Derived from 19th century case law, the general school of thought has been 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 so-called “Shareholder Rule”).

In a judgment dated 27 November 2024, Mr Justice Picken (sitting in the English High Court) delivered a landmark ruling decisively rejecting the ‘Shareholder Rule’ on all bases (the Judgment). The Judgment represents a long awaited, significant, departure from what was considered to be a long-standing legal principle and seeks to align the concept of privilege under English law with contemporary corporate realities. The Judgment also clarifies the concept and scope of Joint Interest Privilege as a mater of English law.

Background

The Judgment was given in relation to ongoing group litigation brought by Aabar Holdings S.À.R.L (Aabar) and other shareholders against Glencore PLC (Glencore) involving claims under s. 90 and 90A of the Financial Services and Markets Act 2000 in relation to alleged (but in some cases admitted) misconduct by companies within the Glencore group. Within the context of the proceedings, a dispute arose as to whether Glencore would be entitled to assert privilege against the shareholder litigants.

Aabar argued that, during the relevant period, it was the indirect shareholder of Glencore (via its shareholding in another company which was the ultimate beneficial owner of Glencore via its holding of intermediated securities) and that, by virtue of the Shareholder Rule, Glencore was not entitled to withhold documents from it on the basis of privilege.

The Shareholder Rule

The Shareholder Rule was historically rooted in the notion that the shareholders of a company had a proprietary interest in the company’s assets, including the legal advice it received. However, Aabar’s counsel argued that the underlying rationale of the Shareholder Rule (i.e. the proprietary interest just described) had “morphed” into an emanation of joint interest privilege and that Aabar, as shareholder, had a joint interest with its company, Glencore, which meant that it was entitled to receive copies of documents which would have otherwise ordinarily been protected by privilege.

The End of the Shareholder Rule?

The Court dismissed Aabar’s argument and ultimately rejected the Shareholder Rule:

• As Aabar accepted, the Shareholder Rule is not supported by the principle of proprietary interest. The Court held that it was “clear that the Shareholder Rule is not (or can no longer be) founded on the principle that a shareholder has a proprietary interest in the company’s assets, and therefore, in advice taken by the company and paid for out of the company’s funds”. The Court further noted that the Shareholder Rule was decided before Salomon v A Salomon & Co Ltd [1987] AC 22, which established the now trite law that a company is a separate legal entity distinct from its shareholders, and at a time when unincorporated joint stock companies, in which trustees held a company’s assets on trust for investors, were still prevalent. This is no longer the case.
• The Shareholder Rule could not be upheld on the basis of joint interest privilege. The Court found that there was no binding authority which could support such a proposition and, in any event, the cases that the Court had been referred to did not concern the Shareholder Rule (or, indeed, the company/shareholder relationship), but instead concerned different kinds of relationships, such as those relating to partnerships or between trustees and beneficiaries.
• The Court also noted that it was unclear whether the joint interest principle has “any independent existence”, concluding that it was in fact an “umbrella term” and that the applicability of joint interest privilege is a factual question that can only be decided on a case by case basis.
• The Court further rejected Aabar’s argument on public policy grounds, suggesting that extending joint interest privilege to a company/shareholder relationship risked “undermining the public policy for legal professional privilege” as it may seek to discourage directors from seeking legal advice in keeping with their duties, out of fear that such advice may need to be disclosed to third parties in the future.

Given its finding, there were certain other issues which the Court had been asked to determine which fell away because they were based on the Shareholder Rules being found to exist. Notwithstanding this, the Court went on to consider such issues on the premise that the Shareholder Rule did in fact exist in some form or another. In this scenario, it found the following:

• If it did exist, the Shareholder Rule would not extend to without prejudice documents. Such documents necessarily engage the interests of a third party and it is more likely that the interests of the shareholder will be adverse (or at least different) to the interests of a third party. The third party is unlikely to have contemplated that its negotiations will be shared with the shareholders and, if it were extended, may deter parties from engaging in settlement negotiations with companies knowing that such negotiations could be disclosable in subsequent litigation between the company and its shareholder.
• If it did exist, the Shareholder Rule could, in principle, extend to Aabar, even though it was not a direct or registered shareholder of Glencore. This is because, as the Court noted, joint interest is predicated on the basis that the documents in question are made for the company and shareholder’s mutual benefit and would apply regardless of whether the shareholder is the legal owner of the shares or is otherwise beneficially entitled to them. Seeking to draw a distinction between registered owners and intermediated securities holders in these circumstances could lead to “somewhat arbitrary consequences”.
• If it did exist, the Shareholder Rule would extend to subsidiary companies within the Glencore group. The Court observed that the Shareholder Rule would “not […] be restricted to applying only between a company and its direct shareholders, on the basis that its indirect shareholders (further up the chain of holding companies) cannot hold the requisite joint interest with the company”.

Significance of the Judgment for Shareholder and Companies

The Judgment, as it presently stands, means that a shareholder cannot rely on the so-called Shareholder Rule, or simply assert joint interest privilege, in order to obtain disclosure of otherwise privileged information held by the company. This is a far-reaching consequence for any proceedings concerning disputes between a company and its shareholder(s), such as unfair prejudice or derivative actions. As noted above, rather than there being some blanket rule, the Court favoured a case-by-case approach, in which the relevant facts must demonstrate that the company and shareholder had a mutually beneficial and joint interest in obtaining the relevant advice or documents of which disclosure by the shareholder is sought. From the shareholder’s perspective, if they want a better chance of being able to see privileged material belonging to the company, then they may seek to agree with the company ahead of time that the relevant advice is being sought on a joint basis. Conversely, directors of a company can now breathe a little easier, knowing that legally privileged documents cannot be obtained by a shareholder simply as of right via the back door of the Shareholder Rule.

Given the significance of the Judgment, we anticipate that it may be appealed by Aabar. Equally there are other cases where the existence of otherwise of the Shareholder Rule also features and it will be interesting to see how the courts in those other cases grapple with the issue and whether those decisions are appealed. So watch this space….