In a recent case heard last year, Aabar Holdings SARL v Glencore plc and others [2024], the High Court found that the historic shareholder rule (also “the rule”) does not exist in English law. The rule stipulated that a company cannot assert its right to legal privilege against its own shareholders by withholding from them the disclosure of certain confidential communications or documents. Prior to this judgment, it was thought that shareholders had an entitlement to the disclosure of a company’s privileged documents. The consequence of this judgment in broad terms is that a shareholder’s interest in a company does not now override a company’s legal right to privilege, and its effect is that a shareholder cannot compel a company to produce a document over which privilege is legitimately claimed.
What is privilege?
Privilege is a legal right that entitles a party to withhold disclosing written or oral evidence from production. This right is useful for a party involved in litigation that is reluctant to make commercially sensitive or confidential documents available to the court and interested parties.
There are two main categories of privilege under English law. The first is legal advice privilege, which protects communications between lawyer and client for the purpose of providing legal advice. This category of privilege enables a client to confide and place unrestricted trust in the communications they have with their legal representative. The second category is litigation privilege, which arises from the principle that a litigant or potential litigant ought to be free to seek advice in relation to a potential dispute without having to disclose such advice to the opposing side.
The foundations of the rule
The shareholder rule dates back over 135 years, and was approved in both the Court of Appeal and Supreme Court. Despite a binding authority not existing on the basis of joint interest privilege (where two or more persons jointly seek legal services), the rule has been inferred from previous common law authorities, most notably Gouraud v Edison Gower Bell Telephone Co of Europe Ltd [1888]. A widely accepted exception to the rule was where documents had come into existence in hostile litigation against a shareholder.
The view of the courts was that the rule was initially underpinned by the principle that shareholders have proprietary interests in a company's assets, and therefore also have an interest in legal advice taken by the company. This was understood to be the case regardless of a company’s size or whether it was a private or public company. Subsequent case law, however, created the distinction between shareholders and companies as separate legal entities, which consequently brought into question the proprietary foundations of the rule.
In the case Sharp and others v Blank and others [2015], a group action made by the shareholders of Lloyds Banking Group plc, the High Court held that the bank could not cloak the legal advice it received relating to its acquisition of HBOS with legal advice privilege in the face of its shareholders. Judge Nugee disagreed with the defendant’s argument that the foundations of the shareholder rule were born out of the principle of common interest. Rather, it was stated that, if an exception to the rule could be deduced in circumstances where interests were adverse, the rule’s foundation must be in the notion that shareholders indirectly finance the actions of a company. Therefore, a company taking advice on the running of its business, and paying for this advice out of the company's assets, cannot assert privilege against its shareholders. This justification is akin to the general rule that applies to the relationship between trustees and beneficiaries, whereby a trustee taking advice as to its duties in running the trust, cannot assert privilege against the beneficiaries if the advice was financed out of trust assets.
There has been some confused commentary on the shareholder rule in recent years. Its foundations have been challenged and the legitimacy of its application queried, given it was established before the distinction between company and shareholder as separate legal entities.
Aabar Holdings SARL v Glencore plc and others [2024]
In this case, an investor brought a claim against a company after the company's subsidiaries had issued certain documents containing misstatements or omissions, which had caused the investor loss. The investor was not a shareholder of the company itself, but was the sole shareholder in its Luxembourgian ultimate beneficial owner. Whilst attempting to settle a few separate issues in the proceedings, the claimant argued for the existence of the rule, alleging that it had “morphed” into a form of joint interest privilege that applies to various relationships.
After an in-depth evaluation of the aforementioned arguments, Judge Picken held that there was no justification of the underlying basis of the rule and therefore that it should not be applied further as it does not exist in English law, and there was no binding authority justifying it by way of joint interest privilege.
A few interesting points Judge Picken deliberated on and then utilised in reaching this conclusion included that:
- the legal and economic interests of shareholders are comprised in the contractual rights outlined in the company’s articles of association, and Glencore’s articles generally restricted shareholder rights to inspect books or documents of the company;
- for a large public company such as Glencore, adopting the rule would be administratively very difficult;
- the relationship between shareholder and company does not demonstrate sufficient unity of interest to warrant a claim to joint interest privilege; and
- adopting the rule risks undermining the public policy rationale for legal professional privilege, in that it could deter directors from seeking legal advice if they are of the understanding that the advice sought may be visible to a large number of people.
This judgment is significant and speaks symbolically to the view of the courts on the relationship between shareholder and company. A relationship that was once viewed in the same light as trustee and beneficiary may now be considered in some ways more severed, in which interests may not always align. Judge Picken distinguished between these two types of relationship, stating that directors owe trustee-like duties to companies, and not to shareholders individually.
Aabar Holdings have since applied for permission to appeal but if the initial decision is upheld, the rule’s absence will have a significant impact on corporate disputes. Shareholder claims that challenge the decision-making of the company’s board may become more difficult to advance and company directors can assert the principle that advice sought from company legal advisors will remain confidential to the company and need not be disclosed to shareholders.
If you have any questions on this article, please get in touch with Kypros Georghiou or your usual Shepherd and Wedderburn contact.
For information on privilege in Scotland, please see our helpful video, available here. We have a wealth of information relating to handling disputes in Scotland, and how this differs from handling disputes in England and Wales – please see more information here.