A legal claim against the Shell board of directors for allegedly failing to manage the foreseeable risks posed to the company by climate change has been granted a reconsideration hearing, after being dismissed by a High Court judge on 12 May.

ClientEarth filed the claim in February, with backing from a number of institutional investors, including UK pension schemes Nest and London CIV, and a number of European pension funds, such as the Sweden's AP3, and Danica Pension and AP Pension in Denmark.

In particular, the claim argued that Shell’s Board is in breach of its legal duties under the UK Companies Act to manage the climate risk facing the company, also failing to ensure compliance with the Dutch Order.

However, the judge recently dismissed the application for permission to bring a derivative claim against the Board of Directors of Shell plc, after concluding that “there is no basis for a claim for breach of directors’ duties (arising from the allegations ClientEarth has made on the Board’s management of climate risk or compliance with the Dutch Order)”.

The judge also found that the remedies sought were too “imprecise” or lacked any “legitimate purpose”.

"It is not the court’s function to express views as to the directors’ conduct which have no substantive effect and which fulfil no legally relevant purpose," the judgment stated.

"The proper forum for generating those types of view as to the directors’ conduct is by vote of the members in general meeting, a remedy which ClientEarth is entitled to take steps to procure in its capacity as a shareholder."

The judgment also reflected on the views of other shareholders, noting that Shell's Energy Transition Strategy (ETS) received support from 88.4 per cent of members at the 2021 AGM, falling to 80 per cent support at the AGM in 2022.

This was compared to the support ClientEarth has received for its claim from members holding 12.2 million shares, representing approximately 0.17 per cent of Shell’s shares, with letters from another 12.5 million shares who have stated that their position is aligned with the arguments made by ClientEarth.

"With one exception, the letters which actually assert support for the claim, as opposed to expressing agreement with ClientEarth’s aspiration to procure a change of direction by Shell, are members of the Climate Action 100+ (CA100+) engagement initiative," the judgment stated.

"This is described as “a common agenda for engagement with high emitting companies to achieve commitments to cut emissions, improve governance and strengthen climate-related financial disclosures.

"With a single exception their letters of support all appear to be based on a detailed common template and do not disclose the number of shares they hold.

"But they are in any event a very small proportion of the total shareholder constituency, and it is that constituency as a whole whose views should carry very considerable weight when determining how Shell can best manage the climate change risk with these proceedings are concerned."

The judge therefore concluded that the level of member support for the ETS and its progress would count strongly against the grant of permission, notwithstanding the support of 30.47 per cent and 20.29 per cent of votes cast in favour of resolutions proposed at the 2021 and 2022 AGMs by the ‘Follow This’ group.

“While the voting in favour of these resolutions demonstrated material minority support for more information to be provided by Shell to its shareholders on the ETS and underlying policies for reaching their targets, they would fall well short of demonstrating any member support for action of the type contemplated by this application,” the judgment stated.

Herbert Smith Freehills highlighted the ruling as a "significant decision" for boards, suggesting that the judgment will provide comfort to boards that the court will be slow to allow shareholders with small or de minimis shareholdings to use the derivative claim procedure under CA 2006 as a way to challenge strategic or long-term decisions made in good faith in relation to addressing the risks posed by climate change.

"The decision suggests that it will be difficult for environmental or other campaign groups to challenge directors’ strategy and decision making via a derivative action, since the court will generally take the approach that it is for the directors themselves, and not the court, to determine how best to promote the success of the company," Herbert Smith Freehills stated.

In addition to this, the law firm warned that the court is unlikely to grant mandatory injunctive relief, even if the claim is successful, suggesting that "this is likely to be a sticking point for any campaign group seeking to compel a company to adopt a different strategy".

Despite the recent dismissal, ClientEarth said that it “stands by its claim”, arguing that Shell’s Board has failed to adopt a strategy that is fit to manage the serious and significant climate risks facing the company, in line with its legal duties.

The group has also been granted permission for an oral hearing at the High Court to request that it reconsiders the dismissal of the lawsuit against Shell’s Board of Directors.

Commenting in response, a Shell spokesperson said: “The court found that ClientEarth’s claim is fundamentally flawed and dismissed it. We firmly believe our directors have always complied with their duties and acted in the company’s best interests.

“The judgment was clear that the claim entirely ignores how directors of a business as large and complex as Shell must balance a range of competing considerations. The judgment also made clear that ClientEarth’s purpose in bringing the claim is to advance its own policy agenda.

“This claim is utterly misconceived and a clear misuse of the English courts. We remain confident that permission to bring the claim should not be granted and that the court will stand by its ruling.”

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