• ClientEarth’s attempted claim against Shell’s directors for failing to set adequate emissions targets and strategies falls at the first hurdle
• The Financial Conduct Authority publishes a series of engagement papers on the future of the UK’s securities prospectus regime
• The Financial Reporting Council publishes a new minimum standard for FTSE 350 audit committees
• The Takeover Panel updates several practice statements following recent rule changes

ClientEarth’s shareholder action on climate targets fails

ClientEarth’s attempt to bring a derivative claim against the directors of Shell plc has fallen at the first hurdle.

The court’s decision (ClientEarth v Shell plc and others [2023] EWHC 1137 (Ch)) shows the difficulty shareholders face in bringing an action against a company’s board.

ClientEarth, a minority shareholder in Shell plc, had alleged that Shell’s directors had failed to take appropriate action within Shell’s business to address climate change. In particular, it alleged that Shell’s directors had:

• failed to set appropriate emissions targets to enable Shell to meet its emissions reduction targets by 2050;
• implemented an inadequate strategy for achieving Shell’s net zero obligations, which contemplated significant expenditure on fossil fuel project, undue reliance on carbon capture and nature-based solutions and opaque investment in renewable energy; and
• failed to set a plan to ensure timely compliance with a Dutch court requiring Shell to reduce its emissions by 45% by 2030.

ClientEarth alleged that these failures amount to a breach by Shell’s directors of their statutory directors’ duties, particularly:

• their duty under section 172 of the Companies Act 2006 to promote the success of Shell for the benefit of its members; and
• their duty under section 174 of the Companies Act 2006 to exercise reasonable care, skill and diligence.

A company’s directors owe their duties to the company itself, not to shareholders. As a result, only the company can bring proceedings against its own directors for breach of duty. However, this is unlikely to happen, given that it is the directors themselves who decide whether to initiate proceedings.

To deal with this, under the Companies Act 2006, a shareholder can bring an action against the directors of a company in the company’s name – a so-called “derivative claim”.

However, the court will allow a derivative claim only if the shareholder can demonstrate that there is a “prima facie case” against the directors. This is because the court must dismiss an application to bring a derivative claim if a person acting in accordance with their duty to promote the success of the company would not seek to continue the claim.

In this case, the court said there was no prima facie case against Shell’s directors.

Fundamentally, the court’s decision rested on the fact that responsibility for commercial decision-making rests with a company’s directors, not the court or its shareholder. It is the directors of a company who are best placed to decide what steps a company should take. The court will not second-guess decisions taken by directors honestly and in good faith unless it is a decision that no reasonable director could have taken. That was not the case here.

You can read more about the decision in this blog by our colleagues.

FCA seeks views on changes to UK prospectus regime

Following its recent announcement (see our previous Corporate Law Update), the Financial Conduct Authority (FCA) has published four engagement papers setting out proposals for the future of the UK’s regime for bringing equity and non-equity securities to market in the UK.

The first three papers contain proposals for changes to the rules for a prospectus when issuing equity securities.

The most interesting changes concern secondary issuances (paper 2) and would implement some of the recommendations from the recent report of the Secondary Capital Raising Review (see our previous Corporate Law Update). These include the possibility of setting a minimum threshold below which a prospectus would not be required and whether to replace the prospectus entirely with a different, simpler document.

Other changes include improving the prospectus process on a primary issue (such as an IPO) (paper 1), such as by encouraging shorter prospectuses and allowing a prospectus to remain valid for longer, as well as proposals for making it easier to include forward-looking statements (paper 3).

The fourth paper contains proposals to improve admissions of non-equity securities, such as debt securities and structured financial products. Most significant among these proposals is the removal of the €100,000 threshold below which a more detailed prospectus is required, instead adopting a lighter disclosure regime for all non-equity securities.

You can read more about the proposed changes in our in-depth piece.

FRC publishes minimum standard for audit committees

The Financial Reporting Council (FRC) has announced the publication of a new minimum standard for audit committees of FTSE 350 listed companies.

The new standard follows the FRC’s previous consultation on the matter in November 2022. See our previous Corporate Law Update for more information.

The purpose of the standard is to enhance performance across FTSE 350 audit committees and ensure a consistent approach across the FTSE 350.

The standard applies immediately to FTSE 350 companies on “a comply or explain” basis but will become mandatory when, in due course, the new Audit, Reporting and Governance Authority (ARGA) gains statutory powers to require companies to comply with it.

The new standard covers four principal areas.

• Audit Committee responsibilities. This includes ensuring the company has a fair choice of suitable external auditors at audit tenders, engaging with shareholders on the scope of external audit and reporting to the board and shareholders.
• Tendering the audit. The standard states that this should be led by the audit committee, with all committee members participating, rather than executive management, and should not preclude participation by “challenger” audit firms without good reason.
• Overseeing the auditors and audit. This should include obtaining evidence of the effectiveness of the audit (the draft standards give examples of approaches the committee might adopt) and ensuring open communication with the auditor.
• Reporting. The committee should describe its work in the company’s annual report (the standards set out specific items that report should include), explain the criteria for the audit tender process and report on how the committee has met the minimum standard.

Takeover Panel updates practice notes following rule changes

On Monday, 22 May 2023, changes to the Takeover Code went live clarifying how an offer timetable applies in a competitive offer situation where one bidder is proceeding by way of a contractual offer and another bidder proposes to implement a takeover by way of a scheme of arrangement.

For more information on those changes, see our previous Corporate Law Update.

As a result of the rule changes, the Takeover Panel has now updated four of its practice statements:

• Practice statement 20 (Rule 2 – secrecy, possible offer announcements and pre-announcement responsibilities)
• Practice statement 22 (irrevocable commitments, concert parties and related matters)
• Practice statement 28 (Rules 2.8 and 35.1 – entering into talks during a restricted period)
• Practice statement 33 (Purchases of shares in the offeree company during an offer period)