The Commercial Court has ruled that the so-called "Shareholder Rule" is "unjustifiable and should no longer be applied" - meaning that the circumstances in which companies can withhold privileged documents from their shareholders have been significantly expanded. In this article we digest the decision and consider the ramifications.

What is (or was) the Shareholder Rule?

A company cannot assert privilege to withhold documents from its own shareholder - except for documents that were created for the purpose of litigation against that particular shareholder. That, in the Claimant's submissions in Aabar Holdings SARL v Glencore PLC & Ors [2024] EWHC 3046 (Comm), is the Shareholder Rule, a rule of some 135 years' standing and approved in cases before the Court of Appeal and Supreme Court.

In this case, the claimant was one of many claimants bringing claims against the defendant under s.90 and s.90A Financial Services and Markets Act (FSMA) 2000 alleging, variously, misleading contents of certain financial reports, and dishonest delay in providing such reports (for more on these claims under FSMA, see our related recent insight FSMA – a tightening of scope for investor claims).

The claimants submitted that the Shareholder Rule was originally predicated on the shareholders having a proprietary interest in the company's assets and therefore a right of access to otherwise privileged legal advice bought with those assets. While the claimants conceded that basis no longer holds as a matter of law, they claimed the Shareholder Rule still exists as a form of joint interest privilege – where two parties have a joint interest in privileged document at time of its creation, and can assert privilege in it against the world at large - but not against one another. The courts have found joint privilege subsists in a number of analogous relationships, e.g. between the partners in a joint venture or partnership. The claimant contended that the company – shareholder relationship was another joint interest relationship where privilege could not be invoked, such that a company should not be able to withhold privileged documents from its shareholders.

Does the rule exist in English law?

No, or at any rate not any more. The judge was referred to more than 20 authorities mentioning or otherwise cited in support of the Shareholder Rule, ranging from 1888 to 2024 and hailing from this jurisdiction and others. Having critically reviewed those authorities though, Picken J ultimately concluded that the authorities cited do not support (and policy does not otherwise warrant) the existence of the Shareholder Rule.

The judge found that many of the cases cited by the claimant have "assumed, apparently without question and anyway without analysis, the existence of the Shareholder Rule". In many of the cases, it was not the Shareholder Rule itself in dispute, but the exceptions to it, and so, curiously, the rule has come to be defined more by its exceptions, with limited critical consideration of the rule itself and its underlying rationale.

Having conducted a rigorous analysis of the authorities, Picken J found there is "no binding authority which decides that the Shareholder Rule can be justified on the basis of joint interest privilege. What there is, in truth, amounts to little more than passing (and anyway obiter) comment in cases where the Shareholder Rule was not in issue… and without independent analysis of the underlying basis for the Shareholder Rule."

He concluded: "the concept of joint interest privilege as a freestanding or standalone species of privilege is not supported by the authorities. What there are are cases where privilege arises on other, case-specific grounds that provide no concrete justification for the suggestion that there is an overarching joint interest privilege concept."

Even if joint interest privilege existed as an overarching concept, he said, there are compelling reasons that it should not be read across to the shareholder and company relationship. Those reasons included the following.

  • Overreaching the articles - shareholders do not have a general right to non-privileged company documents. Recognising the Shareholder Rule would therefore be an unprincipled expansion giving shareholders greater rights over privileged legal documents than their contractual entitlement to non-privileged documents under the company's articles of association.
  • Diversity of shareholder interests - on a pragmatic level, the judge also acknowledged that large public companies have a fluid membership of thousands, if not hundreds of thousands of shareholders, and the interests of such ever-changing shareholders will vary widely. At the extreme, this is illustrated by recent Environmental, social, and governance (ESG) litigation where activist shareholders have acquired company shares with the specific aim of adjusting a company's climate course (for more, see our article ESG – court refuses permission (again) for derivative claim). Even away from this extreme though, it is unrealistic to suppose that the interests of all shareholders and the company are aligned. It would, in such circumstances, said the judge, "be startling to expect that a company would be unable to assert privilege against such a potentially vast and differing group of shareholders".
  • Undermining policy - the judge also considered that recognising the Shareholder Rule may dissuade company directors from taking legal advice at all – which would not only risk dereliction of their duty, but also risk undermining the public policy rationale for the very existence of privilege.

Obiter

Having concluded the Shareholder Rule does not exist, the judge could have stopped. But the judgment continues to consider a series of follow-on questions, had he found the Shareholder Rule existed.

Would the Shareholder Rule extend to documents subject to Without Prejudice privilege?

No, only to those covered by litigation privilege and legal advice privilege. Communications covered by without prejudice privilege involve a third party in addition to the company and shareholder, who would not contemplate the sharing of such documents. A rule allowing for such sharing (and, again, with a potentially large and diverse group of shareholders) could have a chilling effect on the public policy imperative in parties engaging in settlement discussions.

Which shareholders would the rule apply to?

On the facts of the case, the claimant was not a registered shareholder in the company at any material time – its interest in the company was through the medium of intermediated securities. Had the judge found the Shareholder Rule existed, he would have concluded it would extend to the beneficial owners of shares, not only to the company's directly registered shareholders. He also found the Shareholder Rule would cover communications made during the shareholder's tenure, even if they subsequently cease being a shareholder.

Would the Shareholder Rule extend to subsidiaries?

Yes – if he had recognised the existence of the rule, Picken J would have held that it extended to privileged documents belonging to subsidiary companies within the group, such that a shareholder could obtain privileged documents belonging not only to the company in which it held shares, but also to subsidiaries or parent companies.

What is the impact?

For over a century it has been understood that under English law a company could not assert privilege against its shareholders except in the case of documents prepared for litigation between the two of them.

However this decision, which may be subject to appeal of course, sweeps this rule aside and is likely to have ramifications for shareholder claims where shareholders will now have more restricted disclosure from the company to prove their case. In particular, whereas shareholder claimants may previously have been able to obtain from the company relevant legal advice which pre-existed the litigation in question (and therefore would not have fallen into the litigation exception referred to above), this is not now the case. This provides more certainty for companies but is an additional blow to shareholder claimants following the recent decision (referred to above) restricting the scope of claims under s.90A FSMA.

For more information on this judgment and how it may impact you, please contact James Sidwell.