The question about privileged documents frequently arises where a shareholder falls out with a company, particularly in the context of contested removal of a director or unfair prejudice petitions.
Previously, there has been conflicting guidance suggesting that in some circumstances a shareholder may be entitled to those documents, even when they are the opposing party in litigation. This article explores the origins of the shareholder rule, its evolution, and its ultimate rejection in a landmark decision.
What is the shareholder rule?
The principle was first established in Gouraud v Edison Gower Bell Telephone Co of Europe (1888) 57 LJ Ch 498. In this case, Chitty J held that a company cannot claim legal privilege against its shareholders for advice obtained at company expense because they had an interest in all company assets (similarly to beneficiaries of a trust).
This was reaffirmed in the decision of Sharp v Blank [2015] EWHC 2681 (Ch) where the Court stated that “a company taking advice on the running of the company’s affairs and paying for it out of the company’s assets cannot assert a privilege against the shareholders who … have indirectly paid for it’”.
Other cases have justified the disclosure on the basis of “joint interest privilege”, again similarly to that between the trustees of a trust and its beneficiaries.
On that basis, shareholders have relied on this rule to seek disclosure of legally privileged documents obtained by a company – even though they may now be in direct dispute with the company. This can create a problematic legal quagmire where a shareholder is demanding disclosure, but directors do not consider it would be in the company’s best interests to provide this. In reality, there will be very few cases where such disclosure would be appropriate and many companies will hold real concerns of activist shareholders relying on this archaic rule to gain sight of documents which an opponent in litigation would not ordinarily have access to.
Thankfully, in recent years the shareholder rule has been more widely challenged. In Aabar Holdings SARL v Glencore PLC & Ors [2024] EWHC 3046 (Comm), the decision was that the shareholder rule could no longer be supported by its traditional proprietary justification or joint interest privilege. The request for disclosure was therefore denied. Permission to “leapfrog” appeal to the Supreme Court on this point was not granted pending the outcome of the awaited Jardine decision by the Privy Council.
Welcome clarification and authority has now been received on this supposed “shareholder rule” in this recent landmark decision of Jardine Strategic Limited v Oasis Investments II Master Fund Ltd & Ors No 2 [2025] UKPC 34. In Jardine it was held that the so called “shareholder rule” was a “rule without justification” and ought not to be recognised as a binding principle in England and Wales.
Case Background
The dispute in Jardine arose from the amalgamation of two companies (Jardine Strategic Ltd and JMH Bermuda Ltd) within the multinational Jardine Matheson group (Jardine Strategic Holdings Ltd, incorporated in Bermuda, “the Company”).
Bermudan legislation required the Company to pay a fair value to shareholders dissenting to the amalgamation for their cancelled shares. Many of Jardine Strategic’s shareholders were unhappy with the value offered by the Company and thus brought proceedings in the Bermudan courts to determine the fair value of their shares.
During the proceedings, the dissenting shareholders sought disclosure of legal advice obtained by the Company when assessing the value of the shares. The shareholders argue that the so-called shareholder rule means that they were entitled to this legally privileged advice, despite there being litigation between the parties.
This argument was accepted at first instance and later upheld by the Court of Appeal for Bermuda. Consequently, the Company brought an appeal to the Judicial Committee of the Privy Council on the basis that the shareholder rule should be abandoned.
The Privy Council’s Judgment
The Privy Council unanimously allowed the appeal in Jardine, finding that the shareholder rule should be abolished for the purposes of English law. In the Judicial Committee’s view, it was incorrect to justify the shareholder rule either as a proprietary interest (given a limited company is its own separate legal entity), or as a subset of joint interest privilege.
There were two reasons for this conclusion: firstly, shareholders’ interest will not always align between themselves as shown clearly in the facts of the case (the appeal was brought forward by the minority shareholders who voted against the amalgamation against the majority shareholders who voted for it); and secondly, even if every shareholder was in agreement, there may be other stakeholders within the Company, such as its workforce, who may disagree with the views of the shareholders regarding the best course of action for the Company but whose opinion is just as important. As such, there is no definitive joint interest.
The Privy Council’s decision affirms that a company still has a valid defence to a shareholder’s request of privileged company documents in circumstances where there is not a joint interest.
Impact
Companies and their directors can now be reassured that they will be able to obtain legal advice without the concern of activist shareholders later demanding disclosure of this privileged advice. When faced with such requests in the future, companies will have a clear case to rely on to oppose any disclosure.
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Disclaimer
This information is intended for general informational purposes only and does not constitute legal advice. We recommend seeking professional advice before taking any action on the information provided. If you would like to discuss your specific circumstances, please feel free to contact us on 0800 2800 421.
