Can sustainability considerations ever be strong enough to lift the business judgement rule?

26 January 2024

Can sustainability considerations ever be strong enough to lift the business judgement rule?

Erasmus School of Law
Contributor
Erasmus School of Law
26 January 2024

Can sustainability considerations ever be strong enough to lift the business judgement rule?

Authors :
Erasmus School of Law
Contributor
Erasmus School of Law
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Introduction

Directors’ liability cases conventionally center on claims that directors have not fulfilled their duty to act in the interests of the corporation. The efficacy of such claims, however, is often constrained by courts’ loyal adherence to a fundamental concept in corporate law: the business judgement rule. This rule, rooted in common law traditions and mirrored in European jurisdictions, presumes that directors have acted in good faith and with diligence. As a consequence, it offers a strong defense for directors, shielding them from personal liability for decisions made within their corporate capacity. Notably, it also prevents excessively risk-averse behaviour among corporate leaders by offering safe harbours against undue judicial interference, given the courts’ reluctance to interfere with their business decisions.

Utilising directors’ duties for corporate sustainability claims

As societal and environmental risks increasingly demand more from businesses, directors also face more serious scrutiny relating to these risks. Due to heightened expectations, debates have arisen on whether directors’ duties should extend to encompass broader social and environmental interests. Certain jurisdictions, such as France with the Pacte Law, have gone as far as modifying their laws to include these facets within directors’ duties. Nonetheless, even in the absence of such legal amendments, the interpretation of these duties can still expand to embrace corporate sustainability, provided that claimants can establish creative connections between conventional statutory duties and sustainability claims. By using these avenues, claimants have shifted their focus on directors’ liability for unsustainable business practices. In search of stronger deterrents against such conduct, they now choose to broaden their approach by not only addressing corporations but also targeting their directors, thereby adopting a more comprehensive approach to fostering corporate accountability.

The ClientEarth v. Shell’s Board of Directors Case

In this regard, the ClientEarth v. Shell’s Board of Directors case in the UK in 2023 stands as an interesting example of the first derivative action seeking to hold directors liable for climate risk. The case was initiated by ClientEarth in its capacity as a shareholder on behalf of the company. The activist shareholder group alleged that the board of Shell had violated its legal duties under company law by mismanaging climate risks which pose threats to the company’s long-term viability. Remarkably, their claims were based on the breach of two fundamental statutory duties outlined in Section 172 (the directors’ duty to promote the success of the company) and Section 174 (the directors’ duty to exercise reasonable care, skill, and diligence) of the UK Companies Act. While the Court of Appeal refused permission to appeal, the judgement can offer insights into potential approaches by other courts.

Firstly, the court noted that since directors’ duties are inherently broad, they lack the precision to impose legally binding individual responsibilities on directors. According to the court, the duty to act in the interests of the corporation was rather a vague obligation, primarily entrusted to the discretion of directors. In supporting this, a primary highlight of the judgement was that “it is for directors themselves to determine (acting in good faith) how to best promote the success of a company”. Following this, the court determined that significant exceptions required for judicial interference in directors’ discretion were not found to be present in this particular case. Ultimately, the court was of the opinion that the real interest pursued by the claimant was not in how to best promote the success of the company but rather stemmed from an ulterior motive, advancing ClientEarth’s own agenda.

Conclusion

At the current state, it appears unlikely for courts to treat sustainability claims as exceptions justifying the circumvention of the business judgement rule. Even if jurisdictions revise directors’ duties to encompass broader social and environmental concerns, as witnessed with Article 25 of the Proposal for the CSDDD on directors’ duty of care, these aspects will often assume secondary importance since their codification with terms such as “taking into consideration” further diminishes their significance. Under these configurations, these interests will not only be overshadowed by the interests of the corporation but will also lack the precision required by courts for judicial interference. This prompts the question of whether future corporate sustainability claims based on directors’ duties in the near future might have a different fate than this case.

In light of these observations, it appears that the entrenched business judgement rule will maintain its dominance over sustainability claims directed at directors, thereby impeding their favourable outcome. An alternative strategy for claimants could involve pursuing the liability of directors stemming from a breach of their statutory duty, coupled with other complementary obligations, such as corporate sustainability due diligence or sustainability reporting. These strategies would leverage the advantages offered by the more structured legal frameworks established at the national and European levels, and hopefully, would increase claimants’ chances of succeeding.

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By S. Irem Akin, PhD Candidate, Erasmus School of Law

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