Cleary Gottlieb | Activists are Increasingly Seeking Novel Ways to make Directors Personally Liable

As we mentioned in the accompanying article, activists are increasingly pursuing novel claims against companies and their directors in their personal capacity in respect of ESG issues.

Friends of the Earth – Shell

To give one recent example of this, in 2019 a class action lawsuit was filed in the Netherlands against Shell by Friends of the Earth Netherlands and other claimants. These claimants argued that Shell failed to take sufficient measures to reduce emissions, in breach of its duty of care to prevent dangerous climate change.

Shell disputed that it was subject to an enforceable obligation to reduce emissions. In 2021, the Netherlands court held that Shell did in fact have an obligation to reduce its emissions and that Shell may imminently breach this obligation.

Friends of the Earth – Shell

ClientEarth – Shell

More recently, in the first half of 2022, ClientEarth, an environmental charity, announced its intention to pursue claims against Shell’s board of directors personally. Specifically, ClientEarth alleges that the Shell directors have mismanaged climate risk in breach of their duties under sections 172 and 174 of the UK Companies Act.

Section 172 of the Companies Act requires directors to act in a way that they consider will best promote the success of the company for the benefit of its shareholders. In so doing, directors are required to have regard for certain factors including the likely impact such actions will have on the environment. This duty is primarily subjective – did the director believe in good faith that the decision would promote the success of the company?

Under section 174 of the Companies Act, directors are required to exercise reasonable care, skill and diligence. This duty is primarily an objective duty and requires directors to adopt an appropriate decision making process which takes into account relevant factors.

ClientEarth has acquired shares in Shell and seeks to bring these claims as a shareholder derivative action. A derivative action is an action brought by a shareholder of the company on behalf of the company. ClientEarth must seek Court permission to formally proceed with these claims.

ClientEarth – Shell

What to do?

ClientEarth’s claims are untested. It is relatively uncontroversial that the directors must be properly informed and must adopt an appropriate decision making process which takes into account relevant factors, including material ESG issues. UK courts have not, however, historically been prepared to second-guess the outcome of decisions taken by a properly informed board having adopted an appropriate decision-making process.

Notwithstanding, we believe that boards should expect further litigation from activist and other groups against directors in their personal capacity if they fail to identify, disclose and address ESG risks which will or could harm their businesses. In doing so, we believe that activists will carefully scrutinize the increasing volume of ESG information which companies are now being required to publicly disclose.

The GC 100 guidance on directors’ duties contains useful practical steps which boards can take to discharge their duties in this area. This includes:

Identification of factors which are likely to be of strategic importance in achieving the company’s long-term success including material ESG factors;

Appropriate induction and ongoing training for directors;

Reviewing information gathering (including metrics and reports) so that relevant factors are addressed including material ESG issues; and

Considering and applying relevant factors in policy making, directors’ terms of appointment and role descriptions, and in the submission of board papers.

ClientEarth’s claims, if they were to be successful, would go further than the above and, in relation to climate risks, may ultimately require directors to set appropriate medium- and long-term objectives and to adopt tangible near-term actions to achieve those objectives.

At a minimum, the evolving environment requires directors to undertake robust risk assessments and to proactively put in place adequate procedures to manage these risks and to address them in decision‑making processes.