The end of the shareholder rule?

Posted: 12/12/2024

The English Commercial Court recently handed down its judgment in Aabar Holdings SARL v Glencore PLC [2024] EWHC 3046, which revoked a longstanding principle of English law: the shareholder rule.

In short, the shareholder rule prevented a company from claiming privilege against its own shareholder, unless the otherwise privileged documents were created for the purposes of litigation between the company and that shareholder. Mr Justice Picken however, concluded that the rule was unjustifiable and should no longer be applied. Given the significance of the decision, an appeal can be expected. This article reviews some of the key points of the judgment below.

Background

The context surrounding the issues in question concerns claims pursued by Aabar Holdings SARL against Glencore PLC, as well as some of the company’s former directors, under sections 90 and 90A of the Financial Services and Markets Act 2000. In addition, there are three other separately represented claimant groups, whose claims are being managed and tried together with those brought by Aabar.

In the run up to the first CMC, which took place on 21-23 May 2024, a dispute arose as to whether, and to what extent, Glencore would be entitled to assert privilege against the claimants over a number of disclosed documents. Aabar asserted that it could not, due to the shareholder rule.

The challenge led to an interim hearing, where the parties agreed that five privilege-related issues were to be determined, the first and perhaps most prominent of which was: ‘does the shareholder rule exist in English law?’

Does the shareholder rule exist? 

 The principle has existed for over 135 years, having been established in the 19^th century decision of Gouraud v Edison Gower Bell Telephone Co of Europe Ltd (1888) 57 LJ Ch 498. Aabar submitted that the understanding during this period was that shareholders held a proprietary interest in all of the company’s assets, including advice which had been paid for by company funds. The principle however had now ‘morphed’ into an emanation of the more general joint interest privilege and was analogous to that of a trustee and beneficiary relationship, or indeed any relationship where two parties have a joint interest in the subject matter which is of mutual benefit.

Mr Justice Picken considered the rule to have ‘shaky foundations’. In his view, the historical similarities between the trustee/beneficiary relationship ceased to exist following the landmark decision in Salomon v A Salomon & Co Ltd [1897] AC 22, which established that a company is a separate legal entity, distinct from its shareholders.

The joint interest privilege argument was also rejected by the judge, particularly as he found there was a lack of any binding authority which justified the shareholder rule on this basis. The previous cases which made reference to it only did so in passing, and by way of obiter comments, where the shareholder rule was not in issue.

The judge went further in this regard and questioned whether there was any authority for the notion of joint interest privilege as a ‘freestanding or standalone species of privilege’. Rather, it was ‘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’. He conceded that even if he was wrong about that, he saw no justification for concluding that it applied to the company/shareholder relationship for a number of reasons, ranging from practical (it being unrealistic to suppose that a large company and its revolving door of shareholders would all be aligned) to public policy (it may discourage directors from seeking legal advice for the company as that advice may be disclosable to a large number of third parties).

Whilst the judge’s findings in respect of the shareholder rule’s existence were quite categorical, the decision does not completely close the door on the rule, as it was accepted that there may be limited instances where it could be said to survive. A blanket-type rule can, however, no longer be said to apply and any future application of the rule will instead depend on the circumstances of each case.

Conclusion

Given the rise in shareholder group actions, the decision will be welcomed by defendant companies facing increasing litigation. While the decision is thought likely to be appealed, this is a significant change and for those advising on current or prospective shareholder disputes, it will be important to understand the change in the status of communications between shareholders and directors.

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