Environmental, Social Governance (ESG) issues are now more
important to organisations than ever before – influenced by
our changing environment, regulatory demands and the growing
awareness of stakeholders. Company boards increasingly have ESG
high on their agenda and are working hard to identify the ESG
issues and opportunities for their businesses, alongside managing
potential risks.
We have compiled a three-part series of videos focusing on some of
the emerging ESG litigation trends, and the novel ways claimants
are using pre-existing laws and mechanisms to bring about
action.
In this first video, Commercial Litigation Partner Sean Adams,
discusses one such mechanism – the derivative action. He
delves into what 'derivative actions' are, how they work
and key points for companies to consider in protecting themselves
from and responding to such claims.
View Transcript
Whilst ESG is playing an increasing role across many areas of the business and legal world, I'm going to focus today on litigation and disputes. There's been a real rise in ESG related activity over the past two to three years in that space.
What we've seen is claimants, including pressure groups, use pre-existing laws and mechanisms as well as the court system in a novel way, to try and bring about behavioural change or action on ESG issues, particularly climate change. One mechanism we have seen being used in this way is the derivative claim.
Indeed, some of the most high-profile actions over the years have seen individual and activist organisations trying to bring those claims against directors in order to hold corporates to account for climate change, and also to try and bring about changes in those companies' response to the climate change issue.
So, what is a derivative action? Derivative actions aren't new. To briefly summarise, decision making power for a company is ordinarily vested in its board of directors, and these directors owe fiduciary duties to the company they represent.
A derivative action remedy is designed as a safety valve. It allows shareholders to seek permission from the court to step into the shoes of the company and bring a claim against those directors if there's been a breach of fiduciary duty, which the company is being prevented from pursuing.
In order to bring a derivative action, you first need the permission of the court. And in part because of that hurdle, it's traditionally been seen as a difficult, narrow remedy. Despite those inherent difficulties, we are seeing them increasingly being used in an ESG context and recent developments indicate there may be more to come.
Let's take ClientEarth and Shell as an example. The acquisition of a small shareholding, just 27 shares in Shell, gave ClientEarth standing to pursue a claim against the directors, which was premised on those directors failing to do enough to address the risks of climate change. That was said to be a breach of the duties owed by those directors to the company. That claim was ultimately unsuccessful, and permission to bring that claim failed.
Some people could consider that to be the beginning of the end of these approaches. However, the huge amounts of publicity that case generated in relation to both the claim and the underlying issues, could be seen as a valuable victory for those bringing it in its own right. There are also some recent indicators that ESG related derivative actions are not yet confined to mere PR tools.
Lord Carnwath, who spent a quarter of a century as a judge and eight years on the Supreme Court in the UK, and who is now a visiting professor at the Grantham Research Institute of the LSE, has published a paper this year outlining the flaws he sees in the judgements against ClientEarth and the missed opportunity he thinks it presents. This is a view from a very senior individual who, had he still been sitting on the Supreme Court would, with a bit of support from others, have had the power to make his decision the reality.
Further, ClientEarth itself took the unusual step of publishing various of the legal papers from its claim to try and encourage debate on the underlying issues. This is going to be further bolstered by an announcement this year that a proposed amendment to the court rules is coming, which would see greater public access to things like skeleton arguments, witness statements and expert reports.
Whilst the ultimate cost award against ClientEarth as a result of their unsuccessful claim may have something of a chilling effect on this area, others are going to try, and a roadmap to success may eventually emerge, and we must remember that that success is probably going to be measured in different ways given the different objectives of some of the claimants in play.
Derivative claims have always been challenging, and they're going to remain that way. Directors have a significant degree of latitude to comply with their fiduciary duties to a company, and a court is going to be loathe, particularly in relation to large multinationals, to step in and override board decision making on complex issues. However, boards need to be aware that their decision making in areas related to ESG issues is going to come under increasing scrutiny, particularly for big corporates in certain sectors.
Similar issues have recently hit the headlines in the USA, where there's been an escalating dispute between Exxon and various shareholders relating to the company's reaction to minority shareholders seeking to put climate change related items onto the agenda. This led not only to a dispute between Exxon and the minority shareholders, but also to other shareholders in Exxon, such as Norwegian and Californian pension funds, voicing their concerns about the company's attempts to shut down the climate discussion
Unsurprisingly then, this is an issue which is playing out in different ways across different jurisdictions, and that creates even more scope for interested parties to apply ideas and approaches from abroad into their own jurisdiction, and we can see what's coming next.
Read the original article on GowlingWLG.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.