that adherence to policy obligations is embedded within a company’s risk management processes; and/or
- periodically, the stress testing of an insurance programme against hypothetical exposures (like a claim of the kind brought by ClientEarth) to flush out unidentified coverage issues before they are raised in a live scenario wherever possible.
If you are yet to test the legal resilience of your insurance arrangements, or it has been some time since those arrangements were stress tested against hypothetical legal exposures, do contact firstname.lastname@example.org or email@example.com for a no-obligation discussion.
 London Judge Dismisses Lawsuit Accusing Shell Board of Climate Failures (insurancejournal.com)
 See sections 260 and 261
 UK High Court Dismisses Climate Lawsuit Against Shell Directors - ESG Today