For over a century, the English courts have applied the so-called "Shareholder Rule" that a company cannot assert privilege against its own shareholders save in respect of communications concerning hostile litigation between the company and the shareholder. In Aabar Holdings SARL v Glencore PLC & ors [2024] EWHC 3046 (Comm), the High Court has found that the Shareholder Rule is unjustifiable and should no longer be applied, significantly curtailing the circumstances in which a company can be compelled to disclose privileged information to shareholders.
Background
Aabar Holdings SARL (Aabar) is one of a number of claimants who have brought claims against Glencore PLC (Glencore) and its former directors relating to alleged misconduct by certain of Glencore's subsidiaries in Africa and South America, and oil price manipulation in relation to the fuel oil market at certain US ports. The claimants say that Glencore is liable to them under ss.90 and/or 90A of FSMA 2000 because Glencore's IPO prospectus and other documents contained misstatements and/or omissions relating to this misconduct, and that the claimants have suffered losses on their investments in Glencore as a result.
At the first CMC, a dispute arose as to whether (and, if so, in what circumstances) Glencore would be permitted to assert privilege against the claimants in these proceedings. A preliminary issue trial was ordered to resolve this point.
Aabar's position was that there was a "well-established" principle of English law that a company cannot assert privilege against its own shareholder, save in relation to documents that came into existence for the purpose of hostile litigation against that shareholder (the Shareholder Rule). Glencore submitted that the Shareholder Rule is anomalous, unprincipled and should no longer be applied.
Proprietary interest
In 19th century case law, the Shareholder Rule emerged on the basis of shareholders' proprietary interest in the property of the company. The reasoning was that a company cannot resist disclosure to shareholders of otherwise privileged documents because the company is managing the property of the shareholders, and that property has been paid for using the shareholders' money, and that this is analogous to the position in partnership and trust disputes. This basis has become known as the "proprietary interest principle".
However, in Aabar Holdings, Picken J held that this reasoning could not survive the House of Lords' 1897 decision in Salomon v A Salomon & Co Ltd1 which confirmed that a company is a separate legal entity that is distinct from its shareholders. The judge held that "whatever historical similarities there may once have been between the positions of an investor in a company, and partners or trust beneficiaries...those similarities (and so the analogy with a partnership or a trustee/beneficiary relationship) ceased to exist".
Picken J noted that after Salomon, in Woodhouse & Co Ltd v Woodhouse2 (the only reported appellate decision directly concerning the Shareholder Rule) the Court of Appeal referred to the Rule as a "well-settled" principle. However, the Shareholder Rule was not in fact analysed in Woodhouse, because that case was about the "litigation exception" where the company and shareholders were adverse to one another. Woodhouse appeared to accept the proprietary interest principle in obiter comments, but this was neither based on analysis nor binding. Cases after Woodhouse over the subsequent 100 years had, according to the judge, cited Woodhouse and "assumed, apparently without question and anyway without analysis, the existence of the Shareholder Rule."
Much more recently, last year in Various Claimants v G4S3 Michael Green J expressed reservations as to the continuing acceptance of Woodhouse as authority for the application of the Shareholder Rule, noting that "it is a curiously insubstantial case upon which to found this apparent doctrine of no privilege between shareholder and company".
In Aabar Holdings, Picken J said he shared this scepticism. While there were many decisions which had referred to the Shareholder Rule, including at appellate level, on examining these Picken J concluded that none of them involved application of the Rule; there were only cases applying the "litigation exception", and cases that merely referred to the Rule. Thus any commentary these cases contained was obiter and not binding. The judge thus felt able to conclude that the proprietary interest basis could not found the Shareholder Rule (a point he noted Aabar had accepted).
Joint interest
Rather than seek to maintain the proprietary interest basis for the Shareholder Rule, Aabar submitted that, following the decision in Salomon, the principle had "morphed" and that, properly understood, the Shareholder Rule is based on a joint interest privilege that arises between a shareholder and a company.
Picken J rejected this argument, finding that there was no binding authority that the Shareholder Rule could be justified on the basis of joint interest privilege. The Court held that the earlier authorities were clearly premised on the proprietary interest principle, and that subsequent cases merely followed the earlier decisions, often amounting to little more than passing comment in cases where the existence of the Shareholder Rule was not directly in issue, and often by reference to commentary concerning joint interest privilege in practitioner texts and without independent analysis of the underlying basis of the Shareholder Rule.
Further, the judge was doubtful that joint interest privilege existed as a standalone species of privilege, referring to it as an "umbrella term" or "convenient shorthand" which has been used to group together various cases in which privilege had been held to apply, e.g. trustee/beneficiary and partnership relationships: further (often case-specific) justification is required beyond the mere sharing of an interest in the documents, e.g. a proprietary interest in the trust or partnership property.
The judge rejected the idea that any overarching concept of joint interest privilege could apply to a company/shareholder relationship (in a generalised sense). There are important distinctions between the company/shareholder relationship and the trustee/beneficiary relationship, including that the shareholder has no proprietary interest in the company's assets and that generally the shareholders do not have rights to access the company's documents.
Picken J concluded that the Shareholder Rule is unjustifiable and should no longer be applied. Its original basis in a proprietary interest did not survive Salomon, and there was no alternative joint interest basis that could sustain it, either in authority or as a matter of principle.
Picken J added that in the alternative, if the Shareholder Rule were to continue to exist, it could no longer apply as a blanket rule in every company/shareholder case. Its application would depend on whether there was a sufficient joint interest in the circumstances of each individual case.
Other considerations
In case the Shareholder Rule did continue to exist in some form, Picken J went on to consider the other issues that had been raised in the trial.
WP communications
The second issue in the trial had been whether the Shareholder Rule applied to without prejudice (WP) privilege in addition to legal advice and litigation privilege.
Picken J found that if the Shareholder Rule does exist, it cannot extend so far as to prevent withholding WP privileged material from shareholders. Waiver of WP privilege requires the agreement of both parties to the relevant communication. Hence it would be inconsistent to suggest that a company could waive such privilege unilaterally by revealing the content of WP communications to shareholders.
To extend the Shareholder Rule to WP communications would also be contrary to the public policy behind the WP privilege rule. WP privilege is intended to encourage parties to have open negotiations to settle their disputes out of court. Parties would be discouraged from having such discussions with corporate counterparties if they knew that the contents of such communications were not privileged as against the company's shareholders.
Documents of subsidiary companies
Picken J had been asked to consider if the Shareholder Rule would extend to privileged documents belonging to the company's subsidiaries. He found that it would, stating that if there is a chain of holding companies and each shares the requisite joint interest in a communication, then the ultimate subsidiary should not be able to assert privilege against any of them, including the ultimate holding company. The judge commented that to the extent a communication is relevant to the administration of the affairs of a subsidiary, it is also relevant up the chain of shareholders, and "communications made for the mutual benefit of a company and a direct shareholder are also made for the mutual benefit of the shareholders of that direct shareholder."
Position of nominee shareholders
The claimant was not a registered shareholder in the defendant. Instead, it was a shareholder in another company, Commodities S.à.r.l., which the claimant alleged was the ultimate beneficial owner of shares in Glencore. This raised questions as to whether the claimant would be able to invoke the Shareholder Rule. Glencore submitted that the Shareholder Rule could not extend in this way because only persons on the register of members, i.e. the legal owners of shares, are recognised as members of the company, both in general company law and in accordance with Glencore's articles of association. Glencore noted that Michael Green J in G4S had suggested that the Shareholder Rule thus applied to registered shareholders only.
However, Picken J disagreed. He found that such an argument wrongly emphasised form over substance, and the fact that the shareholder may not hold legal title to the shares (such title often vesting in a nominated CREST member) would not preclude operation of the Shareholder Rule. This is because the Shareholder Rule was not a matter of company law, but instead involves asking whether the shareholder and company have a sufficient joint interest in the communication. Such a joint interest may arise through having beneficial ownership of the shares as opposed to legal title.
Implications
Both this decision and the G4S case were issuer liability claims under FSMA. This type of claim has become more prevalent in recent years, with several such actions currently going through the courts. There has also been a general increase in shareholder litigation, for example there have been many recent unfair prejudice petitions before the courts. For the claimants in such corporate disputes, who may have expected that they would be entitled to see a company's privileged documents, this decision could be unwelcome. For defendant companies, it is good news, affirming their ability to assert privilege to resist disclosure of legal advice.
Companies frequently need to seek legal advice on a range of issues that will not, at the time, be considered adverse to their shareholders' interests. For example, advice may be sought to inform decisions on the sale of assets, corporate governance decisions, and decisions on market announcements. These all have the potential to give rise to subsequent claims by shareholders (for example, a corporate governance decision may lead to an unfair prejudice petition). This ruling assists companies, suggesting they need not be concerned that the legal advice they sought at the time of taking the relevant decisions will later be disclosable to shareholders bringing disputes.
The decision appears pragmatic in light of corporate reality. As Picken J noted, it would be difficult to justify the Shareholder Rule as a blanket rule to prevent companies from asserting privilege against shareholders in modern circumstances. Listed companies, in particular, have thousands of dematerialised shareholders. Their shareholders are also in near constant flux. It would be unreasonable to suppose that such a company has a joint interest with its shareholders in all legal advice it obtains. That is all the more so in extreme cases, such as where a competitor or activist has acquired shares.
With all of that said, caution should still prevail. It is of obvious significance for the Court to hold that a 135 year old principle is no longer good law. The position is therefore unlikely to be settled – there is every likelihood that either this decision will be appealed, or the point will resurface in one of the other securities disputes going through the courts soon.
Footnotes
1. [1897] AC 22
2. (1914) 30 TLR 559
3. [2023] EWHC 2863 (Ch)
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