High Court refuses permission for legal claim from environmental activists
The High Court refused permission for environmental activist group ClientEarth to proceed with a derivative action against Shell’s directors under section 261(1) of the Companies Act 2006.
Background
Despite only owning 27 shares in Shell, the environmental activist group ClientEarth sought to use a process by which a shareholder can bring a claim in the name of a company against its directors, if those directors have breached their duties.
ClientEarth alleged that the directors had breached their statutory duties owed to Shell as a result of (1) acts and omissions relating to its climate change risk strategy (Shell’s Energy Transition Strategy (ETS)) and (2) their alleged failure to comply with an order made by the Hague District Court in Milieudefensive v Royal Dutch Shell Plc to reduce CO2 emissions from the Shell group’s business operations and products by 45% by 2030 (the Dutch Order).
As a shareholder seeking to bring a derivative claim on behalf of the company, ClientEarth was required to apply for permission to proceed with the action. ClientEarth had to establish a prima facie case, entitling it to proceed with a substantive application for permission to continue its claim. However, the High Court ruled that ClientEarth failed to meet the initial threshold and so dismissed the application in accordance with s.261(2)(a) CA 2006. In doing so, the court made a number of key findings:-
1. The Court is extremely reluctant to interfere in company management decisions
The High Court’s decision suggests that it may be difficult for environmental or other campaign groups to challenge directors’ strategy and decision making via derivative action. The court reiterated the basic principle that it is for the directors of the company to determine how best to promote the success of the company, rather than a decision for the court.
The court noted 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, something the court deemed to be a “classic management decision” and one that the court is “ill-equipped to interfere” with.
2. No specific duty to ensure compliance with an order of a foreign court
With regards to the Dutch Order, the court held that there was no established English law duty (separate or distinct from the directors’ general duties under the Companies Act 2006) which requires the English courts to ensure compliance with the order of a foreign court.
3. A shareholder intending to bring a derivative action must act in good faith
The court dismissed the claim on the basis ClientEarth were unable to establish a prima facie case however, the court went on to consider the discretionary factors that would have been considered if the claim had continued to a substantive hearing. One of the discretionary factors that the court must take into account under s.263(3)(a) CA 2006, is whether the shareholder is acting in good faith in seeking to continue the claim. In considering this factor, the court’s decision suggests that the court will look at the motivation behind the action and is unlikely to grant permission if it takes the view that there is an ulterior motive, such as to advance the shareholder’s own policy agenda, rather than to secure the directors’ compliance with their duties for the benefit of the members as a whole.
4. A court is unlikely to grant mandatory injunctive relief if constant supervision is required (even if the claim is successful)
It is a well-established principal that the court will not grant a mandatory injunction, if doing so would require constant supervision to enforce the relevant order. In the court’s judgment, the mandatory orders sought by ClientEarth were too imprecise and would require constant court supervision and adjudication on whether the business was being run in accordance with their terms.
What next?
The present judgment is not bringing an end to this claim. The application was considered on the papers and ClientEarth were entitled to ask for an oral hearing to reconsider the decision. ClientEarth have now been given a hearing to ask the court to reconsider its decision.
Regardless of whether the court reconsider its decision and give permission for the claim to continue, the publicity of this claim demonstrates the support it has gained from shareholders and may encourage other shareholders to re-examine the directors’ strategy and decision making in companies they are invested in.