Companies are legal entities in their own right. Companies can enter into contracts and employ staff. They can also sue, and can be sued. It is the directors who have the power to issue legal proceedings on behalf of a company. This then raises the question: what is to be done if a company is mismanaged by its directors? The directors can hardly issue proceedings against themselves.
One option is for the shareholders of the company to step in, by way of a “derivative claim” under Part 11 of the Companies Act 2006. Derivative claims enable shareholders to issue court proceedings on behalf of their company, in respect of alleged breaches of the directors’ duties under the 2006 Act. That is precisely what happened in ClientEarth v Shell plc & Ors  EWHC 1137 (Ch).
ClientEarth is a non-profit organisation, whose stated objective is to use the power of the law to “create systemic change [focusing] on the most pressing environmental challenges…”. ClientEarth acquired 27 shares in Shell Plc. As a shareholder, ClientEarth was able to issue a derivative claim on behalf of Shell, against its directors. The basis of ClientEarth’s claim was (inter alia) that Shell’s directors had failed to implement an energy transition strategy fit to manage climate risk, or in accordance with the stated goals of the Paris Agreement (to keep global warming below 1.5 degrees above pre-industrial levels). ClientEarth also alleged breaches relating to the directors’ response to an order made by the Hague District Court on 26 May 2021 (“the Dutch Order”). ClientEarth argued that shell’s directors had, as such, failed in their statutory duties to promote the success of the company or act with reasonable skill, care and diligence (§§.172 and 174 of the 2006 Act).
ClientEarth sought mandatory injunctions, requiring Shell’s directors to:
Because derivative claims are, by their nature, exceptional, once a claim is issued the claimant shareholders must apply to the court for permission to continue with the claim. This procedural step enables the courts to assess, at an early stage, whether claims have prima facie merit. The courts must dismiss applications that fail, on the evidence, to disclose a prima facie case for giving permission to continue. Applications for permission to continue are considered by the court on the papers, subject to claimants’ rights to request an oral hearing to reconsider any decision not to grant permission.
On 12 May 2023 Mr Justice Trower gave judgment, dismissing ClientEarth’s application for permission to continue with its derivative claim against Shell. The judge’s reasons for his decision were, broadly:
ClientEarth sought, and obtained, permission for an oral reconsideration of Mr Justice Trower’s decision. Legal commentators and environmentalists alike will be waiting and watching closely for the next chapter in the litigation.
ClientEarth’s claim is thought to be the first of its kind in the UK. Whatever the outcome, the claim will have provided ClientEarth with a platform upon which to advance its own policy agenda. As environmental issues continue to occupy the public, political and economic conscience, ClientEarth’s claim is unlikely to be the last of its kind.
ClientEarth v Shell plc & Ors  judgment.
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