The end of the “Shareholder Rule”?

6 December 2024 Reed Smith Client Alerts

Home Publikationen The end of the “Shareholder Rule”?

Key takeaways

On 27 November 2024, the Commercial Court in Aabar Holdings S.á.r.l. v Glencore Plc¹handed down a bold and important decision that the so-called Shareholder Rule is in fact not a rule at all, with Mr Justice Picken describing it as “unjustifiable” and concluding that it “should no longer be applied”.
The Shareholder Rule has historically prevented a company from claiming privilege against its own shareholders, thereby allowing shareholders to access company documents that would otherwise be protected by privilege (with the exception of documents arising from litigation between the shareholder and the company).
While the English High Court had previously held that the Shareholder Rule had a “shaky foundation”², the judgment by Mr Justice Picken in Aabar is significant because it held that the longstanding Shareholder Rule did not exist even though its existence had been referred to in recent decisions of both the Court of Appeal and Supreme Court (albeit the Judge held that the comments in those decisions were obiter dicta).
The main reason for this was the Judge’s conclusion that the historic justification for the Shareholder Rule (which was based on drawing an analogy between shareholders and the beneficiaries of a trust) no longer reflected modern company law, particularly in circumstances where the older cases were based on shareholders having a proprietary interest in the company’s assets (a position inconsistent with the House of Lords’ decision in Salomon v Salomon³).
Without the ability to rely on the Shareholder Rule, it will clearly be far more difficult for shareholders to obtain a company’s privileged documents. Subject to any appeal, this judgment removes a commonly used leverage tool by shareholders to obtain access to privileged advice.

Autoren: George Hoare Michael J. Young James Stockman Daniel Sahraee

Origins of the rule

The Shareholder Rule was first referenced in Gouraud v Edison⁴ where the court held that the position of a shareholder was analogous to that of trust beneficiaries. Accordingly, a shareholder has a proprietary interest in the company’s assets (as a beneficiary does in a trust’s assets), and any legal advice taken by the company, which would be subject to privilege, was paid for using those assets. Privilege should not, therefore, prevent shareholders from accessing such advice.

It was common ground between the parties in Aabar that subsequent developments in company law meant that the historic justification for the Shareholder Rule no longer applied. In particular, Mr Justice Picken referred to the seminal House of Lords decision of Salomon v Salomon which established the doctrine of corporate personality by confirming that a company is a separate legal entity that is distinct from its shareholders and that shareholders did not have a proprietary interest in their company’s assets. The consequence of this, according to the Judge, is that the previous analogy with trust beneficiaries that formed the foundation of the Shareholder Rule no longer applied.

Joint interest privilege – an alternative basis for the Shareholder Rule?

Bankim Thanki KC on behalf of Aabar offered an alternative basis for the Shareholder Rule. He argued that the Shareholder Rule is a manifestation of joint interest privilege, which arises where two parties have a sufficient joint interest in the subject matter of a privileged communication such that one is prevented from asserting privilege against the other.

The substance of this argument is that joint interest privilege operates as a freestanding form of privilege, similar to joint retainer privilege (which applies where two parties jointly retain legal counsel), and that the Shareholder Rule is one manifestation of this principle.

Mr Justice Picken ultimately rejected this argument by holding that:

There was no “binding authority which decides that the Shareholder Rule can be justified on the basis of joint interest privilege”. The early cases of Gouraud and Woodhouse⁵ do not hint at a joint interest privilege rationale – on the contrary, they are premised on the need for a proprietary interest.
Joint interest privilege was not a concept “which has any independent existence” but was an “umbrella term” used to describe a variety of different situations where one party is unable to assert privilege against another.

The shareholder/company relationship

Even if joint interest privilege were found to exist as a free-standing principle, Mr Justice Picken held that there was no justification for why that concept would apply in the context of a shareholder seeking access to its company’s privileged documents. In particular, Mr Justice Picken explained that:

The fact that a shareholder’s interests are in general aligned with that of the company is not sufficient justification for overriding privilege, as this would render the company unable to assert privilege in a variety of other situations. Indeed, if a company is insolvent, the directors are duty-bound to take account of the interests of the company’s creditors, but that does not mean that the creditors have a right to inspect the company’s privileged documents.
The joint interest justification is even more unlikely to apply when considering a large public company such as Glencore, which has thousands of shareholders, who will be constantly changing. The widespread existence of activist shareholders, who often acquire shares for specific reasons that are not aligned with the target company’s interests, means that it may be unrealistic for there to be any joint interest between all shareholders and the company.
A company’s articles often explicitly provide that no person is entitled to inspect the company’s documents, privileged or not, merely by virtue of being a shareholder. Therefore, requiring a company to provide privileged documents on the basis of an alleged joint interest seems to be directly at odds with the parties’ contractual agreement.

As a final practical point, Mr Justice Picken noted that extending joint interest privilege (to the extent that it exists as a free-standing concept) to the shareholder/company relationship would potentially discourage companies from seeking legal advice in the first place, as it may result in such advice being shared with a large number of unknown third parties.

Implications

While the decision in Aabar builds on recent criticism of the Shareholder Rule and its applicability to the modern age of shareholding (see G4S, reported on in our previous alert), the case is a significant departure from previous cases which held that the Shareholder Rule was an established rule of English law, which the Judge thought were misapplied. Given the implications of the decision, it will be interesting to see whether the case is appealed and what conclusions the appellant courts reach.

In the meantime, the practical effect is that it will be far more difficult for shareholders to obtain access to a company’s privileged documents without an ability to rely on the Shareholder Rule. The judgment does leave the door ajar for circumstances in which joint interest privilege may apply, but it makes clear that this will be highly fact-specific and there is no absolute right which the shareholder can rely on.

Equally, directors will need to be mindful that, in the absence of the Shareholder Rule, should any privileged documents be provided to shareholders, this must be done in a way to preserve privilege.

[2024] EWHC 3046 (Comm).
Various Claimants v G4S PLC [2023] EWHC 2863 (Ch), at [42(1)].
[1897] AC 22.
(1888) 57 LJ Ch 498.
Woodhouse & Co Ltd v Woodhouse (1914) 30 TLR 559.

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