Aug 1, 2023

ESG showdown: High Court puts the brakes on ClientEarth's Shell director drama

ClientEarth’s attempts to revive its ongoing battle with Shell have fallen short, with the High Court rejecting its application to continue its derivative action against the board of Shell.

As a minority shareholder, the environmental charity sought to bring a claim against Shell’s directors over alleged failings of the company’s environmental strategy, along with its failure to comply with a landmark Dutch ruling ordering the company to reduce their CO2 emissions by 2050. Judge William Trower rejected ClientEarth’s application to bring its claim back in May. Disappointed with this ruling, ClientEarth asked the court to reconsider the decision at an oral hearing. Having heard the matter, the court has once again rejected ClientEarth’s application.

Notably, the court identified a ‘fundamental defect’ with ClientEarth’s case, namely that it,

‘ignores the fact that the management of a business of the size and complexity of that of Shell will require the directors to take into account a range of competing considerations, the proper balancing of which is a classic management decision with which the court is ill-equipped to interfere.’

The court has highlighted once more its reluctance to meddle in company management decisions.

In addition, the court considered Shell’s contention that the application was an attempt by ClientEarth to advance its own ulterior motive. Such advances are generally considered to be a clear misuse of the derivative claim procedure. ClientEarth countered that proceedings were brought in good faith for the benefit of Shell’s members as a whole, and with the aim of protecting its long-term value. However, whilst the court did not question the sincerity of ClientEarth’s belief that the claim was in the company’s best interests, they emphasised that the question of good faith,

‘may also require an assessment of whether ClientEarth is in fact bringing the proceedings for an ulterior purpose, a point which arises in particularly acute form given the de minimis extent of ClientEarth’s shareholder interest in Shell.’

Directors who have been monitoring the rise of ESG disputes with trepidation can take some comfort from this decision, and activists may well think twice before using derivative claims as a springboard for advancing their own agendas. If anything, it would be advisable to obtain greater shareholder support before embarking on such action. That said, this is only the beginning and directors should not grow complacent.

Practical steps can and should be taken to mitigate the risk of ESG litigation. For any questions in relation to the topics raised in this blog, contact Kerri Wilson or a member of our team.

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