1. The Court of Appeal has recently refused ClientEarth’s application for permission to appeal the decision in ClientEarth v Shell Plc [2023] EWHC 1897 (Ch) in which Trower J refused permission for ClientEarth to bring a derivative claim against the company.
In this article, 4 New Square’s Lionel Nichols and Marie-Claire O’Kane reflect upon some of the key issues raised by these landmark proceedings, and consider the likely impact on future climate change derivative claims against directors.
4 New Square’s Daniel Saoul KC acted as part of the Counsel team for ClientEarth in these proceedings.
The ClientEarth Proceedings
The derivative claim procedure
2. ClientEarth is a non-profit environmental charity, which holds a small number of shares in Shell plc (“Shell”). It sought to bring a claim against Shell’s directors in respect of a cause of action vested in Shell, as a derivative claim within the meaning of s. 260(1) of the Companies Act 2006 (“the 2006 Act”).
3. Pursuant to s260(3) of the 2006 Act, a derivative claim may only be brought in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. The breaches alleged in ClientEarth’s claim were said to arise out of the directors’ acts and omissions in Shell’s climate change risk management strategy and in respect of a 2021 order made by the Hague District Court in Milieudefensie v Royal Dutch Shell plc (C/09/571932) (“the Dutch Order”).
Approach to the prima facie stage
4. S261(1) of the 2006 Act provides that a member of a company who brings a derivative claim must apply to the court for permission to continue it. The court is required by s.261(2)(a) of the 2006 Act to dismiss the application if it appears to the court that the application itself and the evidence filed in support of it do not disclose a prima facie case for giving permission.
5. Pursuant to the procedure set out in CPR 19.15, the court had initially considered the question of whether a prima facie case had been established on the papers, concluding that it had not been made out. ClientEarth thereafter exercised its right to ask for an oral hearing to reconsider the decision.
6. Trower J considered that it would be wrong to suggest that the court at this stage must take the claimant’s evidence “at its highest” and concluded instead that the test of prima facie case requires the court to take the evidence adduced at its “reasonable highest.” The evidence must be sufficiently substantial without more to justify the court in granting the relief sought – i.e. the permission to continue.
The s263(3) criteria
7. As to the substantive application for permission, (i.e. the application for which a prima facie case must be established), the test the court must apply is set out in s263 of the 2006 Act.
8. In ClientEarth, the relief sought was a declaration that the directors had breached their duties in the manner described in the particulars of claim and a mandatory injunction requiring the directors (a) to adopt and implement a strategy to manage climate risk in compliance with their statutory duties; and (b) to comply immediately with the Dutch Order. ClientEarth relied upon the general duties owed by the directors to Shell pursuant to s172 of the 2006 Act (the duty to promote the success of Shell) and s174 (the duty to exercise reasonable care, skill and diligence), and pleaded what it said were six necessary incidents of those duties “when considering climate risk for a company such as Shell.”
9. Trower J concluded that the incidental duties were inconsistent with the principle that it is for 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. As for the s174 duty to exercise reasonable care, skill and diligence, the Judge considered that the law does not superimpose on that duty more specific obligations as to what is and is not reasonable in particular circumstances. Rather, the Judge considered that the directors could continue to have regard to a range of competing considerations – notwithstanding any previous views expressed by, or positions taken by, the Board as to what the appropriate course was. In this regard, ClientEarth’s case was that Shell’s directors had identified climate risk as a material factor in Shell’s business but that those directors had failed to adopt and implement a strategy that would adequately address this risk and align Shell’s business with global climate goals.
10. In respect of the allegations of breach, ClientEarth submitted that the upshot of its evidence was that it is or should be common ground that Shell faces material and foreseeable risks as a result of climate change which have or could have a material effect on it; and it had established a prima facie case to that effect. However, Mr Justice Trower found that this did not however demonstrate a prima facie case for the grant of permission, because he considered that the focus should be on whether ClientEarth had demonstrated a prima facie case of actionable breach of duty by the directors in their management of climate change risks.
The evidential question
11. In respect of the evidence, Trower J thought that the court could place little weight on ClientEarth’s detailed factual evidence in support of its allegations of breach of duty. The Judge rejected ClientEarth’s submission that it was unreasonable to require or expect it to adduce expert evidence at the prima facie stage. If it was not possible for ClientEarth to establish a prima facie case to the effect that the directors’ approach to climate risk fell outside the range of reasonable responses open to the board without properly admissible expert evidence, that was, the Judge considered, a reflection of the very serious nature of the case it wished to advance and the attendant difficulties which its pursuit entailed.
The nature of relief sought
12. In addition to the issues identified in respect of ClientEarth’s evidence, Trower J thought that the mandatory injunction sought that Shell (a) adopt and implement a strategy to manage climate risk in compliance with its statutory duties; and (b) comply immediately with the Dutch Order was insufficiently precise to be suitable for enforcement, and for that reason was an order which a court would be unlikely to make.
Analysis
13. The decision of Trower J, in conjunction with the refusal of permission to appeal by the Court of Appeal, raises four key questions.
14. First, the necessary supporting evidence. ClientEarth placed reliance upon a detailed witness statement of its senior lawyer, not as an expert opinion, but rather as a consolidation of existing climate risk research. Although Shell did not dispute this evidence, Trower J concluded that the prima facie stage could only be established with “properly admissible expert evidence” and that “very little weight” could be placed on the evidence adduced because the witness could not give “expert evidence on which the court can properly rely”. Of course, ClientEarth was not seeking to present its witness statement as expert evidence, but as gathering a substantial body of material produced by third parties, which it contended supported its case. If it is now a requirement that company members must adduce expert evidence at the permission stage, then this would appear to conflict with the judgment Akenhead J in Whessoe Oil & Gas Ltd v Dale [2012] PNLR 33, which concluded that expert evidence is not required in respect of a claim alleging breach of statutory duties under the 2006 Act. Indeed, in claims for breach of directors’ duties, it is far from typical for expert evidence to be adduced (even at trial) as to what the director should or should not have done.
15. Secondly, the good faith criteria. It is of note that the court ultimately concluded that even if it were not bound to refuse permission pursuant to s263(2)(a), ClientEarth had not established a prima facie case on the discretionary factors in s263(3) and 263(4). As for the consideration of good faith under 263(3)(a), Trower J considered that in determining this point a “but for” test was appropriate as a matter of principle. The Judge considered that where, in his view, the primary purpose of bringing the claim was 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.
16. However, the application of a “but for” test in determining good faith is likely to prove a substantial hurdle to succeeding in any application for permission to continue a derivative claim. This is particularly so in any claims brought by minority shareholders, in light of Trower J’s observations on the facts in ClientEarth. The decision also serves as reminder of the need for sufficient evidence to rebut any inference of collateral motive which arises in the course of proceedings.
17. Third, the merger of ex parte and inter partes stages and the order for costs against ClientEarth. As a consequence of the decision in ClientEarth, future derivative claims may see a de facto merger of the ex parte stage (which is intended to filter out clearly undeserving cases) and the inter partes stage (in which the court hears from all interested parties and determines whether to allow the claim to continue and, if so, the terms on which it may continue). During the first stage, the company is not named as a respondent, but the shareholder is required to provide notice to the company. PD19A, paragraph 2 provides that the decision at the first stage will “normally” be made without submissions from or attendance by the company. Despite this, Shell elected voluntarily to participate at the ex parte stage, including through a written submission settled by four counsel, inter partes correspondence between the parties’ solicitors during which further points were made, and attendance at the oral hearing by two counsel, supported by a “detailed skeleton argument” signed by four counsel. Had ClientEarth succeed at the first stage, Shell would then have been entitled to make further written and oral submissions at the second stage. This blurring of the two stages may, as a result of this case, become more common in the future, and potentially permits companies two bites of the cherry in resisting derivative claims at the permission stage.
18. PD19A, paragraph 2 also provides that, where a company, without invitation from the court, volunteers submissions or attendance, “the company will not normally be allowed any costs of that submission or attendance”. Notwithstanding this general rule, Trower J ordered ClientEarth to pay Shell’s costs. The court cited with approval a passage from Gore-Browne on Companies in which the editors suggest that “there are situations in which it would plainly be appropriate for a company to participate prior to the claimant successfully demonstrating a prima facie case” such as where the company “has a knock-out point that can be swiftly, cheaply and incontrovertibly deployed”. Although Trower J did not find that Shell had a knock-out point, the seriousness of the allegations, the large amount of publicity the case generated and his view on the question of good faith led him to consider that the case “out of the norm” such that a costs order against ClientEarth. The risk that emerges from this, however, is that this encourages respondents to participate at the ex parte stage (blurring further that stage and the inter-partes stage) and potentially deters future claimants, concerned with the prospect of an adverse costs order even were they to fail at the prima facie stage, from pursuing claims which may be meritorious.
Conclusions
19. The ClientEarth judgments will likely give shareholders pause for thought before commencing derivative claims against companies, particularly in high-profile climate risk cases. Shareholders may need to satisfy a court that they are bringing the derivative claim in good faith and not in pursuit of an ulterior agenda, and may now also need to adduce expert evidence upon which the court can rely – increasing the complexity and cost involved in bringing such claims. Moreover, in high-profile claims, it may now become the norm for companies to participate in the ex parte stage of the proceedings, with a consequent costs risk to the shareholders that may have a chilling effect on the commencement of similar claims.
Lionel Nichols specialises in international and cross-border disputes, focusing on commercial litigation, international arbitration, public international law, private international law and human rights. Read more about his work here.
Marie-Claire practises in the areas of commercial litigation, civil fraud and asset recovery. She has significant trial experience of some of the largest, most procedurally complex proceedings and associated urgent injunctive relief. Marie-Claire is ranked as a Leading Junior in Commercial Litigation by the Legal 500, 2024. Read more about her work here.
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Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.
