Why Canadian D&O insurers can breathe a sigh of relief

D&O lawsuits claiming boards of directors breached their climate-related fiduciary responsibilities would likely not succeed in a Canadian court if the facts are similar to those in a recent U.K. court case, lawyers suggested in a Mondaq article Wednesday.

Non-profit ClientEarth brought a claim against the board of directors of Shell plc in February alleging a breach of fiduciary duties. The High Court of England and Wales dismissed the action on May 12, saying ClientEarth failed to demonstrate a prima facie case of actionable breach of duty.

ClientEarth, which holds a very small number of shares in Shell, reported it has been granted an oral hearing and will ask the judge to reconsider the case.

Initially, defence lawyers expressed concern the lawsuit might spark “copycat” litigation in Canada. The case is of interest to Canadian D&O insurers as Canadian directors owe a similar duty of care as those cited by the plaintiff.

“While the court’s subsequent decision to dismiss ClientEarth’s claim is not binding on Canadian courts, its reasoning may be influential and could discourage climate activists from pursuing claims in Canada,” wrote Osler, Hoksin & Harcourt LLP partners Andrew MacDougall, Jennifer Fairfax and John Valley and associate Ankita Gupta in the Mondaq article.

ClientEarth had argued Shell’s climate strategy was unreasonable. In particular, the oil company failed to reduce the aggregate annual volume of carbon dioxide emissions by the Shell Group’s business operations and energy-carrying products by at least 45% at the end of 2030 relative to 2019 levels, the lawsuit alleged.

iStock.com/Sakorn Sukkasemsakorn

Other allegations made against Shell’s directors included breaching their duty under the U.K. Companies Act to promote the success of Shell for the benefit of its members as a whole, the authors reported in an earlier article. ClientEarth also contended the board failed to act with reasonable care, skill and diligence by allegedly failing to adopt and implement a climate strategy consistent with the Paris Agreement.

Shell countered that 80% of its shareholders approved its climate strategy, which includes a net-zero emissions plan. The company’s strategy is based on the Paris Agreement’s goal to limit global warming to 1.5 C by 2050.

In Canada, corporate statutes require directors to act honestly and in good faith with a view to the best interests of the corporation and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. These are similar duties to the ones relied on by ClientEarth.

The High Court ultimately decided in favour of Shell, rejecting ClientEarth’s claim.

“The issue before the court was whether the board’s management of climate risk demonstrated a prima facie case of actionable breach of duty,” the authors wrote in their most recent article Wednesday. “The Court concluded that ClientEarth had failed to meet that standard.”

The non-profit organization criticized the adequacy of Shell’s emission targets and proposed use of carbon capture and storage along with nature-based solutions to address climate change risk. But “ClientEarth’s arguments were not enough to show that Shell’s business was being managed in a way that could not properly be regarded by the directors as being in the best interests of Shell’s members as a whole,” the authors wrote Wednesday.

And while there was “no reason to doubt that ClientEarth genuinely believed that its claim is in the long-term interests of Shell, its shareholders and employees,” the U.K. High Court was not satisfied the claim was brought in good faith. “The primary purpose of bringing the claim is an ulterior motive in the form of advancing ClientEarth’s own policy agenda…” the high court said in its decision.

A “fundamental defect” in ClientEarth’s claim was that “it completely ignores the fact that the management of a business of the size and complexity of that of Shell will require the directors to take in account a range of competing considerations, the proper balancing of which is classic management decision with which the court is ill-equipped to interfere,” the ruling said.

Partners from Dentons LLP in London said the case was “groundbreaking as the first-ever climate litigation to try to use a derivative action to establish the personal liability of a company’s directors for allegedly failing to address the threat of climate change.”

Despite the case dismissal, directors should “take notice of the judge’s comments and ensure that they are paying due regard to material climate risk and factoring this into the business’s strategy, particularly if they have a more sizeable proportion of shareholders whose own ESG commitments might lead them to support a similar claim,” Dentons said in a May 22 article. “Even pressure between institutional shareholders to support such claims is conceivable… Other claims are likely to follow seeking to impose personal liability on directors as a way to further ESG agendas.”

Feature image by iStock.com/Petmal