Legal actions against individual Board Directors are rare. ClientEarth’s claim against the Directors of Shell plc filed at the High Court last week has already made headlines and will be followed closely.
The claim itself alleges breach of two provisions of the Companies Act 2006(CA06), the first being that provision which attracts so much interest in larger companies’ Annual Reports, s172. This is the Directors’ duty to promote the success of the company for the benefit of its members as a whole having regard to a range of factors. In this case the factors cited include:
- The likely consequences of any decision in the long term;…and
- The impact of the company’s operations on…the environment…
To quote ClientEarth senior lawyer Paul Benson “Shell may be making record profits now due to the turmoil of the global energy market, but the writing is on the wall for fossil fuels long term…The shift to a low-carbon economy is not just inevitable, it’s already happening. Yet the Board is persisting with a transition strategy that is fundamentally flawed, leaving the company seriously exposed to the risks that climate change poses to Shell’s future success — despite the Board’s legal duty to manage those risks.”
The second provision of the CA06 that is alleged to be breached in the ClientEarth claim is s174, the duty to exercise reasonable care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of the person carrying out the same functions as a director in relation to that company (an objective test) and the general knowledge, skill and experience that the director actually has (a subjective test).
Is the transition strategy fundamentally flawed?
Consider the Hague District Court judgment against Shell in 2021 in which the Dutch arm of Friends of the Earth established that the Company’s business was not aligned with the Paris Agreement’s goals and human rights obligations. The Court ordered Shell to slash emissions across its entire supply chain (meaning emissions from its own operations and from the use of the oil it produces) by 45 percent by 2030. Shell is appealing the verdict. Statements made include that “Shell’s energy transition strategy is to accelerate its transformation into a low- and zero-carbon energy business” and “Shell believes that for the world to decarbonise, a dramatic change in demand for energy is just as critical as changes to supply.”
Returning to the London litigation filed by ClientEarth, this is a derivative claim brought on behalf of the Company against its Directors. As such, there is a process to follow before the claim is accepted by the High Court, set out in s261-263CA06. The Court may, or may not give permission to continue the claim, and this itself is not unproblematic thanks to s263(2)(b) and (c) which contain provisions whereby certain claims may be rejected on the basis that the actions have been authorised by the shareholders in advance. Shell plc’s Annual General Meeting held in May 2022 included a resolution worded as follows: “That Shell’s Energy Transition Progress for the year 2021, as disclosed in Shell’s Annual Report for the year-ended December 31, 2021 and the Shell Energy Transition Progress Report, which are published on the Shell website (www.shell.com/agm), be approved”. It received shareholder support of 79.91%. Clearly that resolution related to progress over just one year, but the basis of that progress was the provisions of the Transition Progress Report. Director reappointments were resoundingly supported as well.
A group of shareholders has already expressed support for the ClientEarth litigation. These include institutional investors holding over 12 million shares (around 0.2% of issued share capital), including among others, UK pension funds Nest and London CIV, Swedish national pension fund AP3, French asset manager Sanso IS, Degroof Petercam Asset Management in Belgium, Danske Bank Asset Management and Danish pension funds Danica Pension and AP Pension, who are all concerned that the Board’s strategy does not reduce Shell’s emissions fast enough.
What does it mean for Shell’s Directors individually?
As a company registered and headquartered in England, they will be considering their own positions in light of Director indemnity and D&O provisions. UK law will only permit indemnification if the conditions for a qualifying third party indemnity are satisfied, s234(2)CA06 stating “Third party indemnity provision means provision for indemnity against liability incurred by the director to a person other than the company or an associated company” so the derivative nature of the claim may prove expensive for them. The terms of the Company’s D&O policy would need to be closely scrutinised. Against the backdrop of a hard insurance market in recent years this may not help much either.
Shell’s Annual Report will be published within the next month and will make interesting reading on many fronts. Climate litigation is likely to continue to represent a significant material risk for the Company. What will Resolution 20 (or its equivalent) say? Will the front cover still read “Achieving Net Zero” and “Respecting Nature”? Will all the Directors hold their ground or will their be early departures from the Board?
Written by Juliet Dearlove, Governance Director, Beyond Governance