Abolition of the 'Shareholder Rule'

Quick read

In a landmark decision, the Privy Council in Jardine Strategic Limited v Oasis Investments II Master Fund Ltd and others [2025] UKPC 34 has abolished the 'Shareholder Rule'. This was an exception to the law of privilege that prevented a company from being able to assert privilege against its shareholders, save in relation to documents that came into existence for the purpose of litigation against a shareholder. This confirms the English High Court's decision last year in Aabar Holdings SARL v Glencore PLC & Ors [2024] EWHC 3046 (Comm) (see our article here), which remains subject to a pending appeal.

Background

The dispute arose out of the amalgamation of two companies within the Jardine Matheson corporate group, to form a company called Jardine Strategic Limited (the 'Company'). As a result of that amalgamation, the shares in one of the original companies were cancelled.

Under Bermuda law, the Company was required to pay fair value for those cancelled shares to shareholders who voted against the amalgamation. Some of those shareholders were not satisfied that the figure offered to them represented fair value for their shares. The shareholders therefore triggered a statutory mechanism under which the Court was required to determine the fair value of those shares.

The shareholders sought disclosure from the Company of documents created prior to the date of amalgamation, including advice that the Company had received in relation to the valuation of the shares. The Company asserted that these documents were protected by legal advice privilege such that the shareholders were not entitled to see those documents. The shareholders, however, sought to rely on the Shareholder Rule to override that privilege.

At first instance, the Chief Justice held that the Company was not entitled to assert legal advice privilege against the shareholders. The Court of Appeal dismissed the Company's subsequent appeal. The issue before the Privy Council was therefore whether the Shareholder Rule formed part of the law of Bermuda and whether it should continue to be recognised in England and Wales.

Decision

The Privy Council unanimously held that the Shareholder Rule forms no part of the law of Bermuda, and that it ought not to continue to be recognised in England and Wales. In doing so, the Privy Council used its power to make a Willers v Joyce direction that its decision should be binding on the English courts.

The Privy Council considered and ultimately rejected three possible bases for the Shareholder Rule as follows:

The original justification for the rule, which was that shareholders had their own proprietary interest in the company's money from which legal advice is paid for. The Privy Council held that this was inconsistent with the proper analysis of a company as a separate legal person from its members, such that the members have no proprietary interests in the company's assets.
The more recently articulated justification based on joint interest privilege. This was the argument that the company/shareholder relationship falls within the "joint interest family of relationships" which includes trustee/beneficiary and principal/agent relationships. The Privy Council was alive to the commercial reality that the views of shareholders (as classes and individually) may sharply diverge, and that shareholders are not "a homogeneous block with a single shared interest which may coincide with, or diverge from, the interests of the company". Further, a broadly-based exception from legal advice privilege between a company and its shareholders would discourage companies from obtaining candid legal advice, which is required for directors to be able to make decisions in the company's best interests.
The narrower justification for the Shareholder Rule which had been advanced by one of the judges in the Court of Appeal, which would require the shareholder to demonstrate a sufficient joint interest on the particular facts of the case. This too was rejected by the Privy Council, on the basis that it would make it impossible for directors to know, when deciding whether to seek legal advice, whether the advice would be protected by privilege against shareholders in the event of subsequent litigation between them.

Implications

The decision brings a definitive end to the Shareholder Rule and resolves prior uncertainty around its status under English law. Directors can now take comfort that legal advice sought on behalf of the company will be protected by privilege and will not be the subject of disclosure in any subsequent litigation with shareholders. Shareholders are now therefore treated the same in relation to privilege as any other stakeholder who may bring proceedings against a company.

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