Shareholder Litigation And Corporate ESG Policy: ClientEarth V The Directors Of Shell PLC

• Law Firm: Torys LLP
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Environment, Commodities/Derivatives/Stock Exchanges, Corporate and Company Law, Directors and Officers, Climate Change, Clean Air / Pollution, Shareholders
• Author: Mr Andrew Gray
• Published date: 09 May 2023

A proposed derivative action aimed at changing a corporation's climate transition plans raises questions about the effectiveness and the aptness of shareholder litigation as a mechanism to change corporate ESG policy, and it highlights longstanding debate about the role of directors in managing corporate affairs that engage areas of public concern.

Background

ClientEarth, an environmental activist with a nominal shareholding in Shell plc, has initiated a derivative action in the United Kingdom against the directors of Shell, alleging that the directors have breached their duties by failing to pursue more aggressive climate transition plans. In the words of ClientEarth, it is "taking legal action to compel Shell's Board to strengthen its climate transition plans, in the best interests of the company in the long-term"¹. The litigation identifies climate change as a corporate risk the board of Shell is responsible for managing, and it deploys the derivative action as the mechanism for achieving a remedy for what is alleged to be harm to the company and, indirectly, to ClientEarth and Shell's other shareholders. The litigation goal is not the recovery of damages already caused to Shell by the board's management of climate change risk, but rather forcing the board to adopt what ClientEarth believes are better climate transition plans. In substance if not in form, ClientEarth's derivative action uses shareholder litigation putatively aimed at remedying harm to the corporation's private interests to address public, ESG-focused goals.

Will ClientEarth's claim succeed?

As shareholder litigation focused on corporate ESG policy, ClientEarth's claim faces a number of potential obstacles:

• Absence of any actual harm to be remedied. Typically the derivative action pursues a remedy for corporate harm that is financial in nature; here, the outcome sought is to force a change to corporate policy, albeit as a way to avoid what is said to be potential harm in the future. Avoiding potential harm to the company from looming climate change risks may not be a strong basis for shareholder litigation.
• Business judgment protection and responsibility for managing risks. Managing ESG risks is a board responsibility one it shares with senior management. Mismanagement of any risk to the corporation'i.e., the failure to monitor and act on risks known or knowable to the board or senior management'is actionable using the derivative action mechanism where that mismanagement leads to...