ClientEarth v Shell: What future for derivative claims?

In 2023, environmental law charity ClientEarth lodged a derivative action against Shell’s directors for not complying with their duties under the Companies Act 2006, in relation to their failure to adopt policies capable of achieving the company’s target of becoming a net zero business by 2050. In this Climate Change Laws of the World insight, Lord Robert Carnwath, Visiting Professor in Practice at LSE and a former justice of the UK Supreme Court, comments on the missed opportunity represented by the High Court’s dismissal of the claim without a full trial, and subsequent refusal by the Court of Appeal for a leave to appeal.

Key messages

• The reform of the Companies Act 2006 provided the codification of directors’ duties and a new statutory provision for derivative actions by shareholders, including, for the first time, a specific reference to the environment.
• A derivative action is brought by a shareholder on behalf of the company; ClientEarth owns 27 shares in Shell.
• ClientEarth’s derivative action argued that Shell’s board had breached the Act, which requires company directors to act in a way they consider will best promote the success of the company for the benefit of its membership as a whole.
• ClientEarth’s case at its core was that Shell’s directors had failed to put in place policies reasonably capable of achieving its stated objective to become a net zero business by 2050, resulting in the breach of their duties of “reasonable care, skill and diligence” under section 174 of the Act.
• The judge concluded that ClientEarth’s witness evidence did not amount to expert evidence, it had not brought the case in good faith, and that there was no universally accepted methodology as to how Shell might be able to achieve the targeted reductions referred to in its energy transition strategy.
• In a departure from the norm, the judge made an order for costs in favour of Shell, primarily relating to the adverse publicity likely to result for Shell, and ClientEarth’s application for permission to appeal both judgments was dismissed by a single Lord Justice, bringing the matter to an end.
• Lord Carnwath contends that the dismissal without trial of ClientEarth’s challenge to the climate change policies adopted by Shell’s board represents a missed opportunity because it could have provided a valuable chance to examine the operation of the relevant Companies Act provisions.