Derivative Claims: What are they and what can businesses learn from ClientEarth v Shell plc?

A derivative claim is a legal action brought by a company member on behalf of the company in respect of alleged wrongdoing by a director. The procedure governing derivative claims is set out in sections 260 to 264 of the Companies Act 2006.

This is different to an unfair prejudice petition, which is brought by the members as individuals. For a guide on unfair prejudice claims, see: Unfair prejudice claims explained: a guide for UK shareholders.

Derivative claims are often brought instead of unfair prejudice petitions, where the company has suffered an alleged loss, but the shareholder is unable to demonstrate that their personal rights as a member have been directly infringed

Under the Companies Act, a company member includes both registered shareholders and persons entitled to be registered as shareholders. There is no minimum shareholding requirement for bringing a derivative claim, and a member may bring a claim in respect of conduct that occurred before becoming a shareholder.

Claims may be brought against both current and former directors. They may also be brought against shadow directors, being individuals who act as directors without having been formally appointed.

When can a claim be brought?

Derivative claims can only be brought in respect of the following circumstances:

• negligence of a director
• default of a director’s obligations
• breach of directors’ duties
• breach of trust by a company director.

The most common cause of action will be allegations that a director has breached one of their seven general directorial duties under the Companies Act 2006. These being:

• duty to act within powers
• duty to promote the success of the company
• duty to exercise independent judgment
• duty to exercise reasonable care, skill and diligence
• duty to avoid conflicts of interest
• duty not to accept benefits from third parties
• duty to declare an interest in a proposed transaction or arrangement.

In practice, examples of circumstances whereby derivative claims are likely to arise include:

• unapproved payments or loans
• misappropriation of company funds
• diverting business opportunities away from the company.

To proceed with a derivative claim, claimants must first obtain permission from the court. The court will consider the following when making a decision as to whether to allow the claim:

• if there is a prima facie case of wrongdoing
• if the claim is being pursued in good faith
• if a reasonable independent director would seek to bring the claim
• if there are any alternative remedies which would be more appropriate.

Due to the requirement to obtain the court’s permission before proceedings may continue, derivative claims are relatively rare, with claimants often favouring unfair prejudice petitions instead. Where a derivative claim is successful, the court may grant a range of remedies, including damages, injunctions, and orders setting aside transactions or agreements.

ClientEarth v Shell plc

ClientEarth is a non-profit environmental law charity. In 2023, ClientEarth sought the court’s permission to bring a derivative claim against the directors of Shell plc, alleging that they had breached their duty to exercise reasonable care, skill and diligence by failing to adopt policies capable of achieving the company’s target of reaching net zero emissions by 2050. At the time the claim was brought, ClientEarth held 27 shares in Shell.

Ultimately, the court refused permission for the claim to proceed. It found that ClientEarth had not brought the claim in good faith and could not conclude that Shell’s climate policies were so inadequate as to constitute a breach of the directors’ legal duties.

Shareholder activism

The case of ClientEarth v Shell plc shows that directors must be aware of shareholders’ growing willingness to challenge management decisions in court.

Although ClientEarth was unsuccessful in obtaining permission to pursue its claim, former Supreme Court Justice Lord Carnwath has suggested that the court missed an opportunity to consider how the derivative claim procedure should have operated in this case by allowing it to proceed to trial.

As climate change continues to rise up the corporate agenda, this view may suggest that the courts could become more willing to consider how derivative claims can serve as a vehicle for shareholder activism, particularly in scrutinising high-profile corporate climate policies. With many UK companies working towards net-zero targets, directors should be aware that shareholders may increasingly seek to pursue derivative claims to challenge decisions relating to the company’s climate strategy.

Contact our Dispute Resolution solicitors today

For advice on business dispute resolution, please contact our specialist team by completing our online enquiry form or by calling 0330 191 4857.

It is important to act promptly as limitation periods may apply. If you are considering a claim, you should preserve relevant evidence, including the contract, emails, letters, invoices, and documents showing any financial loss. These documents can help evidence the breach and show the impact it has had on your business.

We will review the contract and understand the issues affecting your business. We can then advise you on your options and whether a breach of contract claim is the right course for your business. Our team can help assess the merits of a potential claim and guide you through the pre-action protocol and court process.