Late last year, we reported a bold decision of the High Court which suggested that the shareholder rule did not exist in English law, despite a long-held view to the contrary. The Privy Council has now considered this issue in Jardine Strategic Limited v Oasis Investments and othersand determined that the shareholder rule should no longer be recognised in England and Wales.
What was the shareholder rule?
The shareholder rule is the principle that a company cannot, during the course of litigation with a current or former shareholder, assert legal advice privilege against them, meaning that in a disclosure scenario a shareholder would be entitled to see legal advice obtained by the company. This is unless the documents in question came into existence as a result of actual or contemplated litigation between the shareholder and the company.
The rule has been in place in England and Wales since the 1800s and has been applied in case law since that date.
English High Court decision
In November 2024 the High Court in Aabar Holdings SARL & ors v Glencore PLC & ors [2024] EWHC 3046 (Comm) cast doubt on the principle. After detailed consideration of the authorities, including decisions of higher courts purporting to uphold the rule, the High Court found that the shareholder rule was "unjustifiable and should no longer be applied". (See our article for a summary of the court's reasoning.)
A leapfrog appeal of this decision to the Supreme Court was granted, but the Supreme Court declined the leap-frog, taking the view that the same issue would probably be resolved in the current Privy Council case. This left the state of the law in England on this issue uncertain.
Decision in Jardine
Jardine concerned an appeal from the Court of Appeal for Bermuda to the Privy Council. The members of the Board for the appeal were all also Justices of the UK Supreme Court.
It was decided that the shareholder rule forms no part of the law of Bermuda, and that it ought not to continue to be recognised in England and Wales either.
This was on the basis that the original justification for the rule was proprietary (i.e., the shareholders had a proprietary interest in the company's assets which justified their access to privileged documents, given that advice taken by the company had been paid for by the company). However, the Privy Council said that this "is wholly inconsistent with the proper analysis of a registered company as a legal person separate from its members such that the members have no proprietary interest in the funds of the company used to pay for the advice" and has not been supported for some time.
The status-based automatic Shareholder Rule is therefore now, and in truth has always been, a rule without justification. Like the emperor wearing no clothes in the folktale, it is time to recognise and declare that the Rule is altogether unclothed.
The Privy Council then went on to consider whether joint interest privilege would automatically apply to support every claim for production of relevant documents by a shareholder against a company.
The Board declined to undertake a general review of joint interest privilege, which would have been interesting given that Picken J in the High Court decision in Aabar had doubted whether the joint interest privilege principle "has any independent existence". They focused only on the issue to be decided, which was whether the company-shareholder relationship falls within the "joint interest family of relationships" and concluded that it did not.
This is because the interests of shareholders (particularly in large companies) may diverge from each other and that of the company. Further, there are other stakeholders whose interests the company has to take into account, such as its workforce and finance providers, which may diverge from those of its shareholders. It was recognised that directors will need to identify a company's best interests whilst paying attention to the interests of various stakeholders when making decisions and, in doing so, should be able to benefit from "candid, confidential, legal advice". The Board recognised that, subject to contractual terms, shareholders would not otherwise be entitled to demand documents or legal advice.
The possibility that a joint interest might exist on the facts of a particular case was also rejected because of the unacceptable uncertainty it would cause. Directors would never know when taking advice whether it would be privileged from production later down the line or not: "directors need to know with reasonable certainty whether confidence can be maintained in the legal advice at the time when a decision is made whether or not to seek it."
Application in England and Wales
Decisions of the Privy Council are not usually binding in England and Wales but are highly persuasive. However, in this case, the Privy Council took the relatively unusual step of making what is known as a Willers v Joyce direction; a direction that the domestic courts of England and Wales should treat the decision as also representing the law of England and Wales. The Board were "firmly of the view that this decision should be regarded by courts in England and Wales as abrogating the Shareholder Rule for the purpose of litigation in those courts". This makes complete sense and is unsurprising given the Supreme Court declined the leap-frog appeal in Aabar on the basis that the issue would probably be resolved by the Privy Council.
Why is this important?
This decision provides clarity for companies and shareholders alike across jurisdictions.
The decision recognises the complex modern reality of company ownership and decision-making, particularly in large corporates. It is beneficial to companies, which now have a firm basis on which to withhold disclosure of privileged documents to shareholders in a litigation scenario. It is of course possible that a company may be obliged to disclose information to shareholders on a different basis, for example in compliance with rights set out in a shareholders' agreement or in the articles of association. The terms of these documents will need to be reviewed carefully to determine possible disclosure scope, but (subject to shareholder bargaining power), the extent may be limited.
It also upholds a fundamental principle of legal privilege, namely that a party should be able to lay all of its cards out on the table in order to receive legal advice on an issue, without fear of disclosure to a third party.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
