Lifecycle of a Business - Directors are best-placed to make the commercial decisions

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune.

But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

Moving on to Directors: Lights, Camera, Action!

Directors are best-placed to make the commercial decisions – ClientEarth v Shell Plc

We recently wrote an article about the general duties of directors as set out in the Companies Act 2006 (the Act). As mentioned in that article, section 172 of the Act sets out the duty to promote the success of the company for the benefit of the members as a whole and includes a non-exhaustive list of factors that the directors should consider when making any decision.

The recent case of ClientEarth v Shell Plc confirmed that a director’s general duties are those as set out in the Act, “incidental” duties do not apply and the courts will not seek to interfere with the commercial decision-making of directors, provided that they are acting in good faith.

What was the case about?

ClientEarth, an environmental law charity and a shareholder in Shell Plc (Shell), sought to bring a derivative claim against Shell’s directors on the basis that their management of the risks posed to Shell relating to climate change was in breach of their general duties as directors.

Although a director’s statutory duties are owed to the actual company and therefore, it is the company itself that must bring any claim for breach of those duties, it is possible for shareholders to bring a derivative action on behalf of the company, provided that the court gives permission. Initially, the court makes this decision based on papers only, i.e. there is no oral hearing.

Among other points, ClientEarth alleged that Shell’s directors had failed to ensure that the company had a measurable and realistic pathway to achieving net zero by 2050 and that as such, the directors were in breach of their section 172 duty to promote the success of the company for the benefit of the members as a whole and also their duty to exercise reasonable care, skill and diligence (section 174 of the Act). ClientEarth also argued that six further duties relating to climate change (including, for example, “a duty to make judgments regarding climate risk that are based upon a reasonable consensus of scientific opinion”) apply to directors of companies like Shell. These “incidental” duties are at no point mentioned in the Act.

What did the High Court decide?

The High Court refused permission for ClientEarth to bring a derivative claim, but granted the charity leave to exercise its right to an oral hearing to reconsider the decision, which it took advantage of. At the oral hearing, the High Court again dismissed ClientEarth’s application for permission to bring the derivative claim against Shell.

The High Court was of the view that ClientEarth had no evidence to show that a reasonable board of directors could not have decided that Shell’s net zero strategy was achievable.

Shell’s directors had put in place a net zero strategy and just because the directors’ chosen strategy did not align with ClientEarth’s view on what the strategy should encompass, this did not mean that the directors were in breach of their general duties. Directors of a company, especially one as large and complex as Shell, have many competing considerations to take on-board when making commercial decisions and these would not have been taken into account by ClientEarth.

The judge made clear that the directors of a company are best-placed to make commercial decisions with a view to promoting the success of the company for the benefit of the members as a whole and that the courts would be loath to interfere with that.

The “incidental” duties suggested by ClientEarth were not relevant and represented an attempt by ClientEarth to impose “specific obligations on directors as to the management of a company’s business and affairs”.

The fact that ClientEarth had a very small number of shares in Shell (27) was also relevant. Even with the support that the charity had garnered from other shareholders, they still represented a very small minority of the Shell members, the vast majority of which had supported the company’s net zero strategy. The judge considered that the charity was possibly pursuing its own agenda – to advance its own climate change policy – rather than seeking to bring the claim for the benefit of Shell.

What does this mean?

The case made very clear that the general duties of directors are those which are set out in the Act and that “incidental” duties do not apply. Such “incidental” duties would impede the directors’ freedom to make decisions. In addition, the judgment repeated the long-established principle that the management of a business is a matter for the directors acting in good faith, not the courts. Consideration and weighing of the non-exhaustive list of factors set out in section 172 of the Act “is essentially a commercial decision, which the court is ill-equipped to take, except in a clear case”.

While a positive takeaway for directors, this is not to say that directors have a completely free rein to act as they choose. The general duties set out in the Act most certainly have “bite” and directors will need to be able to show that they have considered, and complied with, such duties in relation to their decision-making, actions and inactions.

Record-keeping is important, particularly where decisions are complex or controversial, and while directors cannot absolve themselves of responsibility for the final decision, professional advice should be taken in matters which are outside a board’s usual remit.

Disclaimer

This note reflects the law as at 16 October 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.