The High Court in England has refused permission for the environmental activist group ClientEarth to proceed with a derivative action against the directors of Shell Plc.


Despite only owning 27 shares, ClientEarth sought to use a process by which a shareholder can bring a claim in the name of a company against its directors, if they have breached their duties.

ClientEarth alleged that Shell's directors had breached their duties to promote the success of the company and to exercise reasonable care, skill and diligence. ClientEarth claimed this was because (1) of acts and omissions of the directors relating to its climate change risk management strategy 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).

The court's decision

As a first step, ClientEarth had to establish a prima facie case, entitling it to proceed with a substantive application for permission to continue the claim. The purpose of this requirement under the Companies Act 2006 is to filter out “unmeritorious” or “clearly undeserving” cases. The court held that ClientEarth had failed to meet this low bar and has therefore dismissed the claim. In doing so, the court made a number of key findings.

  1. The court is not prepared to intervene in commercial strategy and decision-making or superimpose new duties onto directors

ClientEarth argued there were "six necessary incidents" of the directors' statutory duties when considering climate risk for Shell, namely to:

  1. Make judgments regarding climate risk based upon a reasonable consensus of scientific opinion
  2. Accord appropriate weight to climate risk
  3. Implement reasonable measures to mitigate the risks to the long-term financial profitability and resilience of Shell in the transition to a global energy system and economy aligned with the global temperature objective of 1.5°c under the Paris Agreement on Climate Change 2015
  4. Adopt strategies which are reasonably likely to meet Shell’s targets to mitigate climate risk
  5. Ensure that the strategies adopted to manage climate risk are reasonably in the control of both existing and future directors, and
  6. Ensure that Shell takes reasonable steps to comply with applicable legal obligations.

The court held that the imposition of such incidental duties would cut across the basic principle that when deciding how to act in the company's best interests, it is for the directors themselves to determine the weight to be attached to a range of factors, only one of which is the impact of Shell's operations on the community and the environment. The court found there was a "fundamental defect" in ClientEarth's case, which completely 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, something the court deemed to be a "classic management decision" and one that the court is "ill-equipped to interfere" with.

The court also found that the law does not superimpose specific obligations as to what is reasonable in every circumstance. Rather, it will consider whether the approach taken by a board falls outside of the range of reasonable responses.

In relation to this, ClientEarth had argued that the directors had breached their duties by failing to adopt appropriate strategies to deal with the climate change risks faced by Shell, including (a) by failing to set an appropriate emissions target and (b) because the directors' strategy for the management of climate risk was not a reasonable basis to achieve Shell's net zero target and was not aligned with the Paris Agreement on Climate Change 2015.

However, the court found that the evidence did not support a prima facie case that there is a universally accepted methodology by which Shell might be able to achieve the target reductions set out in its Energy Transition Strategy, and that in the absence of this the court could not find that no reasonable board of directors would have adopted the approach Shell has as its pathway to achieving net zero.

  1. No specific duty to ensure compliance with the order of a foreign court

In relation to the Dutch Order, the court held that there is no established English law duty (separate or distinct from the directors' general duties under the Companies Act 2006) which requires them to ensure compliance with the order of a foreign court.

  1. A court will not grant mandatory injunctive relief if constant supervision is required

It is a well established principle that the court will not grant a mandatory injunction, if doing so would require constant supervision by the court. This is especially so if the relief sought is insufficiently precise. The court held that the mandatory orders requiring Shell's directors to implement a strategy to manage climate risk and comply with the Dutch Order that had been sought by ClientEarth "fall foul of that basic principle".

  1. A shareholder intending to bring a derivative claim must be acting in good faith

While ClientEarth was unable to establish a prima facie case and therefore the claim was dismissed on this basis, the court went on to consider the discretionary factors that would have been considered if the claim had continued to a substantive hearing. Once of those factors was whether ClientEarth was acting in good faith. The court stated that: 

"Where the primary purpose of bringing the claim is an ulterior motive in the form of advancing ClientEarth’s own policy agenda with the consequence that, but for that purpose, the claim would not have been brought at all, it will not have been brought in good faith".

The court went on to find that there was a "very clear inference" that the claim was motivated by such an ulterior motive, rather than by how best to promote the success of Shell for the benefit of its members as a whole.

What next?

The present decision was made on the papers and ClientEarth has asked the court to reconsider its decision at an oral hearing.

However, Luke Holmes, Managing Associate in Womble Bond Dickinson's Commercial Disputes & Regulatory team, commented that:

"The court has sent a clear message that derivative actions should not be used as a platform for advancing the policy agendas of a particular shareholder, and I would be very surprised if a different decision is reached following an oral hearing".

Ian Newcombe, Partner in Womble Bond Dickinson's Commercial Disputes & Regulatory team, added that: 

"This will provide comfort to the directors of energy companies that the English courts will not lightly interfere with the way in which they exercise their professional judgment, although activist groups will no doubt continue to look for novel ways to challenge their decisions".