High Court finds companies can assert privilege against their shareholders

In a decision handed down yesterday, the High Court held that the so-called Shareholder Rule – ie that a company cannot assert privilege against its shareholders save in relation to documents created for litigation against that shareholder – does not exist in English law, and therefore the claimant shareholders have no right to disclosure of the defendant company's privileged documents: Aabar Holdings SARL v Glencore Plc [2024] EWHC 3046 (Comm).

This contrasts with the High Court's decision last year in Various Claimants v G4S Plc [2023] EWHC 2863 (Ch) (considered here), in which Mr Justice Michael Green expressed doubts as to the justification for the Shareholder Rule but considered that only a higher court could find it did not exist or should be got rid of. The judge in the present case (Mr Justice Picken) disagreed, finding that the Shareholder Rule is unjustifiable and should no longer be applied.

The decision is highly significant in the context of securities class actions, where it was previously thought that the Shareholder Rule would mean at least some shareholder claimants would, in principle, be entitled to disclosure of the defendant company's privileged documents – though the precise boundaries of the rule were unclear and the court could refuse disclosure on case management grounds (as it did in G4S). The present decision finds that there is in fact no such entitlement.

Interestingly, however, if the Shareholder Rule did exist, Picken J would have held that it was not an absolute rule but would depend on whether there was a genuine joint interest in the circumstances of each individual case. He would also have held that the rule was not limited to registered shareholders (contrary to the judge's view in G4S). In agreement with the judge in that case, however, he would have held that the principle applied to those who were shareholders when the relevant documents were created, regardless of whether they later disposed of their shares, but that it did not extend to without prejudice privilege.

It remains to be seen whether the claimants will seek to appeal the ruling. However, given the significance of the issue, it seems likely that this will not be the last word.

Background

The decision arose in the context of a securities class action against Glencore Plc and certain of its former directors. In the run-up to the first case management conference in the action, a dispute arose as to whether Glencore was entitled to assert privilege against the claimants, or whether it was prevented from doing so by the Shareholder Rule.

The parties agreed that the court should determine the following issues:

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

Decision

The High Court (Picken J) held that the Shareholder Rule does not exist. If it did, however, it would not apply to without prejudice privilege but would apply to indirect shareholders, former shareholders and successors in title, and would also extend to privileged documents belonging to subsidiary companies.

1. Does the Shareholder Rule exist?

Picken J noted that the Shareholder Rule was initially justified, in the 19th century cases, on the basis that a shareholder had a proprietary interest in the company's assets and the advice had been paid for from the company's funds. Accordingly, the company could not assert privilege against the shareholder – in the same way that a trustee cannot assert privilege against the trust's beneficiaries in relation to legal advice obtained for the benefit of the trust.

However, as the claimant accepted, the proprietary interest basis for the Shareholder Rule could not stand following the House of Lords' decision in Salomon v A Salomon & Co Ltd [1897] AC 22 which established that a company has separate legal personality. The position is therefore different to a trust in this respect.  

Picken J rejected the claimant's submission that the Shareholder Rule had more recently been justified as an emanation of joint interest privilege, which arises where two parties have a joint interest in the subject matter of the advice at the time it came into existence for their mutual benefit. The judge did not consider there to be any support for that view either in the case law or as a matter of principle.

In the only reported appellate decision directly concerning the Shareholder Rule, Woodhouse & Co Ltd v Woodhouse (1914) 30 TLR 559, the Court of Appeal described the principle as having been "well settled". However, Salomon does not appear to have been cited and the court did not seek to analyse the Shareholder Rule but instead focused on when it would not apply under the so-called "litigation exception". In Picken J's view, the decision provides no support for the joint interest-based analysis, despite having been cited in subsequent first-instance decisions and been treated as binding in some, for example Sharp v Blank [2015] EWHC 2681 (Ch). The judge also referred to Michael Green J's comment in G4S (referred to above) that Woodhouse was "a curiously insubstantial case upon which to found this apparent doctrine of no privilege between shareholder and company".

Picken J recognised that there were other appellate decisions, of both the Supreme Court and Court of Appeal, which had made reference to the joint interest privilege concept arising in a shareholder/company context, but said those cases had not themselves involved application of the Shareholder Rule and the comments made in them could not be regarded as anything more than obiter dicta. He concluded that there is no binding authority which decides that the Shareholder Rule can be justified on the basis of joint interest privilege.

Picken J went further and expressed doubt as to whether the concept of joint interest privilege itself has any independent existence. In his view, joint interest privilege is merely an umbrella term that is used for a variety of situations where one party cannot assert privilege against another on some narrower and more conventional basis (such as the proprietary right to privileged documents in a trust context, or an express or implied contractual right to another party's privileged documents). The concept of joint interest privilege as a freestanding species of privilege is not, in his view, supported by the authorities.

Even if he was wrong about that, he could see no justification for concluding that the joint interest principle applied generally to the relationship between a company and its shareholders. This was for various reasons, including (to state just two of several reasons given):

• It was "difficult to fathom" how there could be said to be a joint interest between a large public company such as the defendant in this case and its thousands of shareholders who would be changing all the time. The judge commented that it was "simply unrealistic" to suppose that the interests of such a company and all its shareholders would generally be aligned.
• It would risk undermining the public policy rationale for legal professional privilege, as it would potentially discourage directors from seeking legal advice needed by the company because of concerns that the advice might have to be disclosed to large numbers of third parties.

If the Shareholder Rule did exist, contrary to the judge's conclusion, his view was that it would not be an absolute rule but would depend on the circumstances of each individual case (as per the Bermudian Court of Appeal's recent decision in Oasis Investments II Master Fund Ltd v Jardine Strategic Holdings [2024] CA (Bda) 7 Civ).

2. Does the Shareholder Rule apply to without prejudice privilege

The defendant accepted that, if the Shareholder Rule existed, it would be capable of applying to both legal advice privilege and litigation privilege. However, it argued that it would not apply to without prejudice privilege.

Picken J agreed for a number of reasons, including because a finding that the Shareholder Rule applied in that context would deter parties from entering into settlement negotiations with companies since such negotiations would be disclosable in subsequent litigation with shareholders.

3. Indirect shareholders, former shareholders and successors in title

Although these issues did not arise, if the Shareholder Rule existed Picken J would have found as follows:

• The rule should not be restricted to direct shareholders, as that would over-emphasise form over substance. In this regard, Picken J disagreed with the view of Michael Green J in G4S that the Shareholder Rule was an incidence of the legal ownership of shares. If it existed at all, it was not an aspect of company law but instead was dependent on whether the company and shareholder had a sufficient joint interest in the relevant communication. The right of beneficial ownership was relevant, and perhaps more relevant than bare legal title, when deciding that question.
• The time for assessing whether there was a relevant joint interest was when the communication was made. It made no difference whether the claimant had later ceased to be a shareholder.
• As the defendant had accepted by the time of the hearing, a successor in title stands in the shoes of its predecessor with respect to privilege, and so the Shareholder Rule would extend to successors in title to the cause of action against the defendant.

4. Documents of subsidiary companies

If the Shareholder Rule existed and was justified on the basis of joint interest privilege, Picken J would have held that where there was a chain of holding companies who shared the requisite joint interest in a communication, the ultimate subsidiary company should not be able to assert privilege against any of them including the ultimate holding company.

In other words, the Shareholder Rule should not be treated as applying only between a company and its direct shareholders, contrary to the decision in BBGP Managing General Partner Ltd v Babcock & Brown Global Partners [2011] Ch 296.