Background
1. The English High Court has considered in Various Claimants v G4S PLC [2023] EWHC 2863 (Ch) the application of the shareholder principle, recognised in Sharp v. Blank [2015] EWHC 2681. The question arose for consideration following an application made by the claimants under Practice Direction 57 AD, heard at a CMC held on 8 November 2023, a little under three months before the start of trial, seeking disclosure of certain documents withheld by the defendant on the grounds of privilege. It was accepted by the claimants for the purpose of the application that privileged material that was prepared for the purpose of the proceedings was covered by litigation privilege and should not be disclosed.
2. In Sharp v. Blank, the English High Court established the shareholder principle, which provides that, in the context of litigation, a company cannot assert privilege against its shareholders. In explaining the rule, Mr Justice Nugee explained that the foundation of the principle was the same as the foundation of the similar general rule that a trustee who “takes advice as to his duties in relation to the running of a trust and pays for it out of the trust assets cannot assert privilege against the beneficiaries who have indirectly paid for that advice”. In the context of companies, Mr Justice Nugee explained that, as with a trustee, a company taking advice on the running of its affairs “and paying for it out of the company’s assets cannot assert a privilege against the shareholders who, similarly, have indirectly paid for it”. It was held that the principle does not apply outside of the context of litigation, nor does it apply to documents created for the dominant purpose of the litigation against the shareholders. (Sharp v. Blank)
3. In his judgment, Mr Justice Michael Green accepted that the rule in Sharp v. Blank “has clearly been recognised in a number of cases” (Various Claimants v G4S PLC) including before the Court of Appeal and that he was in no position to overturn the principle. However, the judge also cast doubt on the justification for the principle and, in doing so, set the foundations for future challenges to its application:
a. He explained that the foundations of the principle emerged before the separation of the company and its shareholders was recognised by the courts and no longer reflects the modern view of company law in which it is accepted that shareholders have no direct interest in the assets of the company.
b. The analogy with trustees and beneficiaries was “not a particularly strong one”. Beneficiaries have a direct interest in the assets of the trust, which can be contrasted with the position of the shareholders.
c. Unlike a beneficiary, there was no “common fund” to which shareholders are entitled and it is therefore a fiction to say that the shareholders had paid, indirectly, for the advice.
4. Mr Justice Michael Green explained that a better explanation for the principle is that it is a right arising out of the relationship between the shareholder and the company and therefore it is a right that attaches to “the legal ownership of shares” in the same way as a shareholder’s right to receive dividends.
Scope of the shareholder principle
Having accepted that he was not in a position to overturn the shareholder principle, Mr Justice Michael Green went on to consider the scope of the principle. He explained that the principle had received little analysis in case law and so the boundaries of the principle were poorly defined and had not been tested. In light of this, and given the “fundamental nature of privilege to the administration of justice”, the judge explained that the application of the principle should be narrowly confined.
Which shareholders?
Mr Justice Michael Green held that all of the relevant authorities concerned legal owners of shares and none of those authorities touched on the question of whether the right extended to beneficial owners of shares held through depository systems. The judge held that there was no justification for expanding the principle to cover the beneficial owners of shares held through depository systems, particularly if one accepted his alternative explanation for the foundation of the right as an incidence to the legal ownership of shares.
In coming to this position, Mr Justice Michael Green pointed out that if the right were to extend to the beneficial owners of shares held through depository systems, then it would mean that a company defendant could never assert privilege in section 90A FSMA claims, a far-reaching consequence that the judge did not consider was justified by the authorities.
When does the entitlement arise?
The shareholders seeking to rely on the shareholder principle must have been shareholders at the time the documents in question came into existence. The right cannot be acquired by a shareholder subsequently purchasing the shares.
However, shareholders who sold their shares prior to proceedings did not lose the right, provided that they were shareholders at the time the documents were created.
Litigation privilege
Mr Justice Michael Green held that the authorities did not place any limitation on the application of the rule to litigation privilege and that, in principle, the rule extended to documents covered by this privilege.
Without prejudice privilege
Without prejudice privilege is not covered by the shareholder principle because (i) there was no authority which extended the principle to such privilege; and (ii) without prejudice privilege “has the complication of a third party being involved” whose rights regarding the privileged document must be respected.
Practical considerations
Out of the 90 claimants in the case before Mr Justice Michael Green, only three were the direct legal owners of the shares and so were entitled to the privileged documents under the shareholder principle. Each of the three shareholders were shareholders for different periods of time, and so they were not each entitled to all of the privileged documents being sought. This raised some serious practical issues with regard to whether it would be possible for the court to make appropriate case management directions permitting the disclosure of privileged documents to some, but not all, claimants given the closeness of the final hearing.
The key issue was that parties and legal counsel to whom privileged material is disclosed have a positive duty not to breach that privilege by allowing those documents to be disclosed to a wider audience. This created the practical difficulty of how it would be possible to prevent the privileged documents from being used by all of the claimants at trial, when all the claimants were represented by the same solicitors and counsel.
Mr Justice Michael Green accepted that, in principle, had the application been brought in good time, then directions could have been sought to protect privilege, such as hiving off those claimants who were not entitled to receipt of the privileged documents to another trial. However, the judge explained that it was too late for such directions to be made and that disclosure to a small number of claimants would be “impossible to manage and potentially highly disruptive to the imminent trial” and so the claimant’s application was denied.
Client Alert 2023-266
