A recent decision of the High Court in Aabar Holdings S.À.R.L. v Glencore plc and others* held that the English legal principle known as the Shareholder Rule should no longer apply.
What is the Shareholder Rule?
The Shareholder Rule, which originated in the 19th century, considered that a company could not withhold documents from its shareholders on grounds of legal professional privilege, unless they were documents that came into existence for the purpose of litigation between the company and that shareholder. The grounds for this rule were broadly that shareholders were owners of the company and so should have access to legal advice given to the company.
Background to the case
The High Court was asked to consider (among other things) the application of the Shareholder Rule in the context of a case involving a listed plc (Glencore), its former directors and others, regarding the implications of alleged misconduct and oil price manipulation in relation to the fuel oil market at some US ports.
It was claimed that such misconduct means that certain documents issued by Glencore contained misstatements and/or omitted matters that should have been included, which in turn has resulted in losses on shareholder investments. In particular, claims were brought under s.90 of the Financial Services and Markets Act 2000 (FSMA) in relation to contents of (i) the prospectus issued by Glencore in relation to the IPO in May 2011, (ii) subsequent prospectuses issued in 2012 and 2013 in relation to Glencore’s acquisition of Xstrata Plc, and (iii) various Annual Reports, Half Yearly Reports and Sustainability Reports issued 2010 – 2019. In considering whether Glencore would be entitled to assert legal privilege against the claimants in these proceedings, the High Court held that the Shareholder Rule, which has existed in English law for over 135 years, does not exist.
Decision
The court held that the Shareholder Rule does not extend to without prejudice communications between the company and its shareholders. The court examined the historical origins and development of the Shareholder Rule, concluding that it was originally founded on the notion of shareholders having a proprietary interest in the company's assets. Mr Justice Picken explained that there is no basis for a principle of joint interest privilege between a company and its shareholders for a number of reasons:
- shareholders have no proprietary interest in their company's assets, and directors owe their duties to the company, not the shareholders;
- a shareholder’s legal and economic interest is comprised of its contractual rights against the company under the company’s articles of association and therefore a request for disclosure of a company’s documents (outside of a litigation perspective) does not form part of the contractual agreement between the company and shareholder (see Model Article 50 of the Model articles for private companies limited by shares);
- whilst it may be the case that a company and its shareholders might have a joint interest in the ultimate success of the company and profit maximisation, it is not a justification for concluding that there is a blanket-type rule which operates to prevent companies from asserting their fundamental right to legal professional privilege;
- particularly in the case of large public companies with hundreds or thousands of shareholders, there is little argument to say that the interests of all shareholders and the company will be aligned and therefore is unreasonable to expect a company to not have the ability to assert privilege against such vast group of shareholders; and
- the company/shareholder relationship risks undermining the public policy rationale for legal professional privilege as it may discourage directors from seeking legal advice which is under their duty to the company as a director.
At [117] of the judgment, Mr Justice Picken found that the Shareholder Rule is “unjustifiable and should no longer be applied”, thereby explicitly rejecting its application. He further explained that if the Shareholder Rule were to exist, it would apply to legal advice privilege and litigation privilege, but not to without prejudice privilege. The court also found that, in principle, the rule could extend to subsidiaries' privileged documents where there is a sufficient joint interest across the corporate group.
What is the impact of this?
While an appeal is anticipated, companies welcome the outcome of this case due to its significant implications in shareholder litigation. Lawyers can now advise corporate clients with the assurance that their advice remains privileged. However, businesses should exercise caution when seeking legal advice on matters that might fall under the Shareholder Rule, especially if contentious issues with shareholders are arising. It is crucial that the purpose of the communication is clearly documented and aligns with the criteria for maintaining privilege.
If you require any assistance or advice in relation to the matters discussed above, please don’t hesitate to get in touch with a member of the Corporate or Commercial Litigation team.
