Lawyers at the environmental law firm ClientEarth earlier this month personally sued the directors of one of the largest oil producers in a derivative action for their alleged failure to manage material and foreseeable climate risks.
ClientEarth filed the action at the High Court of Justice in England and Wales, alleging breach of UK company law. In total, 11 of the company’s directors are named. At issue is whether the 11 board members breached their duty to shareholders by not properly managing climate risk.
If you’re wondering whether this has ever been tried before by shareholders of a corporation, it hasn’t. This derivative action marks the first case in the world of shareholders seeking to hold corporate directors personally liable for failing to properly prepare their company for the net-zero transition set forth in the landmark 2015 Paris Agreement. As such, how the High Court of Justice handles this case could have widespread implications for how other companies plan to cut their emissions.
With its token shareholding in the oil company, ClientEarth is suing under the UK Companies Act. Under UK company law, a company’s board of directors has a legal obligation to promote the company’s success and act with reasonable care, skill, and diligence. In the derivative suit, ClientEarth asserts the board needs to fulfill these requirements by properly managing climate risks.
ClientEarth’s claim has the backing of a group of institutional investors holding approximately 12 million shares and managing assets worth more than $545 billion. The group of investors supporting the claim include U.K. pension funds Nest and London CIV, Swedish national pension fund AP3, French asset manager Sanso IS and Danske Bank Asset Management, among others.
As typical in most derivative actions, ClientEarth, in its capacity as a shareholder, served the board notice of its claim in a pre-action letter in March 2022 before filing their action.
The initial response from the oil giant was swift and not surprising.
“We do not accept ClientEarth’s allegations,” a company spokesperson said. “Our directors have complied with their legal duties and have, at all times, acted in the best interests of the company.”
“ClientEarth’s attempt, by means of a derivative claim, to overturn the board’s policy as approved by our shareholders has no merit. We will oppose their application to obtain the court’s permission to pursue this claim,” the company added.
So, what does this lawsuit mean for companies here in the United States? It’s unclear at this point, considering the enormous legal obstacles such a derivative action would face if attempted here. The significant preliminary procedural requirements and available defenses to filing such a lawsuit make it rare for U.S. officers and directors to be found liable for a breach of fiduciary duties.
Interestingly, however, ClientEarth filed its lawsuit only a week after a complaint was submitted to the U.S. Securities and Exchange Commission charging the same oil company of greenwashing with its renewables investment. The complaint submitted by environmental non-profit NGO Global Witness, pushes the SEC to open an investigation into the company’s “Renewables and Energy Solutions” accounting and reporting and its funding of natural gas, which does not qualify as a renewable.
But, as of the date of this posting, no similar derivative action similar to ClientEarth’s lawsuit has been tried in the United States.
While the U.K. court decides what to do with the lawsuit and observers watch to see what, if any, precedential value it should have, it has likely already attracted greater attention to the question of how accountable directors of companies (and not just the companies themselves) should be for its environmental, social, and governance strategy and action.
