This judgment was handed down remotely at 10.30am on 12 May 2023 by circulation to the parties or their representatives by e-mail
Mr Justice Trower :
ClientEarth
is a private company limited by guarantee, a non-profit environmental law organisation and a UK registered charity. It also holds a small number of shares (currently 27) in
Shell
Plc, formerly Royal Dutch
Shell
Plc, ("
Shell")
and is therefore a member of
Shell.
It seeks to bring a claim against
Shell's
directors
(the "
Directors")
in respect of a cause of action it accepts is
vested
in
Shell
seeking relief on behalf of
Shell.
These proceedings therefore qualify as a derivative claim within the meaning of s.260(1) of the Companies Act 2006 ("CA 2006").
ClientEarth
is only entitled to bring a derivative claim under Chapter 1 of Part 11 to CA 2006 in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by one or more of the
Directors
(s.260(3)) and it requires the court's permission to continue the claim (s.261(1)). The breaches alleged in
ClientEarth's
claim are said to arise out of the
Directors'
acts and omissions relating to
Shell's
climate change risk management strategy as described in corporate documentation published in April 2021, October 2021 and April 2022. It also alleges breaches relating to the
Directors'
response to an order (the "Dutch Order") made by the Hague District Court (the "Dutch Court") on 26 May 2021 in Milieudefensie
v
Royal Dutch
Shell
plc ECLI:NL:RBDHA:2021:5339 ("Milieudefensie").
- The reason the legislation imposes an obligation on a shareholder to obtain permission to bring a derivative claim is that such a claim is an exception to one of the most basic principles of company law: it is a matter for a company, acting through its proper constitutional organs, not any one or more of its shareholders, to determine whether or not to pursue a cause of action that may be available to it.
ClientEarth
must therefore show that the limited and restricted circumstances in which it is appropriate for the court to authorise it, as a shareholder of
Shell,
to continue a derivative action against the
Directors
for breach of duty are present.
- This judgment is concerned with the first question which arises in all such cases, which is whether
ClientEarth
is entitled to proceed with its substantive application for permission to continue the claim. The court is required by s.261(2)(a) of CA 2006 to dismiss the application if it appears to the court that the application itself and the evidence filed in support of it, do not disclose a prima facie case for giving permission.
- The purpose of this stage of the process has been said to provide a filter for "unmeritorious" or "clearly undeserving" cases (Hollington on Shareholder Rights (9th edn) at 6-03 and 6-14). In some respects, this is a useful shorthand, but the court must not lose sight of the fact that the obligation on the applicant to ensure that its application establishes a prima facie case before a substantive hearing is held imposes an evidential burden on the applicant which arises at the outset. If it is not satisfied, the application must be dismissed. Although there have been disputes in which the parties have accepted that the application for permission can proceed without a prima facie case first being established (e.g., Franbar Holdings Ltd
v
Patel [2008] BCC 885 at [24]), this hurdle is required by the statute and, in the absence of consent, should not be dispensed with (Re Seven Holdings Ltd [2011] EWHC 1893 (Ch) at [62]).
- CPR 19.15 (the renumbered rule 19.9A as amended by rule 12(16) of the Civil Procedure (Amendment) Rules 2023 (SI 2023/105)) makes provision for the procedure to be adopted when the court is considering the question of whether a prima facie case has been established.
Shell
is not to be made a respondent at this stage (CPR 19.15(3)) and the court will consider the matter on the papers in the first instance. PD19A para 2 contemplates that a company may wish to make submissions of its own
volition
in which event it will not normally be entitled to its costs of doing so. In the present case,
Shell
has put in a lengthy written submission which I have taken into account in reaching my conclusions.
- If the court concludes that a prima facie case for giving permission has not been established, the application must be dismissed, but
ClientEarth
is entitled to ask for an oral hearing to reconsider the decision so long as it makes a request in writing within 7 days (CPR 19.15(10)). If the court concludes (either at this stage or after an oral hearing) that a prima facie case for giving permission has been established, the court will then order that
Shell
and the
Directors
be made respondents to the permission application and will give directions for a substantive hearing of that application (CPR 19.15(12)).
- In Iesini
v
Westrip Holdings Limited [2010] BCC 420 ("Iesini") at [78], Lewison J explained the procedure as follows:
"At the first stage, the applicant is required to make a prima facie case for permission to continue a derivative claim, and the court considers the question on the basis of the evidence filed by the applicant only, without requiring evidence from the defendant or the company. The court must dismiss the application if the applicant cannot establish a prima facie case. The prima facie case to which s.261(1) refers is a prima facie case "for giving permission". This necessarily entails a decision that there is a prima facie case both that the company has a good cause of action and that the cause of action arises out of a
directors'
default, breach of duty (etc.). This is precisely the decision that the Court of Appeal required in Prudential."
- Lewison J's reference to Prudential was to the decision of the Court of Appeal in Prudential Assurance Co Ltd
v
Newman Industries Ltd (No 2) [1982] Ch 204 at 222A, in which it was laid down that, before being permitted to continue with a derivative action at common law, it was necessary for the claimant to establish a prima facie case both that the company was entitled to the relief claimed and that the action falls within the proper boundaries of the exception to the rule in Foss
v
Harbottle. In the context of a double derivative action governed by the common law rules rather than the provisions of CA 2006, David Richards J explained in a passage from his judgment in Abouraya
v
Sigmund [2015] BCC 503 ("Abouraya") at [53] (which was also cited with approval by Morgan J in Bhullar
v
Bhullar [2016] BCC 134 at [21]) that:
"A prima facie case is a higher test than a seriously arguable case and I take it to mean a case that, in the absence of an answer by the defendant, would entitle the claimant to judgment. In considering whether the claimant has shown a prima facie case, the court will have regard to the totality of the evidence placed before it on the application."
- As Lewison J went on to explain in Iesini at [79], there is a difference between the procedural position at common law and the procedural position where permission is sought to continue a derivative action governed by the statutory rules. In the latter case, but not the former, there is a two stage process which commences with the filter required by s.261(2). However, the approach to what amounts to a prima facie case will be similar, although affected by the fact that the company and its
directors
will not have put in any evidence, a point which was also made by Peter Knox KC, sitting as a deputy High Court Judge in Haider
v
Delma Engineering Projects Company LLC [2023] EWHC 218 (Ch) at [48]. The question for the court on the present application is whether, on the face of the case advanced by the
ClientEarth,
and in the absence of an answer by
Shell,
ClientEarth
will obtain the permission it seeks.
- As to the substantive application for permission, the test the court must apply is set out in s.263 of CA 2006, as to which:
i) s.263(2) provides that an application for permission must be refused if the court is satisfied (a) that a person acting in accordance with his duty to promote the success of the company would not seek to continue the claim or (b) / (c) that any act or omission from which the cause of action arises has been authorised or ratified by the company before or since it occurred;
ii) s.263(3) makes provisions for a number of discretionary factors which the court must take into account in reaching its decision - they are (a) whether the member concerned is acting in good faith in seeking to continue the claim, (b) the importance which a person acting in accordance with his duty to promote the success of the company would attach to continuing it, (c) / (d) whether any act or omission from which the cause of action arises would be likely to be authorised or ratified by the company, (e) whether the company has decided not to pursue the claim and (f) whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company; and
iii) the court is also required by section 263(4) of CA 2006 to have particular regard to any evidence before it as to the
views
of members of the company who have no personal interest, direct or indirect, in the matter.
- Any conclusion on the merits of the claim reached by the court at this stage of the proceedings does not mean that, at the time of any substantive application for permission, it will be satisfied that, all other considerations being equal, those merits are sufficiently strong to justify the grant of permission. As is made clear in Iesini at [79], the court will have to form its own
view
on the strength of the claim at that stage in order to ensure that the requirements of s.263(2) and s.263(3)(b) are met.
- The claim which
ClientEarth
wishes to continue on behalf of
Shell
is pleaded in particulars of claim settled by counsel and
verified
by a statement of truth signed on behalf of
ClientEarth
by Mr William Hooker, a partner in Pallas Partners LLP. He has also made a witness statement in support of the application for permission, as has a senior lawyer employed by
ClientEarth,
Mr Paul Benson. Both parties have also lodged short supplementary submission letters from their solicitors. The relief sought is for a declaration that the
Directors
have breached their duties in the manner described in the particulars of claim and a mandatory injunction requiring the
Directors
(a) to adopt and implement a strategy to manage climate risk in compliance with their statutory duties and (b) to comply immediately with the Dutch Order, with which it is said that
Shell
has failed to comply.
- The duties relied on by
ClientEarth
include two of the statutory general duties owed by the
Directors
to the Company pursuant to s.170 of CA 2006: the duty to promote the success of the Company (s.172 of CA 2006) and the duty to exercise reasonable care, skill and diligence (s.174 of CA 2006s). As to those general duties:
i) s.172 imposes a duty to act in the way the
director
concerned considers in good faith would be most likely to promote the success of the company for the benefit of its members as a whole, having regard, amongst other matters, to an identified list of considerations, such as the likely consequences of any decision in the long term and the impact of the company's operations on the community and the environment. It is well established that this is a subjective test (e.g., Regentcrest Plc
v
Cohen [2001] 2 BCLC 80 at [120] per Jonathan Parker J); and
ii) s.174 requires a
director
to exercise the 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 a person carrying out the functions they carry out, and the general skill and experience that
director
actually has. This therefore includes both subjective and objective elements.
- In principle, each of the
Directors
owes those duties to
Shell
for the duration of their time as a
director.
The evidence establishes a prima facie case that each of the
Directors
was under such duties for anyway part of the time in which the acts and omissions complained of occurred.
- The duties owed by the
Directors
are also said to include what are pleaded as six necessary incidents of the statutory duties "when considering climate risk for a company such as
Shell".
These are said to be:
i) a duty to make judgments regarding climate risk that are based upon a reasonable consensus of scientific opinion;
ii) a duty to accord appropriate weight to climate risk;
iii) a duty to implement reasonable measures to mitigate the risks to the long-term financial profitability and resilience of
Shell
in the transition to a global energy system and economy aligned with the global temperature objective of 1.5°c under the Paris Agreement on Climate Change 2015 ("GTO");
iv) a duty to adopt strategies which are reasonably likely to meet
Shell's
targets to mitigate climate risk;
v)
a duty to ensure that the strategies adopted to manage climate risk are reasonably in the control of both existing and future
directors;
and
vi)
a duty to ensure that
Shell
takes reasonable steps to comply with applicable legal obligations
- In Pallas' letter of 24 April 2023, it is said that
ClientEarth
does not need to establish these special incidental duties in order to succeed on its claim. Nevertheless it is appropriate for me to say something about the way this part of the case is pleaded because it casts some light on what might be thought to be an underlying misapprehension of what
Shell
would have to prove (and what
ClientEarth
therefore seeks to prove on its behalf) if the claim were to proceed.
- In its written submission,
Shell
contends that the allegation that the
Directors
were subject to these incidental duties is misconceived for three reasons. The first is that they are inherently
vague
and incapable of constituting enforceable personal legal duties. The second is that they cut across the basic principle of company law that it is for the
directors
themselves to determine the weight to be attached to the non-exhaustive list of factors referred to in s.172 to which each
director
must have regard in the performance of their duty to promote the success of the company. The third is that they are incompatible with the subjective nature of the duty under s.172 and amount to an unnecessary and inappropriate elaboration of the statutory duty of care referred to in s.174.
- I agree with
Shell's
submissions on this aspect of the case. The formulation of these incidental duties makes plain that they seek to impose specific obligations on the
Directors
as to how the management of
Shell's
business and affairs should be conducted, notwithstanding the well-established principle that it is for
directors
themselves to determine (acting in good faith) how best to promote the success of a company for the benefit of its members as a whole. This has always been the law (e.g., Re Smith & Fawcett Limited [1942] Ch 304, 306 per Lord Greene MR) and is unaffected by the codification of the duty in section 172. It is an important principle because, as Lewison J observed in Iesini at [85]:
"The weighing of all these considerations [as set out in s.172] is essentially a commercial decision, which the court is ill-equipped to take, except in a clear case."
- Furthermore, in complying with their duty to
Shell
under s.174 CA 2006, each of the
Directors
is required to display the care, skill and diligence that would be exercised by a reasonably diligent person with both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the
Director
in relation to that company and (b) the general knowledge, skill and experience that the
Director
has. The law does not superimpose on that duty more specific obligations as to what is and is not reasonable in every circumstance. As
Shell
submitted, the question is whether the decision falls outside the range of decisions reasonably available to the
Directors
at the time (see e.g. Sharp
v
Blank and others [2019] EWHC 3096 (Ch) per Sir Alastair Norris at [631], applying this principle in a case to which the duties codified in CA 2006 applies).
- In general terms, it seems that
ClientEarth
accepts that this is the correct approach, because it says through Mr Hooker that "
ClientEarth
is not proposing any specific strategy which it requires the Board to adopt. Instead, … it alleges that the Board's current approach falls outside the range of reasonable responses to climate change risk". However, I do not think that the duties pleaded as necessarily incidental to the statutory general duties are reconcilable with the true nature of the duty to exercise reasonable care, skill and diligence to which the
Directors
are subject under s.174.
ClientEarth
also pleaded two additional duties which are referred to as the further obligations. They are that, pursuant to the common law of England and Dutch law respectively, a
director
who is aware of a court order is under a duty to take reasonable steps to ensure that the order is obeyed. This is pleaded as a precursor to
ClientEarth's
allegation that
Shell
has failed to comply with the Dutch Order.
Shell
said that there is no recognised duty owed by
directors
to a company in which they hold office to ensure that they comply with the orders of a foreign court.
- I also agree with
Shell's
submission on this point. While a
director
of a company is under a legal obligation to take reasonable steps to ensure that an order made by an English court is obeyed, the case on which
ClientEarth
relied (Attorney-General for Tuvalu
v
Philatelic Distribution Corpn [1990] 1 WLR 926 at 936E-F) is not authority for the proposition that there is any such duty owed by the
directors
to the company itself, which is separate or distinct from the duties they owe to the company as codified in Part 10 Chapter 2 of CA 2006. The discussion in the Tuvalu case was concerned with the circumstances in which
directors
might be liable for contempt of court if they failed to take reasonable care in this regard; it was not concerned with the nature or extent of any duty owed to the company, in this case
Shell,
in respect of whose cause of action
ClientEarth
wishes to sue.
- I also agree that the nature and extent of the
Directors'
duties to
Shell
are governed by English law as the law of
Shell's
incorporation, as to which the underlying point is the same. There is no established English law duty separate or distinct from the general duties owed by the
Directors
to
Shell
under CA 2006, which requires them to take reasonable steps to ensure that the order of a foreign court is obeyed, let alone to ensure compliance with that order. It follows that, even if as a matter of Dutch law, the
Directors
were to owe duties to
Shell
to take reasonable steps to ensure that the Dutch Order is obeyed, that would be irrelevant to the claims sought to be made in these proceedings, governed as they are by English law. So far as
Shell's
potential claims against the
Directors
are concerned, the only question is whether their response to the Dutch Order rendered them in breach of an English law duty.
- I therefore think that
ClientEarth's
approach to the formulation of the incidental duties and further obligations alleged to be owed by the
Directors
to
Shell
has insufficient regard to the way in which the legislature has formulated the general duties. The way in which
ClientEarth
puts its case seeks to impose absolute duties on the
Directors
which cut across their general duty to have regard to the many competing considerations as to how best to promote the success of
Shell
for the benefit of its members as a whole. The impact of
Shell's
operations on the community and the environment is a matter which the
Directors
are required to weigh in the balance in that context (s.172(1)(d)), but their response to the business risks for
Shell
associated with climate change is part of the decision making process by which the
Directors
manage
Shell's
business and is subject to the well-established principle explained by Lord Wilberforce in Howard Smith Ltd
v
Ampol Ltd [1974] AC 821 at 832E/F:
"There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at."
- As I have already mentioned,
ClientEarth
recognises that it needs to establish a prima facie case that the
Directors'
current approach falls outside the range of reasonable responses to climate change risk and will cause harm to
Shell's
members. However, it is important not to lose sight of what that means. It is not simply that "the general principle of subjectivity is subject to several qualifications, including … the test of reasonableness" (as Pallas said in their 24 April 2023 letter). That formulation is apt to mislead. The case on which they relied (TMO Renewables
v
Yeo and others [2021] EWHC 2033 (Ch) at 391) supports a more rigorous principle with which I agree,
viz.
that
ClientEarth
must show a prima facie case that there is no basis on which the
Directors
could reasonably have come to the conclusion that the actions they have taken have been in the interests of
Shell.
- In the particulars of claim, the specific breaches alleged against the
Directors
fall into three categories:
i) The first, pleaded in paragraphs 51 and 52 of the Particulars of Claim, relate to a failure to set an appropriate emissions target. It is said that an absolute emissions target to be met before 2050 is required and that the
Directors'
decision to set certain Carbon Intensity Targets is inadequate. In particular it is said that they have failed to ensure that
Shell
has a measurable and realistic pathway to meeting the net zero ("NZ") target so as to align with what are set to be future expected market conditions consistent with the GTO.
ii) The second, pleaded in paragraph 53 of the Particulars of Claim, is that the
Directors'
strategy as regards the management of climate risk does not establish a reasonable basis for achieving the NZ target and are not aligned with the GTO. In particular
ClientEarth
criticises (a) the
Directors'
proposals to make significant new investments in fossil fuel projects, (b) their reliance on carbon capture and storage and nature based solutions which will not mitigate the economic risks to
Shell's
underlying business model, (c) the proposed capital expenditure on renewable energy expenditure which is said to be opaque and insufficient and (d) the absence of measures sufficient to respond rapidly to changes to the legal, regulatory and financial conditions so as to ensure that their strategy is sufficiently robust.
iii) The third, pleaded in paragraph 63 of the Particulars of Claim, is that the
Directors
have failed to comply with the Dutch Order. It is said that, although the Dutch Order determined that Dutch law imposed a 45% emissions reduction obligation on
Shell
to be achieved by 2030, the
Directors
have not prepared a plan to ensure timely compliance.
- The evidence adduced by
ClientEarth
in support of its first two categories of alleged breach is
voluminous.
In large part it is marshalled in Mr Benson's witness statement and is all said to be directed at what he explains is
ClientEarth's
central allegation that by adopting and pursuing an inadequate energy transition strategy, the
Directors
are mismanaging the material and foreseeable risk that climate change presents to
Shell.
The third alleged breach relating to compliance with the Dutch Order, is dealt with in Mr Hooker's witness statement to which he annexes a letter from a Dutch lawyer, Antonius
van
Mierlo, who is a professor of law and partner in Habruken Rutten.
- Sections A and B of Mr Benson's witness statement concentrate on setting the scene. Section A is concerned with explaining the cause of climate change and its impact on rising global temperature levels. It outlines that climate change presents material financial risks to companies, particular to those such as
Shell
which operate in the fossil fuel sector. Both Mr Benson's witness statement and
ClientEarth's
particulars of claim identify climate risk as a financial risk comprised of physical risks, economic transition risk, litigation risk and productivity losses all flowing from climate change. Mr Benson then explains in some detail how, in order to achieve the GTO, there must be a global energy transition to move from what will occur on current policy settings to NZ emissions by 2050. He also gives a broad description of international standards on corporate transition plans, the widely accepted practice of dividing a company's greenhouse gas emissions into three Scopes in accordance with a methodology established by the Greenhouse Gas Protocol, the differences between absolute emission reduction targets and carbon intensity targets and the way in which they should be set. He concludes this section of his witness statement by stating that many institutional investors consider that the best way to manage climate risk is for a company to align their business with the GTO, although he accepts that there is no single universally accepted methodology for assessing whether a company's targets and strategy are Paris-aligned.
- In the light of the way
ClientEarth
puts its case, I should explain what it means by Scope 1, Scope 2 and Scope 3 emissions. Scope 1 are direct emissions from (e.g. in the case of
Shell)
its production of oil and gas. Scope 2 are indirect emissions from the generation of energy used to carry out its operations (e.g. the refining of oil). Scope 3 are the indirect emissions which arise when
Shell's
products are used by its customers. Mr Benson says that international standards on corporate transition plans generally require a company's targets to include a reduction in Scope 3 emissions and that the
vast
majority of an oil and gas company's emissions will be Scope 3 emissions.
- Section B of Mr Benson's witness statement is concerned with the specific risks faced by
Shell
in relation to energy transition. They are explained in
Shell's
2021 Annual Report as commercial risk, regulatory risk, societal risk and physical risk, of which Mr Benson referred to more detailed evidence on the impact for
Shell
of the first two categories:
i) As to commercial risk, Mr Benson explains that the
Directors
have identified lower demand and lower margins for oil and gas products as
Shell's
principal climate-related financial risk together with access to and the cost of capital.
ii) As to regulatory risk, there is a detailed explanation of how the states which are parties to the Paris agreement have set NZ targets for 2050, together with interim targets over the intervening period, and that the
Directors
have recognised that there is an ever-increasing threat that governments worldwide will set regulatory frameworks to restrict further exploration, production and use of hydrocarbons and their products. Examples are given of
ClientEarth's
case as to how this is more than a threat, with a global regulatory focus on carbon pricing, low carbon buildings, clean industry, clean power and zero emission
vehicles.
- Mr Benson also explained that
Shell
is exposed to what he called stranded asset risk, by which he means assets which have already been acquired but which become unviable or less profitable as a result of climate risk materialising. He asserts that the extent of this risk depends on the way in which the energy transition unfolds. He also accepts that
Shell's
auditors consider that, because of the depreciation of its current Upstream and Integrated Gas property plant and equipment and the recoverability of its remaining reserves, the risk that the assets in respect of which there may be a higher risk of the reserves not ultimately being produced is low.
- The upshot of Sections A and B of Mr Benson's witness statement is that
ClientEarth
submits that it is or should be common ground that
Shell
faces material and foreseeable risks as a result of climate change which have or could have a material effect on it. For present purposes, it has established a prima facie case to that effect. Indeed,
Shell
does not disagree with that proposition in broad terms, although it does not accept the way in which some of the risks have been explained and characterised in the evidence.
- That does not, however, demonstrate a prima facie case for the grant of permission, because the more important question is the nature of
Shell's
response to those risks and the extent to which
ClientEarth
has demonstrated a prima facie case of actionable breach of duty by the
Directors
in their management of those risks.
- The
Director's
management of climate risk, said by
ClientEarth
to give rise to the breaches of duty alleged in paragraphs 51 to 53 of the particulars of claim, is addressed in Section C of Mr Benson's witness statement. The first part of Section C starts by describing the emissions reduction targets
Shell
has adopted. He summarises the public statements made by
Shell
in relation to its climate risk management and emission reduction targets culminating in what is called its Energy Transition Strategy ("ETS") published in April 2021. This contains what
ClientEarth
says is
Shell's
current strategy for dealing with these risks. The progress
Shell
has made in implementing the ETS is recorded in an energy transition progress report dated April 2022, which explains how it proposes to reduce emissions by a mixture of increasing the ratio of gas to oil in its sales portfolio, by growing its electricity sales, by increasing low-carbon fuel sales and by increasing the use of 'carbon capture and storage' and 'nature-based solutions' involving carbon offsetting. The April 2022 report also records
Shell's
short, medium and long-term emissions targets based on its analysis of its Scope 1, 2 and 3 emissions.
- However, unlike Sections A and B of the witness statement, Section C does not only contain a factual description of the steps which the
Directors
have taken. It also contains an analysis of what are said to be the inadequacies and deficiencies in the
Directors'
management of climate change risk and what is said to be the basis on which those inadequacies and deficiencies give rise to breaches of duty.
ClientEarth's
first criticism of the
Directors
is that they have always stated that the targets
Shell
has set are consistent with the GTO, but that it does not disclose the extent to which its pathway to their achievement is reliant on carbon capture or nature-based solutions. He also says that shareholders have not been told whether the targets the
Directors
have set would lead to an absolute reduction in emissions, although it says that this lack of transparency does not affect its case because "the problems with the Board's case are apparent from the disclosure that has been made".
- The core of the criticism on which the allegations of breach of duty made in paragraphs 51 and 52 of the particulars of claim is based is what is said to be the inadequacy of the targets for
Shell's
Scope 1, 2 and 3 emissions as disclosed in the April 2022 report. All three have a 100% target for 2050, but
ClientEarth
relies on the fact that there is no pathway for the Scope 3 absolute emissions and that the pathway for the Scope 1 and 2 targets relating to absolute emissions is 50% by 2030 and 20% for the carbon intensity of the products it sells.
- Mr Benson also goes on to explain that the reason it can be seen that there is no target at all to reduce Scope 3 absolute emissions in the period up to the ultimate goal of 100% by 2050 is that none is given for absolute net emissions, while the use of a carbon intensity metric leading to 20% reduction by 2030 (and indeed a 45% reduction by 2045) has no necessary correlation to a reduction in its Scope 3 emissions. Mr Benson then gives some examples of statements by
Shell
that it did not know where it would be on its absolute emissions by 2030. He concludes that:
"In light of the above,
ClientEarth
alleges that the Board's current targets do not materially mitigate the climate risk facing the company, and are not proportionate to the scale of that risk. In the circumstances, its failure to adopt, disclose and implement a proportionate Scope 3 absolute emissions reduction target, or carbon intensity targets which credibly result in demonstrable absolute emission reductions in line with the GTO, is manifestly unreasonable and in breach of duty.
In circumstances where the Board has set a net zero target by 2050 and stated its strategy to be Paris-aligned,
ClientEarth
further alleges that the failure to set any or any proper interim targets to actually meet those objectives is unreasonable and a breach of duty."
- The second criticism made by
ClientEarth
is reflected in the breach pleaded in paragraph 53(a) of the particulars of claim. It is said that
Shell
intends only a modest decline in its oil production and an active growth in its gas business, in the case of liquified natural gas by creating new markets and embracing new customers. Details are given of 27 projects which are described as significant oil and gas assets under construction, said to hold 2.48 billion barrels of oil and which are said to be estimated to be producing oil and gas for decades to come. Details are also given of discovered assets which may or may not be developed, said together to hold just under 6.1 billion barrels of oil. Mr Benson bases his evidence on reports produced by Rystad Energy UCube which provides tables on the extent to which these assets are estimated still to be in production at the beginning of each decade through to 2050. He also gives details of the published material from which the extent of
Shell's
plans on exploration for new reserves can be ascertained.
- The conclusions which Mr Benson draws from the timeframes relating to these projects is that they run directly contrary to the
Directors'
assertions that
Shell
is preparing for the transition to a Paris-aligned economy and its own NZ target. He refers to evidence in the form of recent documentation produced by the International Energy Authority that there is enough supply in conventional fields already producing or under construction to satisfy Paris-aligned oil and gas demand and from the International Institute for Sustainable Development that there is a large consensus that developing new oil and gas fields is incompatible with the GTO. He then extrapolates from this an allegation that, given the Board's strategy is to minimise the risks of energy transition while enhancing
Shell's
ability to lead as the world transition to a Paris-aligned energy system, the size and scale of its project pipeline makes no sense and indeed appears materially to increase those risks.
- There is then an explanation, based on reports from a financial think-tank, Carbon Tracker, as to why
Shell
has a high proportion of unsanctioned capital expenditure in assets which are unviable even on a pathway to 2.5°c. It is said to be the owner of a number of pre-final investment decision assets and projects which are incompatible with a Paris-aligned scenario and therefore it is heavily exposed to stranded asset risk. This is said to mean that the Board's approach to new projects is manifestly unreasonable and contrary to
Shell's
long-term success.
- The next breach alleged by
ClientEarth
relates to the
Directors'
approach to mitigating
Shell's
exposure to climate risk by diversifying into low-carbon alternatives, an approach which
Shell's
2021 Annual Report describes as a way of addressing the resilience of its portfolio. The
Directors
have published their expectations as to how this capital expenditure will evolve over time, but it is said to be difficult to make sense of this information because, amongst other things, the figures are intermingled with marketing which means that the true figures for capital expenditure on low and zero carbon energy going forward cannot easily be established. It also points out that capital expenditure actually made on what are called Renewables and Energy Solutions has
varied
between 12% and 14% for 2021, 2022 and 2023 (the latter of which is a projected figure). Mr Benson reiterates that
ClientEarth's
case is that, while carbon intensity targets are capable of mitigating climate risk,
Shell's
do not do so even partially. Its case is that the primary driver of climate risk is the anticipated
value
destruction of
Shell's
fossil fuel business and that risk is only properly mitigated by reducing the size of that business.
- Mr Benson's evidence also gives further details of
Shell's
carbon capture and storage and nature based solutions to climate change risk, but says that there a number of difficulties in relying on both of them.
ClientEarth's
allegation (paragraph 53(b) of the particulars of claim) is that they will not mitigate the economic risks to
Shell's
underlying business model. As to carbon capture and storage, the reason for this, according to Mr Benson, is that the technology can only address Scope 1 emissions, that its use is nascent or underdeveloped and that it is expensive. As to nature-based solutions involving the use of carbon credits, Mr Benson says that international standards on corporate transition strategies provide that carbon credits should not be counted as emissions reductions for the purposes of short or medium term targets, that carbon credit offsetting is not specifically regulated, that emissions reductions from overseas carbon credits are overstated and that serious concerns have been identified regarding their feasibility and proposed scale. He says that one reason for this is that
Shell's
carbon credit target appears unrealistic, given the economy wide demand for them.
- In summary, Mr Benson alleges that the
Directors'
reliance on carbon capture and storage is unreasonable because it is ineffective. He also says that their assumptions relating to nature-based solutions offsetting, and their reliance on it as an effective mitigation for
Shell's
transition risk is also unreasonable. He says that neither does anything to mitigate that risk and in fact they both add to the costs for
Shell
of maintaining or growing its fossil fuel business. Nature-based solutions in particular are said to present a serious risk to
Shell
achieving its emissions targets. However, more fundamentally, it is said that:
"it simply does not address the key climate risk to
Shell:
the
value
destruction of its fossil fuel business. It is in those circumstances that
ClientEarth
principally alleges that the Board's reliance on it is unreasonable."
- In my judgment, there are a number of fundamental reasons why
ClientEarth's
allegations in relation to the breaches of duty pleaded in paragraphs 51 to 53 of the particulars of claim do not establish a prima facie case. The starting point is that the court can place
very
little weight on the opinions expressed by Mr Benson. I accept that the criticisms he makes of the
Directors'
approach reflect
ClientEarth's
opinions which are genuinely held, but that is plainly insufficient. This is not just because on a proper analysis Mr Benson's evidence does not establish a case that the
Directors
are managing
Shell's
business risks in a manner which is not open to a board of
directors
acting reasonably but also because, even if that were to be his opinion, neither he nor
ClientEarth
is able to give expert evidence on which the court can properly rely. As Mr Benson accepts:
"My role at
ClientEarth
focuses on law and policy relating to climate change. I have previously specialised in emissions-related litigation and generally worked in and around environmental regulation and disputes for over 10 years. I do not have expertise in climate science, macro-economics, oil and gas price forecasting, accounting, carbon pricing, carbon markets or related fields, and no part of this statement purports to articulate any expert opinion. Rather, it seeks to set out the statements of fact which underpin
ClientEarth's
claim, and the assertions which
ClientEarth
make as part of its claim.
- Secondly, the evidence does not support a prima facie case that there is a universally accepted methodology as to the means by which
Shell
might be able to achieve the targeted reductions referred to in the ETS. This means that it is
very
difficult to treat what is said as providing a proper evidential basis for alleging that no reasonable board of
Directors
could properly conclude that the pathway to achievement is the one they have adopted. While it is plain that there are fundamental disagreements between
ClientEarth
and the
Directors
as to the right way to achieve the NZ 2050 targets that
Shell
has set itself, the law respects the autonomy of the decision making of the
Directors
on commercial issues and their judgments as to how best to achieve results which are in the best interests of their members as a whole. The evidence falls some way short of establishing a prima facie case that the way in which
Shell's
business is being managed by the
Directors
could not properly be regarded by them as in the best interests of
Shell's
members as a whole.
- Thirdly, it is part of
ClientEarth's
own case that the
Directors
do in fact have policies and targets to achieve NZ by 2050, but it is just that they are manifestly unreasonable. This is inconsistent with any suggestion that the
Directors
have not in fact considered what is in the best interests of
Shell
and its members as a whole when addressing the most appropriate manner in which to deal with climate risk. However, the evidence does not engage with the issue of how the
Directors
are said to have gone so wrong in their balancing and weighing of the many factors which should go into their consideration of how to deal with climate risk, amongst the many other risks to which
Shell's
business will inevitable be exposed, that no reasonable
director
could properly have adopted the approach that they have. This is a fundamental defect in
ClientEarth's
case because it completely ignores the fact that the management of a business of the size and complexity of that of
Shell
will require the
Directors
to take into account a range of competing considerations, the proper balancing of which is classic management decision with which the court is ill-equipped to interfere.
- As to the third alleged breach relating to compliance with the Dutch Order, the evidence is that the Dutch Court has ordered
Shell:
"both directly and
via
the companies and legal entities it commonly includes in its consolidated annual accounts and with which it jointly forms the
Shell
group, to limit or cause to be limited the aggregate annual
volume
of all CO2 emissions into the atmosphere (Scope 1, 2 and 3) due to the business operations and sold energy-carrying products of the
Shell
group to such an extent that this
volume
will have been reduced by at least net 45% at end 2030, relative to 2019 levels."
- The Dutch Court has also directed that the Dutch Order is provisionally enforceable, which means, as I read Professor
van
Mierlo's opinion letter, that there is no stay on its enforceability pending appeal. The appellate court has the power to suspend provisional enforceability, but the evidence is that
Shell
has not sought such relief and is therefore obliged as a matter of Dutch law to take steps to comply with the Dutch Order. It is also said that the Dutch Order takes effect immediately after the decision has been made, which means that
Shell
is required to take steps to comply with it immediately.
- Professor
van
Mierlo says that what this means in practice is that:
"[
Shell]
is immediately obliged to take certain measures … to effect a reduction of its Scopes 1, 2 and 3 CO2 emissions levels. If Milieudefensie considers that [
Shell]
is failing to comply with that obligation, it may demand compliance with the Judgment by means of the formal Court process set out in Article 430 (3) CCP and require that [
Shell]
take steps to effect the Judgment within a reasonable period of time.
"When considering whether or not [
Shell]
is in breach of its obligations under the Judgment, it is essential that it is offered a reasonable period of time to take steps to implement measures to achieve the required emissions reductions (i.e. to develop a robust group policy aimed at emissions reduction). However, given the nature of the obligation imposed on [
Shell]
by the Judgment and the relatively short timeframe within which the Judgment requires it to be achieved, Milieudefensie would certainly be able to argue that [
Shell]
is required to initiate the necessary measures to achieve a reduction of CO2 emissions in relatively short order."
- It appears from the wording of the Dutch Judgment that, although the Dutch Order is in some respects results-based, the Dutch Court accepted that
Shell
is not currently acting in an unlawful manner and recognised that it is a matter for
Shell
as to how it exercises its discretion to comply with reduction obligations imposed by Dutch law. This is clear from the following passage, which encapsulates a refusal by the Dutch Court to interfere with the means by which the
Directors
may choose to ensure that
Shell
complies with its obligations:
"
Shell
has total freedom to comply with its reduction obligation as it sees fit, and to shape the corporate policy of the
shell
group at its own discretion."
- This passage is not referred to by Professor
van
Mierlo, and seems to me cut across the suggestion that the Dutch Court regards the
Directors
as being under any duty to
Shell
to take steps towards compliance with the Dutch Order in any manner other than through compliance with their duties to do that which they consider in good faith would be most likely promote the success of
Shell
for the benefit of its members as a whole in accordance with s.172 of CA 2006. I should add that although Professor
van
Mierlo's letter expresses his opinion, it does not comply with CPR PD35 because it is addressed to
ClientEarth's
solicitors not the court, it does not exhibit his instructions, it does not contain the statement identified in PD35 para 3.2(9) and it is not
verified
by the statement of truth required by PD35 para 3.3.
- Of equal importance, I agree with
Shell's
submission that
ClientEarth's
reliance (in Mr Hooker's witness statement) on what has been said by
Shell's
former CEO does not come close to establishing a prima facie case that the
Directors
have no genuine intention of procuring
Shell
to comply with its best efforts obligations under the Dutch Order in respect of its Scope 3 emissions. Pallas asserts that
Shell
is trying to adduce its own evidence on this point which is not something which the court should permit at this stage of the process. I disagree with this description of this part of
Shell's
submission. In substance, it does not do anything more than explain why the material on which Mr Hooker relies does not disclose a prima facie case in relation to this category of breach, having regard (per David Richards J in Abouraya) to the totality of the evidence which
ClientEarth
has placed before the court on the application.
- I also agree with
Shell's
submission that one of the issues the court must consider at this stage of the process is the precise nature of the relief sought and the prospects of the court granting it if proceedings were to be continued. The nature of the relief sought is as much a factor in the company's entitlement to obtain that relief as is the nature of the breaches on which
ClientEarth
relies.
- As to the injunction, there is no doubt that a court will not grant mandatory injunctive relief if constant supervision is required, which will be particularly acute as a factor if the relief sought is insufficiently precise. This would be the case if the order sought necessarily contemplated that the court may be required to adjudicate on disputes over whether or not a business is being run in accordance with its terms (Cooperative Insurance Society Ltd
v
Argyll Stores (Holdings) Ltd [1998] 1 AC 1 at 12G-H). As Lord Hoffmann went on to say at 14A-B: "
"The fact that the terms of a contractual obligation are sufficiently definite ... to found a claim for damages ... does not necessarily mean that they will be sufficiently precise to be capable of being specifically enforced."
- In my
view
the mandatory orders currently sought by
ClientEarth
fall foul of that basic principle. A mandatory injunction that
Shell
(a) adopt and implement a strategy to manage climate risk in compliance with its statutory duties and (b) comply immediately with the Dutch Order is too imprecise to be suitable for enforcement, and for that reason alone is an order which a court would be most unlikely to make. Indeed, it is difficult to see how the court could be satisfied that the disruptive impact which disputes over compliance would have on the conduct of
Shell's
business would not of itself have the serious adverse impact on the success of
Shell
for the benefit of its members as a whole, which
ClientEarth
contends that these proceedings are designed to avoid.
- Although the declaratory relief sought does not suffer from the same problems, it is difficult to see what legitimate purpose the grant of a declaration would fulfil. In their 24 April 2023 letter, Pallas submit that, if the court is satisfied that the
Directors
have breached their duties,
Shell's
position that the court should do nothing about it is
very
unattractive. I do not think that is the right approach. In any proceedings, the court is concerned with the utility of the substantive relief sought. 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 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.
- It follows that in my
view,
ClientEarth
have not made out a prima facie case for the relief sought either on the basis that the
Directors
are in breach of their duties in the respects alleged or on the basis that the court should grant the relief sought. In those circumstances, I do not consider that there is a prima facie case for giving permission because, on the totality of
ClientEarth's
own evidence, the court can be satisfied that a person acting in accordance with s.172 CA 2006 would not seek to continue the claim. This means that the court is bound to refuse
ClientEarth
permission to do so come what may (s.263(2)(a)).
- However, I think it is also appropriate to have regard to the factors referred to ss.263(3) and 263(4) CA 2006, both because they are confirmatory of the fact that a person acting in accordance with s.172 would not seek to continue the claim and because they bear on the issue that, even if the court were not bound to refuse permission because of s.263(2)(a),
ClientEarth
has not established a prima facie case that it would do so.
- The first discretionary consideration which the court is required to take into account at any substantive hearing for permission is whether
ClientEarth
would be acting in good faith in seeking to continue the claim: s.263(3)(a) CA 2006. If the court cannot be satisfied at the prima facie stage that such parts of the applicant's own evidence as raise the prospect of a want of good faith has not been satisfactorily answered, that of itself will be a material consideration against a conclusion that a prima facie case for permission to continue has been made out.
Shell
contends that there is good reason to conclude that this application is an attempt by
ClientEarth
to publicise and advance its own policy agenda, which is clearly a misuse of the derivative claim procedure and supports the conclusion that the application is not brought in good faith.
- This is disputed by
ClientEarth.
Both Mr Hooker and Mr Benson assert that
ClientEarth
is bringing these proceedings in good faith for the benefit of
Shell's
members as a whole and with the aim of protecting its long term
value.
It is Mr Benson's evidence that
ClientEarth
genuinely believes that its claim is in the long-term best interests of
Shell,
its shareholders and employees. Client Earth submits that it would not be right for the court to disbelieve Mr Benson on this point, a submission which it has stressed in Pallas' 24 April 2023 letter to the court.
- I do not think that
ClientEarth's
evidence is an answer to
Shell's
point, not least because I do not think it is right to characterise
Shell's
response as an invitation to the court to disbelieve Mr Benson. For the purposes of the present exercise, there is no reason to doubt that the belief expressed by Mr Benson is genuinely held. However, the question of good faith does not just involve an examination of whether
ClientEarth
has an honest belief that the claim is in the long-term best interests of
Shell.
It may also require an assessment of whether
ClientEarth
is in fact bringing the proceedings for an ulterior purpose, a point which arises in particularly acute form given the de minimis extent of
ClientEarth's
shareholder interest in
Shell.
This test was applied in a pre-CA 2006 case (per Peter Gibson LJ in Barrett
v
Duckett [1995] BCC 362, 367H-368D) and was adopted in Iesini at [113] to [121] (albeit with the opposite result) in which Lewison J held that, because the dominant purpose of the claim was to benefit the company, it could not be said that, but for the collateral purpose, the claim would not have been brought at all. For that reason the claim in Iesini was brought in good faith.
- However, it seems to me that where the primary purpose of bringing the claim is an ulterior motive in the form of advancing
ClientEarth's
own policy agenda with the consequence that, but for that purpose, the claim would not have been brought at all, it will not have been brought in good faith. The reason for this is that it will be clear to
ClientEarth
that it is using an exceptional procedure in the form of a derivative action, for a purpose other than the purpose for which the legislation has made it available. If, on the evidence adduced by the applicant, that remains an open and unanswered question irrespective of what
Shell
might say at the substantive hearing, the court cannot be satisfied that
ClientEarth
is acting in good faith, a situation which will count strongly against a conclusion that it has established a prima facie case for permission.
- In my
view,
the fact that
ClientEarth
is the holder of only 27 shares in
Shell,
but is proposing that it should be entitled to seek relief on behalf of
Shell
in a claim which on any
view
is of
very
considerable size, complexity and importance (and will be exceptionally expensive and time-consuming to pursue), gives rise to a
very
clear inference that its real interest is not in how best to promote the success of
Shell
for the benefit of its members as a whole. In short, there is substance in
Shell's
submission that
ClientEarth's
motivation is driven by something quite different from a balanced consideration as to how best to enforce the multifarious factors which the
Directors
are bound to take into account when assessing what is in the best interests of
Shell.
It seems to me that
ClientEarth
has adopted a single-minded focus on the imposition of its
views
and those of its supporters as to the right strategy for dealing with climate change risk, which points strongly towards a conclusion that its motivation in bringing the claim is ulterior to the purpose for which a claim could properly be continued. In my
view,
ClientEarth
has not adduced sufficient evidence to counter the inference of collateral motive which therefore arises.
- There is nothing further to be said about the second discretion factor in s.263(3)(b) CA 2006. It follows from the conclusion I reached on s.263(2)(a) that, on the present state of the evidence, a person acting in accordance with s.172 would attach little if any importance to continuing the claim because
ClientEarth
has not established a prima facie case that
Shell
has a good cause of action arising out of the
Directors'
defaults or breaches of duty.
- As to issues of authorisation and ratification, if the acts or omissions relied on by
ClientEarth
have been authorised or ratified by
Shell,
ss.263(2)(b) and (c) CA 2006 provide that permission to continue the claim must be refused and the likelihood of authorisation or ratification in the future is a discretionary factor under ss.263(3)(c) and (d). It is not said by
Shell
that authorisation or ratification has occurred and there is no direct evidence of the likelihood that it will be. But there is evidence as to the
views
of the members of
Shell
generally and, if they have no personal interest in the matter, that is evidence to which the court is required by s.263(4) to have particular regard.
- At
Shell's
AGM held on 18 May 2021 the support for its ETS was 88.4% of the
votes
cast by members. This fell to 80% support at the AGM held on 24 May 2022, when a progress report on the ETS was under consideration. In my
view,
Shell
is correct to say that the strength of the members' support for the
Directors'
strategic approach to climate change risk is a factor to which the court is bound to have particular regard if faced with a substantive application for permission.
- Set against this is the support which
ClientEarth
has received for its claim from members holding 12.2 million shares amounting to approximately 0.17% 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. 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.
- I consider 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% and 20.29% of
votes
cast in favour of resolutions proposed at the 2021 and 2022 AGMs by the activist shareholder group 'Follow This'. 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.
- For all of these reasons, it appears to me that
ClientEarth's
application and the evidence adduced in support of it do not disclose a prima facie case for giving permission to continue the claim. The court is therefore required to dismiss the application in accordance with s.261(2)(a) CA 2006.
ClientEarth is entitled to ask for an oral hearing to reconsider this decision in accordance with CPR19.15(10). If it does so, directions for that hearing can be given in due course. If it does not seek an oral hearing, the claim will be dismissed in accordance with s.261(4)(b).