For more than 135 years, the 'shareholder rule' has prevented a company from claiming legal professional privilege against its shareholders (save in respect of documents created for the purpose of hostile litigation against that shareholder).

In a highly significant decision, the High Court has held that this rule has no proper justification and should no longer be applied. 

While it may be subject to appeal, the decision as it stands will be welcome news to all companies and their directors especially those facing shareholder securities actions.

The claim

Investor group claims were brought against Glencore plc (Glencore) and certain former directors for alleged misstatements in published information under sections 90 and 90A/Schedule 10A of the Financial Services and Markets Act 2000. At a case management conference in May 2024, the court was asked to determine whether Glencore was entitled to assert privilege against the claimant investors, which required consideration of the validity and scope of the shareholder rule.

The High Court's reasoning

Justification based on a proprietary interest

Earlier cases applying the shareholder rule appear to have been decided on the basis that shareholders had a proprietary interest in the company's assets, including any advice procured using company funds. In such instances, the company's shareholders were treated as being in an analogous position to beneficiaries of a trust.

It was common ground between the parties that this original rationale for the rule was clearly untenable. In particular, the judge noted the seminal House of Lords decision of Salomon v A Salomon & Co Ltd¹ in 1897, which established that a company is a legal entity distinct from its shareholders, and that shareholders have no interest in company property. The court therefore specifically rejected the analogy with a trust.

Justification based on joint interest privilege

The Claimants submitted that the modern justification for the rule lay in conceptualising it as a form of joint interest privilege, which arises between a company and its shareholders by virtue of a shared interest in communications relating to the administration of the company.  

This argument was rejected by the court. On a detailed review of the authorities, there was no binding decision which found that joint interest privilege could be the justification for the rule, and nor did the cases engage in any meaningful analysis of the point. As a matter of principle, there was no good basis for finding that the concept of joint interest privilege applied as a general matter to the shareholder/company relationship. It was found that the existence of the rule may deter directors from obtaining legal advice where this is necessary for the performance of their duties owed to the company for fear of disclosure to its shareholders, thereby undermining the public policy rationale for legal professional privilege.  In any event, the cases suggested that joint interest privilege was simply a convenient shorthand for what was in fact a range of narrower (and more conventional) circumstances in which a party cannot claim privilege against another, rather than an independent, freestanding concept.

Application of the rule if it did exist

Though not strictly necessary given his decision as to the validity of the rule, the judge went on to find that, if he was wrong and the shareholder rule did exist, then:

• rather than being an absolute rule, its application depended on whether there was a genuine joint interest as between company and shareholder on the facts of the case.
• it applied to legal advice and litigation privilege, but not to without prejudice privilege. Among other reasons, the Judge held that to find otherwise would have a deterrent effect on third parties engaging in settlement negotiations with companies.
• it was not limited to direct or registered shareholders. The Court recognised that shares are often held on an intermediated basis, and so beneficial ownership to shares may well be more relevant to determining whether there was a sufficient joint interest with the company than bare legal title.
• the question of a sufficient joint interest was to be assessed at the time the relevant communication was made, and so the rule was not limited to current shareholders.
• in principle, the rule extended to documents belonging to subsidiaries in the same group. Where there was a chain of holding companies and each shared a joint interest in a communication, then the ultimate subsidiary company would be prevented from asserting privilege against any of them, including the ultimate holding company.

Implications

The decision of the High Court to depart from what had long been perceived as a well-entrenched rule of English law is a fairly bold one. In a recent case cited in the judgment,² a different High Court judge expressed doubts as to the traditional rationale for the shareholder rule, but ultimately concluded that only a higher court could determine that the rule did not exist or should be abolished.

Given the significance of the court's key finding, it is likely that the decision will be appealed. Both companies and shareholders should not assume that this is the final word on the existence of the rule.

1. [1897] AC 22.↩
2. Various Claimants v. G4S plc [2023] EWHC 2863 (Ch).↩