In our recent blog post, we discussed the English High Court’s decision to block the shareholder derivative action commenced by an activist shareholder, ClientEarth, against Shell’s directors. The English High Court found that ClientEarth did not have a prima facie case against Shell’s directors.
While this previous decision was made on the papers, ClientEarth invoked its rights under the English civil procedures to request the Court reconsider its decision at an oral hearing. Following an oral hearing, the English High Court reaffirmed its earlier decision on 24 July 2023: ClientEarth v Shell plc  EWHC 1897 (Ch). While part of the judgment concerned certain technical details at the permission stage of a derivation action under English law, the following points may be of interest to Hong Kong readers:
- Previously, ClientEarth had contended that the Shell directors owed the company a number of “incidental duties”, which required them to (i) accord appropriate weight to climate risk, (ii) implement strategies that reasonably mitigate climate risk, and (iii) reasonably ensure that the company could meet its emission targets. In the oral hearing, ClientEarth sought to make a nuanced distinction between the board’s adoption of climate strategy, and its implementation of climate strategy. It advanced a refined argument that even though it may not have been appropriate for the law or courts to intervene with the board’s commercial decision to adopt certain climate strategy, there was still room for the “incidental duties” to apply at the stage of implementation. This was nonetheless rejected by the English High Court – be it at the adoption or implementation stage, any attempt to impose those “incidental duties” on directors would undercut and interfere with their well-established and general duty to promote the interests of the company as a whole.
- In its latest decision, the English High Court also confirmed that directors’ duty to promote the success of the company, codified in section 172 of the UK Companies Act 2006 (UK CA), will not be breached if a director honestly – albeit unreasonably – believed that the course of action in question would promote the success of the company. This echoes the position in Hong Kong, as recognised in our case law, in respect of directors’ duty to act bona fide in the company’s best interests.
- As for the directors’ duty to exercise reasonable care, skill and diligence, codified in section 174 of the UK CA, the English High Court once again iterated that this duty would be satisfied so long as the decision or action taken by the directors fell within the range of reasonable options which could be taken by a reasonable board. The Hong Kong formulation, which is now entrenched in section 465 of the Companies Ordinance (Cap. 622), has been accepted as setting out the same standard as English law. As such, the English High Court’s latest judgment, coupled with the similarities between the English and Hong Kong formulations of directors’ duties, have made it clear that any alleged “incidental duties” for directors to specifically consider ESG-related factors, would unlikely be accepted by Hong Kong courts.
With the English High Court’s two rounds of decisions on this matter, it would appear rather difficult for activists to contend for any specific duties incumbent upon directors to consider climate risks or to take management decisions in an ESG-friendly manner, at least in the near future. These decisions are to be welcomed as they offer clarity and reassurance to private companies, who can now continue to operate with a singular view to promote the overall interests of the company as a whole, without having their commercial autonomy inhibited by rigid duties to conduct matters in line with a specific ESG agenda.
For more details, please see our blog post on the English High Court’s latest judgment here.
For more information, please contact Gareth Thomas, Partner, Rachael Shek, Partner, Jojo Fan, Partner, Troy Song, Associate, or your usual Herbert Smith Freehills contact.