ClientEarth, an environmental law organization, was dealt a significant blow recently when the High Court decreed it must pay all costs related to their unsuccessful application for permission to continue a derivative claim against Shell and its directors. The court’s decision marks a significant departure from the default position in derivative proceedings where the company is ordinarily required to bear the costs. As detailed in JD Supra, the case is emblematic of an emerging trend to raise the stakes in activist shareholder claims.
Derivative claims are a means for an individual shareholder or group of shareholders to initiate litigation on behalf of the company, typically against its own officers or directors. These claims are often premised on allegations of breaches of fiduciary duty, fraud or mismanagement. Given their representative nature, it is customary for the company to bear the costs if the shareholder(s) is unsuccessful.
The High Court’s ruling in the ClientEarth case sets an unusual precedent. By ordering ClientEarth to cover the costs of their failed claim, the court is sending a strong signal to activist shareholders about the potential financial risks they could be exposing themselves to, possibly deterring them from filing derivative claims.
Discussions have ensued whether this trend is an additional barrier to the already complex corporate structure for the activist shareholders seeking change in how companies are run. The financial implications are substantial, potentially dissuading shareholders from holding directors accountable through the use of derivative claims.
In this era where corporate governance and responsibility take center stage, the case and its potential implications for future activist shareholder claims will certainly be closely watched. Both shareholders and corporations alike must provide due diligence in understanding the implications involved. The High Court’s decision could redefine the landscape of corporate lawsuits, continuing a broader trend towards shifting risks to activist shareholders.