The High Court has handed down a judgment which overturns over 135 years of precedent, holding that the so-called ‘Shareholder Rule’ – which posits that a company cannot assert privilege against its own shareholder, save in relation to documents that came into existence for the purpose of hostile litigation against that shareholder – is “unjustifiable and should no longer be applied”.

Background

The case arose in the context of proceedings brought by a number of claimants against Glencore PLC (“Glencore”) in relation to alleged (and in some cases, admitted) misconduct by subsidiaries in the Glencore Group in Africa and South America. Certain of the claimants asserted that prospectus documents issued by Glencore contained misstatements and/or omitted matters which led to them incurring losses on their investments in Glencore.

Early in the proceedings, a dispute arose as to whether Glencore, relying on the Shareholder Rule, would be entitled to assert privilege against any of the claimants, and the matter fell before the Court to determine.

Judgment

A number of issues for determination for the Court were agreed by the parties. However, most fundamental – and underpinning all others – was the first, namely “does the Shareholder Rule exist in English Law?”

It is a question that was answered in the affirmative – albeit somewhat reluctantly – only last year by Mr Justice Green in Various Claimants v G4S PLC [2023] EWHC 2863 (Ch). There, Mr Justice Green stated that “I, therefore, as a lowly first instance judge, and even though I have my doubts as to the justification now for such a principle, cannot say…that the [Shareholder Rule] does not exist or should be got rid of. I think that would require a higher court to say that.”

In the present case, Mr Justice Picken felt differently, and embarked on an interrogation of the principles on which the Rule was apparently based, finding them to be wanting. First, he considered the proposition that the Shareholder Rule is founded on the principle that a shareholder has a proprietary interest in the company’s assets and, therefore, also in advice taken by the company and paid for out of the company’s funds. This argument was quickly rejected, since it has been long established that a company is a separate legal entity that is distinct from its shareholders and, as such, shareholders share no interest in the property of the company.

The Court turned to an alternative proposed justification for the Shareholder Rule: that it arises out of joint interest privilege. However, after a detailed analysis of the relevant case law on this point, Mr Justice Picken concluded that “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 – often by reference to what is said about joint interest privilege in Thanki, The Law of Privilege – and without independent analysis of the underlying basis for the Shareholder Rule”.

The judge went further to state that he was persuaded that joint interest privilege is not, in fact, a “concept that has any independent existence”. Instead, he argued that it is “merely an umbrella term that has been used to describe a variety of different situations in which one party is unable to assert privilege against another, not because of there being any such freestanding concept but on other, narrower and more conventional grounds”.

Notwithstanding the above, he said that even if he was wrong on this point, he saw no justification for joint interest privilege to apply in any generalised sense to the relationship between companies and shareholders. He pointed to the fact that it is difficult to argue for a joint interest when companies today “will have thousands or even hundreds of thousands of dematerialised shareholders, who will be changing all the time”. Furthermore, he said that such a position “risks undermining the public policy rationale for legal professional privilege” because directors will be discouraged from seeking legal advice “because of concerns on their part that any advice obtained might be seen by a large number of third parties and, indeed, third parties whose identities may not even be known at any given point in view of the ever-changing make-up of the shareholder community”.

To read the judgment in full, click here.