Shareholder Rule no more after 135 years

The High Court finds that companies are entitled to assert privilege against its own shareholders.

Summary

On 27 November 2024, the Commercial Court in Aabar Holindgs SARL v Glencore Plc & Ors [2024] EWHC 3046 (Comm) held that companies are entitled to claim privilege against their own shareholders. The Court found the so-called “Shareholder Rule” – that a company cannot assert legal privilege against its shareholder, unless it is in relation to documents created for litigation, or in reasonable contemplation of litigation, against that shareholder – does not find any support in the binding authorities nor is it justifiable as a matter of a principle.

Key Takeaways

Aabar is a ground-breaking decision because:

1. Claimant shareholders, particularly in section 90/90A Financial Services and Markets Act 2000 litigation, sought privileged documents by invoking the Shareholder Rule to gather ‘insider’, detrimental, evidence against the company. This was particularly important for arms-length investors in companies, whose knowledge of the affairs of the company would necessarily be very limited.  For companies, this judgment represents a strong shield against activist shareholders.
2. For over 135 years, it was understood that the Shareholder Rule would, in principle, entitle litigant shareholders to disclosure of the company’s privileged documents. Indeed, in a nod to its entrenchment, Mr. Justice Michael Green, despite his own misgivings, recently found in Various Claimants v G4S Plc [2023] EWHC 2863 (Ch) that only a superior court could decide whether the Shareholder Rule is unjustifiable. This issue appears apt for appeal but it is not known at present if the claimants will appeal the decision.
3. Whilst Picken J in Aabar canvassed the policy considerations that belied the existence of the Shareholder Rule in depth, especially the consequence on the director’s duties towards the company, the policy consequences of the judgment on investors (and investment) was a somewhat glaring omission.

Background

The case is a securities class action brought by various claimants against Glencore Plc and some of its former directors in relation to alleged misstatements in the prospectus issued prior to the IPO of Glencore and certain corporate reports, including annual reports.

Issues

The following preliminary issues arose between the parties:

1. Does the Shareholder Rule exist in English Law?
2. If so, does it also apply to without prejudice privilege?
3. Does the Shareholder Rule apply to former shareholders and successors in title?
4. Does it apply to privileged documents belonging to subsidiary companies?

Decision

1. Does the Shareholder Rule exist?

Picken J found that the Shareholder Rule does not find any support in any binding authorities for the following reasons.

First, he found that some of the previous authorities relied upon to invoke the Rule were dealing with a historical fact pattern, where unincorporated joint stock companies were prevalent and trustees held the company’s asset on trust for the investors holding equitable interests in the assets. See Mayor and Corporation of Bristol v Cox (1884) 26 Ch D 678 and Gouraud v. Edison Gower Bell Telephone Co. of Europe Ltd. (1888) 57 LJ Ch 498. Thus, the right to disclosure in those cases arose because the company was managing the property of the shareholders and the legal advice, of which disclosure was sought, was paid for by property belonging to the shareholders. See paragraphs [35]-[37], [42], and [56]. This point was conceded by counsel for Aabar.

Second, Picken J found the proprietary justification for the Shareholder Rule held little force once it was decided that a company is a separate legal entity, distinct from its shareholders. Thus, any analogy to the position of a trustee who cannot assert privilege against the trust's beneficiaries in relation to legal advice obtained for the benefit of the trust is of no application in case of shareholders and a company. See paragraph [38].

Third, the judge held that several other authorities asserting the existence of the Shareholder Rule failed to address the evolution of the (distinct) legal personality of a company and failed to provide any justification for the existence of the rule at all. Further, several of the authorities relied upon for the existence of the rule, were in fact dealing with the exception. That is to say, they do not provide a rationale for the existence of the Shareholder Rule. See paragraphs [39]-[49].

Fourth, Picken J also rejected the submission that authorities support joint interest privilege as the justification for the Shareholder Rule. Whilst the judge accepted that other appellate judgments made reference to joint interest privilege, none of those cases concerned the Shareholder Rule and therefore those judicial comments were no more than obiter. See paragraphs [66]-[82].

Fifth, the judge was sceptical about whether there was a general species of joint interest privilege at all. That is to say, where two parties have a shared interest in the subject matter of the document, when it came into existence for their mutual benefit. Picken J’s analysis of the authorities led to the conclusion that it is merely an umbrella term to describe different situations where one party cannot assert privilege against another, for example a joint retainer to obtain legal advice or the trustee/beneficiary context. See paragraphs [96]-[104].

Picken J also held that even if the Shareholder Rule existed as a freestanding concept, joint interest privilege could not provide a justification for the Shareholder Rule for the following reasons (summarised below). See paragraphs [107]-[116].

First, shareholders do not hold a proprietary interest in the company’s assets nor do directors owe duties to shareholders. Second, shareholders (outside of the litigation context) do not generally have a right to access company documents.

Third, that a company’s interests can be equated with the shareholders’ interests as a whole cannot be a sufficient basis for granting [some] shareholders a right to inspect privileged documents.

Fourth, the identity of the shareholders of a large company will change all the time and, often, there are conflicting interests amongst shareholders. Thus, it is in fact unlikely to be a joint interest.

Fifth, there is risk of undermining the policy rationale behind legal professional privilege because it would discourage directors, in conflict with their duties, from seeking legal advice because of a fear of subsequent disclosure in litigation against shareholders.

The judge concluded that if the Shareholder Rule did exist, contrary to his judgment, it would not be a general rule but rather a fact-specific exercise of evaluation.

Issues 2 to 4 – the scope of the Shareholder Rule

These issues became academic given the answer to the first issue. Nevertheless, the judge concluded that if the Shareholder Rule did exist, he would have found as follows.

Issue 2. The Shareholder Rule does not apply to without prejudice privilege because it would undermine the policy rationale of encouraging parties to enter into settlement negotiations with companies for fear of further disclosure in subsequent litigation. See paragraphs [119]-[130].

Issue 3. The Shareholder Rule would apply beyond current shareholders because to hold otherwise would be a distinction of form. A successor in title stands in the shoes of its predecessor with respect to privilege. Whilst the existence of the beneficial ownership of shares would be relevant to assessing whether the Shareholder Rule ought to apply, it could not be determinative since the time for determining whether joint interest existed was when the document came into existence. Thus, it could not be invoked by a subsequent purchaser of shares in relation to those documents created before the shares were purchased. See paragraphs [131]-153].

Issue 4. The Shareholder Rule applies to documents of subsidiary companies who share the requisite joint interest in a document. An ultimate subsidiary cannot assert privilege against any other company in the chain, including the ultimate parent company. Thus, the Shareholder Rule is not limited to applications between a company and its direct shareholders. See paragraphs [159]-[167].