Climate change is one of the most important challenges facing society, the economy, and individual businesses. Two recent high-profile shareholder litigation cases have highlighted fundamental issues for corporate directors in their oversight of climate change risk management, raising key questions that have wide-ranging implications for businesses and beyond. First, who is responsible for managing climate change risk and setting corporate policy: shareholders or the board? And second, what is the relevant governance consideration for those policymakers: is it the risk of climate change to the corporation and its business, or is it the contribution of the corporation's business to climate change?
Both pieces of litigation in question involve climate change advocates advancing their positions as nominal shareholders through corporate law mechanisms:
- In the first case, an application for permission to pursue a proposed derivative claim against the directors of Shell plc was dismissed by the UK court on the basis that it did not meet a threshold standard of disclosing a prima facie case. Shareholder litigation in this form was not the right mechanism for shareholders to steer the management of climate change risk for Shell.
- In the second case, which is unresolved, Exxon Mobil Corporation resorted to court proceedings to confirm that a shareholder proposal aimed at the management of Exxon's climate change risk needn't be put to shareholders, in part on the basis that managing climate change risk falls to directors and their business judgment and not to any particular shareholder.
These cases confirm a corporate governance norm that directors, not shareholders, make policy decisions, even on matters of profound significance, and that corporate decision-making is primarily focused on the business and affairs of the corporation and is a matter for the directors' business judgment.
ClientEarth and Shell
ClientEarth, an environmental activist with a nominal shareholding in Shell plc, initiated a derivative action in the United Kingdom against the directors of Shell, alleging that the directors breached their duties by failing to pursue more aggressive energy transition plans. In the words of ClientEarth, it took "legal action to compel Shell's Board to strengthen its climate transition plans, in the best interests of the company in the long-term"1. The litigation identified climate change as a corporate risk that the board of Shell is responsible for managing, and deployed the derivative action as a mechanism for remedying what it alleged to be harm to the company and, indirectly, to shareholders. The goal of the litigation was not to recover damages already caused to Shell by the board's management of climate change risk, but rather to force the board to adopt what ClientEarth believed are better climate transition plans.
In substance if not in form, ClientEarth's derivative action used shareholder litigation putatively, aimed at remedying harm to the corporation's private interests to address public, climate-change-focused goals. After two hearings and an appeal, ClientEarth's claim has failed.
As shareholder litigation focused on corporate climate change policy, ClientEarth's claim faced numerous obstacles:
- An absence of any actual harm to be remedied. Typically, a derivative action pursues a remedy for corporate harm that is financial in nature; here, the outcome sought was to force a change to corporate policy, albeit as a way to avoid what was said to be potential future harm. Avoiding potential harm from looming climate change risks was not deemed a strong enough basis for shareholder litigation.
- Business judgment protection and responsibility for managing risks. Managing climate change risk is a board responsibility. Mismanagement of any risk to the corporation—that is, the failure to monitor and act on risks known to the board—may be actionable using the derivative action mechanism where that mismanagement leads to corporate harm (e.g., Caremark claims as developed in Delaware). However, choosing how to manage climate change risk engages business judgment considerations.
- The views of and effects on Shell's shareholders as a whole. In the context of a derivative action, a court can consider the views that the majority of the corporation's shareholders have on an issue, as well as the effect that such an action would have on shareholders were the action to move forward. Here, the proponents of the litigation were small in number relative to overall shareholder support for Shell's energy transition plans. ClientEarth and its supporters represented 0.17% of Shell's shares while 80% of Shell's shareholders voted in favour of the company's climate transition plans in an advisory vote in 2022.
If these obstacles suggest that derivative action is an ineffective means of altering climate change policy, it may simply reflect the broader inaptness of shareholder litigation as a change mechanism. Along with shareholder voting, shareholder litigation is one mechanism for holding directors accountable for the way they manage the corporation's affairs, particularly in regards to corporate performance and profit-seeking activities. But it may not be an effective mechanism for changing the way a corporation is managed in matters of public concern.
It might be tempting to look to shareholder litigation as a way of linking corporate affairs and broader social matters, but the link is evasive, highlighting a longstanding debate about the role of directors in managing corporate affairs that engage areas of public concern. In his classic article on shareholders' derivative action published 50 years ago, Stanley Beck starts his analysis with comments on the role of the corporation more generally in economic life and society:
The large corporation, as the dominant economic institution of our time, is particularly being redefined. No longer is it seen as a private institution operating solely for profit of and answerable only to its one true constituency, its shareholders. It is realized that it is a public institution in the sense that its major decisions have a significant impact on the economy as do those of government and that its constituency, like government's, is the entire citizenry whether in the guise of shareholder, worker, consumer supplier or simply user of clean air and water. And so a debate has ensued ... as to how the large corporation should be governed and by whom, how it is to be made answerable to broader public concerns while ensuring a reasonable return to investors ...2
Despite those provocative opening comments, Beck does not find in the derivative action mechanism a viable link between areas of public concern and the management of corporate affairs.
Recent climate-related shareholder activist cases confirm a corporate governance norm that directors, not shareholders, make policy decisions, even on matters of profound significance.
ClientEarth's application for permission to pursue the proposed derivative claim was dismissed because it failed to disclose a prima facie case. At its core, the reasons of the UK court expose a fundamental problem with the theory of the case and the roles for directors and shareholders posited by ClientEarth for corporate decision-making: it is the responsibility of the board, not shareholders, to set corporate policy and the corporation's approach to managing climate change risk. This is a responsibility the board carries out in accordance with the directors' duties, and it is obliged to consider different stakeholder interests and act in the best interests of shareholders as a whole.
Litigation by a shareholder is not an apt tool for questioning that decision-making exercise. It is impossible to avoid the conclusion that ClientEarth's real interest in this litigation was not the risk of climate change to Shell's business, but rather the impact of Shell's business on climate change.
Exxon challenges activist shareholder proposals
This year, Exxon received a shareholder proposal from two climate change advocates with nominal shareholdings seeking to have shareholders vote on an advisory resolution requiring Exxon to accelerate its energy transition and disclose a new plan. Exxon resorted to litigation (which is still ongoing) for a determination as to whether it was required to include that proposal in its 2024 shareholder meeting disclosure. Even after the activists withdrew the proposal, Exxon persisted in the litigation, seeking to obtain a ruling which speaks not only to the specific shareholder proposal but also to the broader question about the roles of the board and management, on one hand, and shareholders, on the other, in directing the corporation's policy on climate change. The central premises of the litigation are: (1) that, in the context of climate change risk, the activists are not interested in Exxon and its business; and (2) that corporate policy affecting the management of climate change risk, including energy transition, is a matter for the board and business judgment and not for shareholders voting in accordance with diverse, unaligned interests.
It might be tempting to use shareholder litigation to link corporate affairs and broader social matters, but the link is evasive, highlighting the debate about the role of directors in managing corporate affairs that engage areas of public concern.
A legal basis for refusing to publish the activists' shareholder proposal is that it deals with a matter of day-to-day management of the corporation. In its complaint, Exxon alleges that the activists' proposal falls squarely within the business judgment of the board and is therefore not a matter for shareholder voting. Exxon alleges that what the activists really want is something that properly belongs to board decision-making: that is, fundamental change to corporate policy, contrary to the strategy and business interests of the corporation. Furthermore, Exxon alleges, the activists want that change not in order to promote the best interests of Exxon, but to promote a policy agenda at odds with those best interests. As with Shell, a very large majority of Exxon shareholders have endorsed the corporation's energy transition plans and, Exxon alleges, activists with nominal corporate investments—obtained for the purposes of making a shareholder proposal—should not steer corporate policy or require the expenditure of resources involved in putting a proposal to all shareholders. Rather, Exxon alleges, developing corporate policy about energy transition and other aspects of climate change risk is a matter for directors to consider. As the complaint puts it, the activists' proposal seeks to replace management's "substantial expertise and well-considered business judgment with [the activists'] preferred approach to reducing [greenhouse gas] emissions".
An amicus brief supporting Exxon, filed by the U.S. Chamber of Commerce and the Business Roundtable, put the governance issue in stark terms: "[b]lack letter corporate law provides that directors, rather than shareholders, manage the business and affairs of the corporation"3. The brief argues that the activists sought to use shareholder proposals and voting to upend this fundamental corporate governance principle.
The way forward
Shareholder litigation and shareholder proposals may both prove to be ineffective mechanisms for driving corporate policy on climate change. The efforts of activists highlight that corporate governance norms will dictate decision-making in this area.
Footnotes
1. ClientEarth litigation against Shell's Board FAQs (February 2023): shell-directors-case-faq-2023.pdf (clientearth.org)
2. S. M. Beck, "The Shareholders' Derivative Action", Canadian Bar Review 52:2 (1974) 159 at 159-60.
3. Brief/Memorandum in Support filed by Business Roundtable, The Chamber of Commerce of the United States of America at p. 4: Exxon v. Arjuna Capital, LLC | U.S. Chamber of Commerce (uschamber.com)
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