In England and the United States, legal professional privilege or attorney-client privilege is considered fundamental to the administration of justice, allowing clients to make confidential, full, and frank disclosure to their legal counsel and, in turn, be properly advised. Such is its importance that the law in those jurisdictions closely guards privilege and there are few exceptions to its application.
In this comparative piece, we explore the extent to which shareholders can access privileged documents in England and the United States under exceptions known as the "shareholder principle" and the Garner doctrine, respectively, and we consider the practical implications.
England: "Shareholder Principle" Punctured
For many years it was understood that a "shareholder principle" or "rule" existed under English law such that a company could not assert privilege against its shareholders except in relation to documents which came into existence in connection with hostile litigation between the company and its shareholders. Typically, this principle would come into play where shareholders brought claims against the company and sought disclosure1 of the company's privileged documents that were relevant to the issues in dispute but that were not brought into existence for the sole or dominant purpose of adversarial litigation with the company and were, therefore, not permitted to be withheld on the grounds of litigation privilege.
As shareholder activism and related litigation has increased in England, companies under attack have tried to challenge this principle and prevent shareholders from accessing legal advice that has been provided to the company. Late last year, the English High Court of Justice had cause to reconsider the existence of the "shareholder principle" in Aabar Holdings SÀRL v. Glencore PLC and Others. Aabar2 is one of a number of claimants that have brought claims against Glencore and, in some cases, its former directors. The claims brought (including under the Financial Services and Markets Act 2000) relate to alleged and admitted misconduct by certain subsidiaries of the Glencore Group in Africa and South America and also to oil price manipulation. In its decision, the court declared that, in fact, the "shareholder principle" does not exist, concluding that there was no justification for such a principle. The court observed that companies are legally distinct from their shareholders who have no proprietary interest in the company's assets and are not owed any duties by the directors. There was, therefore, no basis on which to conclude that a proprietary interest justified disclosure of privileged documents.
Furthermore, the case law did not support a concept of joint interest privilege between a company and its shareholders. Again, the court observed that shareholders have no proprietary interest in the company's assets. The court also observed that shareholders' legal and economic interests comprise their contractual rights as set out in the company's articles and that this typically controls the extent to which shareholders may inspect company books and records. It would be inconsistent if shareholders could essentially bypass these contractual rights as set out in the company's articles by commencing litigation against the company and using the "shareholder principle" to obtain privileged material.
Further, the interests of a company and its shareholders are not always aligned, and (particularly in the context of large public companies that will have a very large number of ever-changing shareholders) it was difficult to see how there could be a joint interest between a company and its shareholders. Another important consideration for the court was that by extending joint interest privilege to the shareholder–company relationship, the public policy rationale behind legal professional privilege — the ability to consult a lawyer in confidence — would be undermined. In turn, the fear that advice may later have to be disclosed to shareholders might discourage directors from seeking legal advice even when it would be consistent with their duties as directors.
The decision is being appealed to the Court of Appeal3 but, in the interim, the decision provides companies in England with some comfort that they can — generally speaking — seek and obtain legal advice without the risk of having to disclose the same to their shareholders.
US: The Garner Doctrine Exception to Attorney-Client Privilege
Traditionally, the law in the United States has been the opposite of English law on this issue.
Indeed, the most relevant privilege rule in US jurisdictions, the Garner doctrine, takes its name from a decades-old decision that explicitly rejected application of the English shareholder principle.4 Instead, under the Garner doctrine, a corporation has a qualified privilege over documents reflecting attorney-client communication sought by shareholders in litigation "subject to the right of the stockholders to show cause why it should not be invoked in the particular instance."5 Whether good cause exists to set the privilege aside depends on a number of factors, including:
- The number of shareholders and the percentage of stock they represent;
- The "bona fides" of the shareholders;
- The nature of the shareholders' claim and whether it is "obviously colorable";
- The necessity of the information being sought and its availability from other sources;
- Whether the shareholders allege criminal or illegal conduct by the corporation;
- Whether the communication related to past or prospective actions;
- Whether the communication sought is related to the litigation itself;
- Whether the shareholders are "blindly fishing"; and
- Whether the corporation has an interest independent of attorney-client privilege in maintaining the confidential nature of that communication (e.g., the protection of trade secrets)6.
Because of the structure of the US court system, application of the Garner doctrine is not uniform across US jurisdictions. The Garner decision was issued by a federal court of appeals with limited territorial jurisdiction (i.e., the Fifth Circuit, which hears appeals from the federal district courts in Louisiana, Mississippi, and Texas), and while a number of other lower federal courts have since adopted Garner's privilege rule, the US Supreme Court has never had occasion to review it. In addition, Garner involved application of the federal common law of privilege, meaning the decision does not apply directly to cases decided under state privilege law. Importantly, however, the Garner doctrine does apply to cases governed by the law of Delaware — the US state that, due in part to the expertise of its Court of Chancery, is the jurisdiction in which most US companies are incorporated and, in turn, where many company disputes are litigated.7
Specifically, in its 2014 Wal-Mart decision, the Delaware Supreme Court explicitly adopted the Garner doctrine for both litigation between a company and its shareholders generally and in the specific context of a shareholder's statutory demand for the production of books and records.8 In doing so, the Delaware Supreme Court emphasized that the exception to the privilege under the Garner doctrine is "narrow, exacting, and intended to be difficult to satisfy."9 At the same time, the Wal-Mart decision makes clear that the exception is not impossible to meet. Indeed, the Delaware Supreme Court affirmed the Chancery Court's holding that the plaintiff in the case had satisfied the exception. The plaintiff was able to assure the court that it was not "just" engaging in "a broad fishing expedition" by, among other things, identifying the specific privileged documents it sought and showing that those documents, which concerned Walmart's internal investigation of potential misconduct by a Mexican subsidiary, were essential to evaluating whether to commence a shareholder derivative lawsuit on behalf of the company.10
Given the number of US public companies incorporated in Delaware, the Wal-Mart decision and its express adoption of the Garner doctrine are significant for US shareholder litigation generally. Again, however, it is important to note that not every US jurisdiction has adopted the Garner doctrine. Indeed, some prominent jurisdictions have rejected it. California, for example, "does not recognize Garner and does not permit shareholders to discover privileged communications [even] upon a showing of good cause."11
Practical Implications for Companies
Currently, under the law in England and the United States, there is no general right under which shareholders are entitled to access a company's privileged documents.
Under English law, where legal advice or litigation privilege exists, that privilege is inviolate. That said, privilege may be lost if confidentiality is not maintained, and this can easily happen through the uncontrolled sharing of privileged documents – something that can be a risk in early-stage companies where information controls may not be well-established and certain directors may also represent investors in the company with their own obligations to share information with the investor. As such, it is important that any sharing of privileged documents is done carefully and with appropriate controls.
Matters can be even more complex in the United States because in certain jurisdictions there, such as Delaware, a company's privilege may be qualified (in addition to being waivable if confidentiality is not maintained).
Ultimately, whether in England or in the United States, it is wise for companies to seek counsel on how best to protect privileged communications and, insofar as possible, manage the risk of disclosure to shareholders.
Footnotes
1. Known as discovery in the United States.
2. Aabar was not, in fact, a registered shareholder of any shares in Glencore but rather claims to be the successor to the rights of an ultimate beneficial owner of shares in Glencore that were held indirectly through the Certificateless Registry for Electronic Share Transfer.
3. The Court of Appeal hearing is fixed for January 2026.
4. Garner v. Wolfinbarger, 430 F.2d 1093, 1097 (5th Cir. 1970).
5. Id. at 1103–04.
6. Id. at 1104.
7. Over two million business entities are currently incorporated in Delaware; this includes nearly 68% of Fortune 500 companies and 80% of all initial public offerings in 2023. (Delaware Division of Corporations, "Annual Report Statistics" [2023]. URL: https://tinyurl.com/y3uvauka)
8. Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, 95 A.3d 1264, 1278 (Del. 2014).
9. Id.
10. Id. at 1278–80.
11. Swortwood v. Tenedora de Empresas, S.A. de C.V., 2014 WL 895456 (S.D. Cal. Mar. 6, 2014) (emphasis added) (collecting authority).
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.