Litigation Trending: Is this the end of the Shareholder Rule?

Has Picken J's judgment in Aabar Holdings SARL v Glencore PLC & Ors put an end to the 135 year old legal principle?

What you need to know

Last week, Mr Justice Picken held that an English legal principle that has existed for over 135 years known as the Shareholder Rule does not in fact exist. Although a first instance decision and highly likely to be appealed, it has significant implications for shareholder litigation and the ability for lawyers to advise corporate clients in the knowledge that the advice remains privileged. 

The operation of the Shareholder Rule can often cause practical issues for companies seeking advice on issues which are becoming contentious with a shareholder, with companies sometimes not appreciating that there is a good chance that the advice they are seeking is not in fact privileged against its shareholders, even in subsequent litigation or arbitration against that shareholder.

What is the Shareholder Rule?

The Shareholder Rule means that a company cannot assert legal professional privilege against its own shareholder, except in relation to documents that came into existence for the purpose of hostile litigation between the company and the shareholder. It is only available where a shareholder brings proceedings against the company, and is increasingly being relied on in securities and other shareholder litigation to obtain disclosure of legal advice given to the company on issues relevant to the dispute.

Why was it raised in this case?

The claimant, Aabar Holdings, is one of several claimants who have brought claims against Glencore PLC and certain directors under s90 and/or s90A of the Financial Services and Markets Act 2000. Arguments arose as to the extent to which Glencore was entitled to assert privilege over its documents. Key to the argument was the question of whether the Shareholder Rule existed. 

The decision: the Shareholder Rule does not exist in English law

In a thorough and bold decision, Picken J held that the Shareholder Rule did not exist in English law. 

First, he looked at the justification for the Rule. The original rationale was based on the notion that shareholders had a proprietary interest in the company's assets and the advice paid for from the company's funds. However, and as accepted by Aabar, that justification was no longer valid after the recognition of the separate legal personality of the company in the seminal House of Lords' decision in Salomon v A Salomon & Co Ltd [1897] AC 22.

The critical question was therefore whether the Shareholder Rule exists on the basis that a joint interest privilege arises as between a shareholder and a company. 

Picken J's answer was no, it didn't. After a thorough analysis of the case law and commentary he concluded that "the Shareholder Rule is unjustifiable and should no longer be applied". In doing so, he made the following observations and findings. 

• There is no binding authority which decides that the Shareholder Rule can be justified on the basis of joint interest privilege. At most, any supportive judicial commentary was made in passing and in cases where the Shareholder Rule was not in issue.
• He questioned whether there was an overarching free standing concept of joint interest privilege. He accepted that there are cases where it has been recognised, and certain relationships, eg trustee and beneficiary and partnerships, where privilege cannot be asserted by one party against another. However, he considered that "the joint interest privilege concept is merely an umbrella term that has been used to describe a variety of different situations in which one party is unable to assert privilege against another". Those cases were decided on "narrow and conventional grounds" rather than supporting the existence of a wide ranging general principle of joint interest privilege.
• Even if incorrect on that, Picken J still saw no justification to conclude that joint interest privilege existed in the company/shareholder context. His reasons included:
  • The authorities provided no support for joint interest privilege being the basis for the existence of the Shareholder Rule. As he had observed, there is no real analysis in the case law or the textbooks as to why the relationship should give rise to joint interest privilege. In many cases the focus was on the litigation exception rather than the basis for the Rule, and over time the fact of its existence as a general rule became accepted without any real analysis as to its rationale.
  • Reasons such as alignment of a company's and shareholders' interests were not sufficient justification to override a company's fundamental right to assert legal privilege. There is even less justification in the case of large public companies with hundreds of thousands of shareholders who are changing all the time. "It is simply unrealistic to suppose that the interests of all shareholders and the company will, in general, be aligned".
  • The company/shareholder relationship was distinct from other relationships such as partners, trustees/beneficiaries and joint venturers. Notably, shareholders have no proprietary interest in their company's assets, and directors owe their duties to the company, not the shareholders.
  • Outside of the litigation context, shareholders do not generally have any rights to access the company's documents under the Articles of Association. As such, to order disclosure would be at odds with what has been contractually agreed.
  • The extension of joint interest privilege to the company/shareholder relationship would also undermine the public policy rationale for legal professional privilege, by discouraging directors from seeking legal advice and by exposing the company's confidential communications to a potentially vast and diverse group of shareholders.

• Alternatively, if the Shareholder Rule does exist, Picken J held that:
  • It only does so on a case by case basis where the particular circumstances give rise to a sufficient joint interest between company and shareholder.
  • It would apply to both legal advice privilege and litigation privilege, but not to without prejudice privilege.
  • It would extend to a successor in title to the cause of action against the company.
  • It applied whether the shareholder was a direct or indirect shareholder and was not limited to current shareholders (provided the communication was made at a time when the relevant party was a shareholder).
  • It could not be invoked by a subsequent purchaser of shares in relation to documents created prior to the date on which that purchaser acquired its shares.
  • It extends to privileged documents belonging to subsidiaries of the company in which the shareholder held its shares, subject to the facts and circumstances of each case.

What happens next

The decision is a bold but very welcome move. Picken J has basically upended over a century of case law and many would argue that it was long overdue. The Shareholder Rule was out of step with modern company law. 

One particular reason that Picken J's decision is welcome is that when litigation or arbitration between a shareholder and a company starts, there is often a battle about whether advice the company has previously obtained on a particular issue should be disclosed to the shareholder. In this way, the operation of the Shareholder Rule can often cause practical issues for companies seeking advice on an issue which is becoming contentious with a shareholder, but where it may reasonably be said that the document in question does not come within the litigation exception, in that it has not come into existence for the dominant purpose of hostile litigation between the company and the shareholder. 

It will be interesting to see if other first instance judges follow suit. Last year, in Various Claimants v G4S Plc, Mr Justice Green had doubts about the Rule but felt unable to rule on the principle as a "lowly first instance judge" and on the basis of limited argument at a CMC. All eyes will therefore be on another securities litigation, where similar arguments were raised last week in the High Court against investors seeking disclosure of otherwise privileged documents. Picken J's finding that there is no binding authority which decides that the Shareholder Rule can be justified on the basis of joint interest privilege may embolden that court to make a similar ruling.

That said, we expect the judgment to be appealed. Until then, there is no certainty that a different first instance court would follow Picken J's judgment and so corporates should continue to be prudent with regard to the taking of legal advice on matters that could fall within the Shareholder Rule, particularly where contentious issues with a shareholder are emerging.