The UK Court of Appeal has declined to hear ClientEarth's appeal in a landmark climate case involving Shell plc ("Shell").
ClientEarth is a private, non-profit environmental law organization, and a holder of 27 shares of Shell. In the UK, as in Canada, a shareholder of a corporation may seek leave from the court to bring a claim on behalf of the corporation, i.e. a "derivative action". ClientEarth sought leave to bring a derivative action on behalf of Shell based on alleged deficiencies of the directors' acts and omissions relating to Shell's climate change risk management strategy.
On July 24, 2023, a Judge of the UK High Court of Justice dismissed ClientEarth's application for leave to bring a derivative action on behalf of Shell. On November 14, 2023, the UK Court of Appeal, without oral hearing, refused permission for ClientEarth to appeal the High Court's decision.
To obtain permission to bring a derivative claim against Shell's directors where Shell itself doesn't wish to bring the claim, section 263(2)(a) of the UK Companies Act requires ClientEarth to establish a prima facie case on the merits of the claim. ClientEarth had submitted a substantial amount of evidence for this purpose.
The main thrust of ClientEarth's case, and the alleged grounds for appeal, were the statutory duties of Shell's directors to Shell under sections 172 and 174 of the Companies Act. Section 172 imposes a duty on a director to act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In exercising this duty, section 172 sets out a list of considerations a director must have regard to, one of which is "the impact of the company's operations on the community and the environment". Section 174 requires a director to exercise the care, skill and diligence that would be exercised by a reasonably diligent person with both the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions they carry out in relation to the relevant company, and the general knowledge, skill and experience that director actually has.
The Court of Appeal characterized ClientEarth's pleadings as alleging six necessary incidents of the directors' statutory duties "when considering climate risk for a company such as Shell":
- a duty to make judgments regarding climate risk that are based upon a reasonable consensus of scientific opinion;
- a duty to accord appropriate weight to climate risk;
- a duty to 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 ("GTO") under the Paris Agreement on Climate Change 2015 (the "Paris Agreement");
- a duty to adopt strategies which are reasonably likely to meet Shell's targets to mitigate climate risk;
- a duty to ensure that the strategies adopted to manage climate risk are reasonably in the control of both existing and future directors; and
- a duty to ensure that Shell takes reasonable steps to comply with applicable legal obligations.
The High Court Judge rejected these so-called incidental duties as inconsistent with the well-established principle that it is for the directors themselves to determine (acting in good faith) how best to promote the success of a company for the benefit of its members as a whole.
With respect to the directors' duty of care under section 174, the High Court held that the question is whether their decision fell outside the range of decisions reasonably available to the directors at the time. The Judge held that the statutory standard of care did not logically require the six requirements that ClientEarth had pleaded as necessarily incidental duties.
The Court of Appeal refused to hear ClientEarth's appeal on these points as not having a realistic prospect for success. The Court of Appeal cited with approval the Judge of the High Court's finding 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."
In Canada, the Canada Business Corporations Act (CBCA) (as an example)has generally similar statutory duties for directors.Section 122(1) of the CBCA provides that directors of a corporation must "(a) act honestly and in good faith with a view to the best interests of the corporation; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances." Section 122(1.1) goes on to say that "When acting with a view to the best interests of the corporation under paragraph (1)(a), the directors and officers of the corporation may consider, but are not limited to, the following factors: ... (b) the environment; and (c) the long-term interests of the corporation." Together these provisions are similar to Sections 172 and 174 of the UK Companies Act, except that the CBCA provision referencing the environment is permissive. The provision states that the directors "may consider ... the environment". This differs form the UK Companies Act provision which states that the directors must have regard to "the impact of the company's operations on the ... the environment".
Even with a prescriptive requirement to consider the environment, the UK court still determined that it is for the directors themselves to determine (acting in good faith) how best to promote the success of a company. This finding broadly aligns with the business judgment rule under Canadian corporate law which generally provides that deference should be given to the business judgement of directors and their decisions should be protected as long as they lie within a reasonable range of alternatives.
The case is significant as it is one of the first attempts by a shareholder to bring a derivative action on behalf of a company for the directors' alleged mismanagement of climate risks.
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