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ClientEarth announce legal action against Shell’s Board of Directors

ClientEarth, in its capacity as shareholder, has announced it is to bring a "derivative" claim against Shell's board of directors in relation to the company's net-zero energy plan.

The claim

The environmental law organisation ClientEarth intends to pursue a claim against Shell’s board, claiming that the directors have breached their duties under s.172 and s.174 of the Companies Act 2006. ClientEarth state that the board has failed to properly prepare the company for the net-zero transition, arguing that the board is mismanaging a material and foreseeable climate risk facing the company.

Under s.172 directors have a duty to promote the success of the company, having regard to a range of factors which include the likely long term consequences of a decision and the impact of the company’s operations on the environment. Under s.174 directors must exercise reasonable care, skill and due diligence in the discharge of their duties.

ClientEarth believe that the company’s energy strategy is inconsistent with the Paris Agreement’s net-zero goals, the board failing to adequately prepare for energy transition-related risks and putting the long-term value of the company at risk.

Derivative action

A derivative claim is brought by a shareholder on behalf of the company in relation to a breach of duty by a director for the benefit of the company as a whole. Derivative action is required because the duties of the directors are owed to the company and not to the shareholders.

It can be used in circumstances where the majority shareholders wrongfully prevent the company bringing the claim itself. This action is thought to be the UK’s first shareholder attempt to hold directors personally liable for a failure to properly prepare for the net-zero transition.

What is the significance?

ClientEarth will need to ask the court for permission to bring a derivative action against the board. The court will consider whether permission should be given with reference to s.263 of the 2006 Act, with particular regard to any evidence as to the views of members without a personal interest in the matter. The court will also consider whether the pursuit of the claim would cause any damage to the success of the company. At the 2021 annual general meeting over 30% of Shell’s shareholders voted against the board, supporting a resolution calling for emissions targets in line with the Paris Agreement.

The derivative action brought by ClientEarth highlights directors’ responsibilities in respect of environmental impact and opens a new avenue for shareholders who have previously relied on AGMs and shareholder resolutions to exert pressure on a boards’ environmental strategy to meet the UK’s net-zero emission commitments.

The shift in public attitude toward environmental concerns means more derivative actions could be brought against directors who fail to consider their personal responsibility and duties owed to the company in respect of net-zero plans.

For any queries regarding this case or any other derivative action claims please get in touch.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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