Under the Companies Act 2006 (the “2006 Act”), shareholders may bring a claim to challenge decisions taken by directors that they do not believe have been taken in good faith and do not advance the interests of the company.
In a recent case, ClientEarth, a climate change campaign group and a shareholder in Shell, brought an action arguing that the company’s climate change strategy, as approved by the directors, failed to adequately deal with the risk posed to Shell’s business by climate change.
ClientEarth first had to obtain permission to bring the claim under section 263 of the 2006 Act and test applied by the court to decide whether to grant permission was to consider whether a hypothetical person acting in accordance with a director’s duty to promote the success of the company would seek to challenge the directors’ decision.
When applying this test, the court considers a number of factors including whether the director is acting in good faith and in accordance with the decision or strategy promoting the success of the company and whether the alleged breach of director’s duty is so serious that the shareholder could pursue a claim in their own name rather than on behalf of the company.
The court refused to allow the application. It is a well-established principle that directors have discretion to decide how best to promote the success of the company for the benefit of all shareholders. The duty upon directors to exercise reasonable skill, care and due diligence under the 2006 Act, requires them to manage competing considerations such as the business’ existing fossil fuel business with the response to climate change and trend to de-carbonise the economy.
Shell’s directors had identified that its climate strategy was a commercial objective and the court would not intervene in the running of the company in order to give this policy greater prominence. Such a decision would have invariably required close supervision by the court which could not be as finely attuned to the commercial considerations facing the company as its directors.
The Court appears to have been mindful of the ulterior motive which may have motivated a small shareholder like ClientEarth to bring an action but whilst these claims are useful in drawing attention to a very important issue such as climate change, the courts are very unlikely to intervene in circumstances where directors have to balance commercial decisions with their response to global issues.
Alex Haddad is a legal director in the Litigation department (ahaddad@nockolds.co.uk / 0203 892 6805). Alex would be happy to deal with any enquiries about claims relating to companies or the activities of directors.