English Commercial Court rejects the longstanding “Shareholder Rule” as an exception to privilege

In a significant ruling, the English Commercial Court has rejected the longstanding “Shareholder Rule”. This rule traditionally prevented companies from asserting privilege against their own shareholders, but was found to be unjustifiable under modern legal principles. The decision has important implications for companies and their shareholders, particularly in the context of legal privilege and access to the company’s documents.

Background

The Shareholder Rule has been a feature of English law case law for over 135 years, originally justified on the basis that shareholders had a proprietary interest in the company's assets and that this interest extended to advice obtained by the company. This meant that companies could not withhold privileged documents from their shareholders, unless the documents were specifically generated for use in hostile litigation with those shareholders.

However, this proprietary interest justification has been increasingly questioned. The Shareholder Rule originated at a time when the principle of separate corporate personality was not yet well developed. In the light of the modern understanding of the distinction between companies and individual shareholders, there were discussions in academic publications as well as in case law as to whether an alternative justification for the Shareholder Rule was needed.

Main issues before the Commercial Court

In Aabar Holdings SARL v Glencore PLC & Ors [2024] EWHC 3046 Comm, the court was asked to consider several key issues:

1. Whether the proprietary interest justification for the Shareholder Rule is still sustainable;
2. If not, whether an alternative justification, such as joint interest privilege, is available;
3. Whether the Shareholder Rule extends to beneficial owners of shares held through intermediaries as well as to direct shareholders; and
4. Whether the Shareholder Rule applies to privileged documents held by subsidiary companies within a corporate group.

Court's decisions and reasoning

Proprietary interest

The court concluded that the proprietary interest justification is no longer sustainable. The principle established in Salomon v A Salomon & Co Ltd [1897] AC 22, which treats a company as a separate legal entity distinct from its shareholders, had fatally undermined this basis for the Shareholder Rule. That case had also rejected an analogy between the shareholder’s interest in a company and that of a trust beneficiary in trust property, which might have supported a proprietary analysis.

Alternative justification

The court considered at some length whether the Shareholder Rule could be justified on the alternative basis of joint interest privilege, before ultimately rejecting the notion. It found no concrete support in the authorities for a freestanding concept of joint interest privilege that could then be applied to the company/shareholder relationship. Nor had the cases consistently distinguished between a notional joint interest privilege and common interest privilege. Rather, the courts had found that a series of specific relationships gave rise to exceptions to the general rule of privilege. It was wrong to generalise from these to an overarching principle.

In its analysis, the court again emphasised the traditional view of the English courts that legal professional privilege is a fundamental right that should not be overridden without compelling justification.

Beneficial owners

Although it was not strictly necessary for the court to go on to consider the other questions, Picken J did so in order to provide an indication of his views in the event that his decision on the Shareholder Rule is appealed. He considered that if the Shareholder Rule remained in effect, it could extend to beneficial owners of shares held through intermediaries. This was a recognition of the practical reality that a significant proportion of shares are held in this manner and that beneficial owners have a real economic interest in the company's performance.

Subsidiary companies

The court also decided that if the Shareholder Rule did still apply, it could extend to privileged documents belonging to subsidiary companies within a corporate group. It reasoned that the activities of subsidiaries are conducted for the benefit of the parent company's shareholders, creating a joint interest in the administration of the subsidiaries' affairs.

Comment

This decision is likely to be appealed, given that it dispenses with a rule dating back to the 19^th century, and one which has been relied on by the Court of Appeal as recently as 2020 (Dawson-Damer v Taylor Wessing LLP [2020] EWCA Civ 352), as well as being adopted in other common law jurisdictions. However, if upheld on appeal, the decision will provide greater confidence to companies in holding free and frank discussions with their legal advisers, which is the key public policy reason for the value placed on privilege in the English legal system.

For shareholders, the decision will be of more concern, since it has the potential to limit greatly the evidence that will be available to them on disclosure in any dispute with the company, including disputes involving unfair prejudice and derivative actions where the Shareholder Rule has been applied for many years. This of course assumes that the judgment will be followed in other cases. 

It is also worth noting that despite the similarity in terminology, the decision does not disturb the existing principle of joint retainer privilege (as opposed to joint interest privilege). Joint retainer privilege applies where both parties agree to instruct a single lawyer to advise them. Both parties then become clients of the lawyer, both are entitled to access the resulting advice, and both benefit equally from privilege in it, irrespective of the nature of their interest in the underlying subject matter. This was not the scenario that arose in the present case, where the company alone had instructed the lawyer.

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