Privy Council rejects “shareholder rule” on privilege

The Privy Council has held that there is no rule against companies claiming legal advice privilege against their shareholders.

The Shareholder Rule

The Shareholder Rule has historically been seen as an exception to a company’s legal advice privilege when the party seeking access to the documents is a shareholder in the company (or at least was a shareholder at the time that the advice was sought or received).

At the end of 2024 we predicted that the bold decision of Picken J in Aabar Holdings SARL v Glencore PLC, in which he held that there was no “Shareholder Rule” preventing a company claiming privilege against its shareholders, would gain judicial support in 2025. The Privy Council has now confirmed in Jardine Strategic Limited v Oasis Investments II Master Fund & ors that the Shareholder Rule forms no part of the law of Bermuda (from where the appeal originated) “and that it ought not to continue to be recognised in England and Wales”.

The dispute arose out of a corporate restructuring under which two companies amalgamated and the shares of one, Jardine Strategic Holdings Ltd, were cancelled. The other company held 85% of the shares in Jardine Strategic and would receive shares in the amalgamated entity. The other 15% of shareholders would be paid out a fair value for the cancelled shares. The minority shareholders were unhappy with the amount offered and requested to see the company’s legal advice on the valuation. The Court of Appeal in Bermuda held that the company could not claim privilege against its shareholders.

The emperor’s new clothes

The Privy Council noted that the original justification for the Shareholder Rule was that the property of the company (including its legal advice) belongs to its shareholders. This is an outdated concept, replaced by the full recognition of the separate legal status of companies as entities in their own right. More recently, shareholders arguing that they should have access to the company’s legal advice have tended to argue that there must be a joint interest in the advice.

The Privy Council rejected arguments that the company shareholder relationship should be included “within the joint interest family of relationships” i.e. along with fiduciary relationships like trustee and beneficiary, and as between partners. A joint interest approach also fails to recognise that there may be multiple classes of shareholder with divergent interests themselves.

In this case, a related company held 85% of the shares to be cancelled, but would receive shares in the amalgamated entity. It was in its interest to pay out as little as possible to the minority shareholders, creating a sharp divergence of interest between the different groups of shareholders and between the company and the minority shareholders. The Privy Council found that “it cannot sensibly be said that there is always a community of interest between every company and its shareholders, either as a class or a fortiori individually”. Assessing joint interest using an “unsatisfactory and uncertain” multifactorial test is “unsuitable … at least in the corporate context, as marking the boundary of a fundamental right to seek legal advice in confidence.” The purported rule was in fact “like the emperor wearing no clothes in the folktale”.

Implications

With a growing number of high value claims for financial misstatements brought by shareholders under s.90A FSMA, this question is of real relevance to many corporates and financial institutions. The Privy Council recognises that senior management need to be able to seek legal advice on behalf of the company, certain in the knowledge that their legal advice communications are privileged. In the ESG context, where campaign groups are active and can buy shares in their target under cover of individual members, a company’s ability to take advice and not share it with its members can be of critical importance.

With Picken J’s position now supported so emphatically by the Privy Council, the Shareholder Rule is dead. English courts are not formally bound by Privy Council decisions unless a Willers v Joyce declaration is made. This enables the Privy Council to direct that domestic courts should treat the decision of the Privy Council as representing the law of England and Wales. Despite there being no clear authority of the Court of Appeal or Supreme Court which would be contradicted by this decision, the Privy Council made such a declaration in this case.