ClientEarth v Shell Plc & Ors

At the prima facie stage of a statutory derivative claim, the applicant must show, on its evidence, a prima facie case for permission to continue. The court may evaluate that evidence critically and need not assume that allegations are true or take them at their highest without qualification.

Directors retain responsibility for balancing the competing factors relevant to the company’s success. Climate risk does not impose specific, absolute or overriding duties beyond the statutory general duties in the Companies Act 2006. The court will not substitute its commercial judgment unless no reasonable board could have adopted the impugned approach. Proposed mandatory relief must also be sufficiently precise and capable of supervision.

ClientEarth, a small shareholder in Shell Plc, sought permission under Part 11 Chapter 1 of the Companies Act 2006 to continue a derivative claim against Shell’s directors. The claim alleged breaches of the duties to promote Shell’s success and to exercise reasonable care, skill and diligence in managing climate risk, together with alleged duties concerning compliance with an order of the Hague District Court.

The application had initially been dismissed on the papers under section 261(2)(a). ClientEarth requested reconsideration at an oral hearing. The central issues were whether the evidence disclosed a prima facie case for permission, whether the alleged duties and breaches were legally sustainable, and whether the proposed relief could properly be granted.

1. Prima facie threshold. The application was dismissed. The court must determine whether the applicant’s case and supporting evidence disclose a prima facie case for giving permission. The evidence is assessed at its reasonable highest, but the court is not required to assume that the allegations are true or to adopt a passive and uncritical approach. The relevant question is whether, in the absence of an answer by the defendants, the applicant would obtain permission.
2. Statutory permission criteria. The criteria in section 263 of the Companies Act 2006, including the mandatory refusal where a director acting in accordance with the duty to promote the company’s success would not continue the claim, inform the prima facie assessment as well as any later substantive permission hearing.
3. Directors’ commercial judgment. Section 172 imposes a subjective good-faith duty. Directors must balance the statutory and commercial considerations relevant to the company’s success. Climate risk does not give rise to overriding or prescriptive incidental duties requiring particular targets, methodologies or strategies. Irrationality may bear on good faith, but irrationality alone is not a breach of section 172. Under section 174, the court asks whether the decision fell outside the range of decisions reasonably available to the directors. The evidence did not establish that no reasonable board could have adopted Shell’s approach.
4. Evidence. ClientEarth’s evidence principally expressed opinions and collected views from others. In a case alleging that eleven directors acted irrationally or unreasonably, the absence of properly admissible expert evidence explaining why the directors’ balancing exercise was wrong was a fundamental defect.
5. Foreign court order. English law governed the directors’ duties to Shell. There was no separate English law duty requiring directors to ensure compliance with a foreign court order. Any question was whether the directors’ response breached their existing statutory duties. The Dutch judgment itself recognised Shell’s freedom as to the means of compliance.
6. Relief and good faith. The proposed mandatory injunction was too imprecise and unsuitable for supervision. A declaration would serve no legally relevant purpose. The evidence also supported an inference that ClientEarth’s primary purpose was advancing its own policy agenda; applying the but-for approach, that was capable of negativing good faith.
7. The application disclosed no prima facie case for permission. The court dismissed the application under section 261(2)(a) and made an order dismissing the claim.

The application was initially dismissed without a hearing in the May Judgment, [2023] EWHC 1137 (Ch), under section 261(2)(a) of the Companies Act 2006. ClientEarth exercised its right to request reconsideration at an oral hearing. The present judgment confirmed the earlier decision and dismissed the claim.