A Dutch Court Fires A Warning Shot Across The Bow Of U.S. Enterprise

After baseball, litigation is America’s national sport. A Harvard Law School paper, “Comparative Litigation Rates,” by Professors J. Mark Ramseyer & Eric B. Rasmusen notes that the U.S. has 5,806 lawsuits per 100,000 people. The UK is a poor runner-up with a paltry 3,681.  Please forgive my patriotic pride, but when it comes to litigation Team USA is at the top of the Premier League.

America is also famous for being the Land of Milton Friedman, well known for his argument that the only purpose of a company is to make money for its shareholders. Professors Colin Mayer, Leo Strine, and Jaap Winter have brilliantly argued that the time for this doctrine has passed. But it is far from dead as noted by how many companies behaved during the peak of the COVID-19 crisis and the lack of substantive steps following the Business Roundtable’s self-congratulatory “Statement of the Purpose of a Corporation” several years ago.

So what happens when the unstoppable force of litigation meets the unmovable object of shareholder primacy? While I cannot answer this ultimately metaphysical question, I’m thinking that the question  could become more substantial than metaphysical in the U.S. I explore this idea in some detail in a recent piece, “What the Shell Judgment Means for US Directors,” posted on the Harvard Law School Forum on Corporate Governance which I co-authored with four eminent legal scholars Sarah Barker, Alex Cooper, Ellie Mulholland, and Cynthia Williams.

The reason this metaphysical question could answered in the physical world is the recent ruling by the Hague District Court on May 26, 2021 which ruled that the iconic oil and gas company Royal Dutch Shell (RDS) must reduce its carbon emissions (Scopes 1, 2, and 3) by 45 percent by 2030 compared to 2019 levels. While Shell has appealed the ruling, it must abide by it while the case wends its way through the Dutch legal system. There is a certain irony in  that the ruling was the result of a lawsuit filed by a group of seven environmental and social NGOs (jointly referred to as Milieudefensie) in a country not nearly as well known for its litigious prowess as is the U.S.

It is also nicely symbolic that this ruling came the same day as the ExxonMobil annual shareholder meeting which resulted in Engine No. 1 placing three new directors on the company’s board of directors. I have written that this successful proxy battle by Engine No. 1 was a great victory for shareholders given the decades of miserable financial performance by a company doing everything it can to ignore the fact that the energy transition being forced by climate change requires fundamental changes to the company’s strategy and capital expenditures.

Which raises a further irony. In its ruling, the court assumes “that the reduction obligation will have far-reaching consequences for RDS and the Shell group “and that the reduction obligation will require “a change of policy” that “could curb the potential growth of the Shell Group.” But the court goes on to say that “the interest served with the reduction obligation outweighs the Shell group’s commercial interests, which for their part are served with an uncurtailed preservation or even growth of these activities.” I should also note that although irrelevant to the ruling, it could provide positive pressure on Shell to speed up its own strategic transformation.

To many, and not just in the U.S., this decision might seem like the most egregious of legal overreaches. An appalling example of a high court being duped by a bunch of rabid anti-corporate NGOs who banded together to sue a company that is doing a lot more than ExxonMobil to sort out the role of an oil and gas company in the years ahead.

This is not the case. What is fascinating and telling about this case—and what makes it relevant to the U.S.—is that it is based on tort law. For those of you who, like me, are not lawyers (which we have plenty of in the U.S already), a tort “is an act or omission that gives rise to injury or harm to another and amounts to a civil wrong for which courts impose liability.” What the Dutch court case has done is to apply the definition of a tort to damage to people and the environment from a company’s actions in the context of climate change. In doing so, it is just another example of how environmental and climate issues are being seen as creating potential liabilities under tort law.

A law is a law and courts will step in to enforce it. Making money is no excuse for breaching the law. Which gets us to the duty of board directors. The board is responsible for ensuring that the company complies with the law. Here tort law meets fiduciary duty under company law. For years there has been an ideologically driven argument that directors are violating their fiduciary duty if they take account of other stakeholders. That’s not true. But in this context, it’s also irrelevant. The financial interests of shareholders become secondary if the company is regarded by the courts as a tortfeasor (one who commits a tort) creating a liability for a person or group protected by the law. Even advocates of shareholder primacy have to agree that it is not in the best interest of its shareholders for the company to be breaching the law.

Am I saying that board directors of U.S. companies should all start getting nervous about a similar lawsuit in the U.S.? Probably not yet. But as tort law starts expanding around the world to cover climate issues, I can’t imagine that the most accomplished country in the world when it comes to litigation will not want to enter this new playing field. To win it.