Is time up for the Shareholder Rule? High Court departs from the century-old principle

In a recent decision, the High Court departed from a century-old precedent in ruling that the so-called 'Shareholder Rule' – the principle that a company cannot assert privilege against its own shareholders save for communications regarding litigation between the company and the shareholder – does not exist in English law. Justice Picken, in making this departure, has significantly limited the circumstances in which a claimant shareholder may be able to obtain disclosure of privileged information.

Background

Aabar Holdings SARL v Glencore PLC & ors [2024] EWHC 3046 (Comm)concerned alleged misconduct by various subsidiaries of Glencore PLC (Glencore), with a number of the claims against Glencore being brought under sections 90 and 90A of the Financial Services and Markets Act 2000 (FSMA), which broadly sets out the statutory regime for shareholders to bring claims against companies in relation to misleading published information. Aabar Holdings (Aabar) was not a shareholder in Glencore, but was instead the sole shareholder in another company, Commodities S.a.r.l (Commodities), which was the ultimate beneficial owner of shares in Glencore. Commodities was dissolved in 2021 and Aabar claimed that as a result, all the assets of Commodities transferred to Aabar – including the Glencore shares.

During the course of the claim, a dispute arose as to whether (and if so in what circumstances) Glencore would be entitled to assert privilege against the claimants in these proceedings. In deciding this dispute, the issues to be considered by Picken J were:

1. Does the Shareholder Rule exist in English Law?
2. If so, does the Shareholder Rule apply to each of (i) legal advice privilege; (ii) litigation privilege; and (iii) without prejudice privilege?
3. Does the Shareholder Rule extend to Aabar?
4. Does the Shareholder Rule extend to privileged documents belonging to subsidiary companies within Glencore's corporate group?

Issue 1 – the existence of the Shareholder Rule

The key aspect of this case relates to this first question – does the Shareholder Rule exist in English Law. This rule has been applied for over a century, and dates back to the 19th century case of Gourand v Edison Gower Bell Telephone Co of Europe Ltd where the principle was first applied.  Ultimately however, Justice Picken departed from the century-old precedent and held that the Shareholder Rule does not exist as a matter of English Law.

In looking at the question of whether the Shareholder Rule exists in English law, Picken J considered the argument that it exists either (1) on a proprietary interest basis, or (2) on a joint interest privilege basis.

Turning first to whether it exists on a proprietary interest basis, at paragraph 33 of the judgement, Picken J stated that "the Shareholder Rule is not (or can no longer be) founded on the principle that a shareholder has a proprietary interest in the company's assets and, therefore, in advice taken by the company and paid for out of the company's funds". In rejecting this founding principle on the idea that a shareholder holds no interest in company assets, this left the question to be answered as to whether the Shareholder Rule exists not on a proprietary interest basis, but on the basis that a joint interest privilege arises between a shareholder and company.

In considering whether it exists on a joint interest basis, Picken J reviewed the existing case law discussing the issue, however, ultimately he concluded that the rule's existence cannot be justified on this basis either. At paragraph 93 of the judgment he states "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) comments in cases where the Shareholder Rule was not in issue…".

Picken J then went further than this, at paragraph 94, discussing his uncertainty as to whether the joint interest privilege principle is a concept with its own independent existence – instead, his view was that the term 'joint interest privilege' is merely an umbrella term that describes a variety of different situations where one party can assert privilege over another based on case by case circumstances.

Picken J did go on to discuss the alternative, in the event his analysis on joint interest was wrong. In his view, in the alternative, he considered there to be no justification as a matter of principle, to conclude that it applies to the relationship between companies and shareholders – based on, amongst other things, the fact that nothing in the shareholder/company relationship justifies depriving companies of the privilege they are otherwise entitled to, noting that typically shareholders have no right to company assets beyond what is established in contract.

Given that the Shareholder Rule could not be said to have either a proprietary interest basis nor a joint interest basis, the court therefore concluded that the rule is now unjustifiable and should no longer be applied. As such, for the purpose of issue 1, the court concluded that the Shareholder Rule does not exist in English law.

Further points of interest

Despite concluding that the Shareholder Rule does not exist, Picken J went on to consider the further issues, namely assuming the rule does exist, (1) whether the rule applies to legal advice, litigation privilege and without prejudice privilege, (2) whether the rule extends to unregistered shareholders who do not directly hold shares, and (3) whether the rule extends to privileged documents belonging to subsidiary companies.

On this first issue, Picken J considered that the rule would, if it existed, apply to legal advice and litigation privilege but not without prejudice privilege. He noted that without prejudice privilege typically involves a third party, in addition to the company and shareholders. Even if the interests of a shareholder could be said to be aligned with those of the company, it does not follow that there is also interest between the shareholder and the third party. As such, without this third party dynamic, it is difficult to see how it could apply to without prejudice privilege. Glencore did not dispute that the rule would apply to legal advice and litigation privilege, so these were not given further consideration.

On the second issue, Picken J ultimately considered that, in principle, the rule could extend to unregistered shareholders which never held shares directly. Justice Picken rejected the suggestion that the rule could not cover persons who were not on the register of members. In his view, the fact a shareholder may not directly hold legal title to shares does not preclude the operation of the rule. His underlying reasoning being that the rule does not exist as a matter of company law, but rather through joint interest where the company/shareholder hold a sufficient joint interest – joint interest allowing for beneficial ownership rather than legal title.

On the final issue, Picken J concluded that the rule would extend to privileged documents belonging to subsidiaries. Discussing again that, if the rule exists, it must be on the joint interest basis, Picken J considered that if there is a chain of holding companies and each shares the requisite joint interest in a communication, meaning that no company can assert privilege against another, then the ultimate subsidiary company should not be able to assert privilege against any of them. This then applies to the shareholders, with the shareholder in the subsidiary having an interest in the success of both the subsidiary and the parent company. Where a particular communication is relevant to the chain of holding companies, it is also relevant up the chain of subsidiaries. In principle therefore, there is no reason why the rule could not extend to subsidiary companies.

Summary

This High Court decision represents a significant departure from a principle established more than a century ago. The claim itself was brought in respect of FSMA, so the extent to which it may be applied in other areas of litigation remains to be seen, though in principle there is no reason that Picken J's views could not extend beyond FSMA matters. What remains to be seen, however, is whether Picken J's rationale will be applied in subsequent cases. Whilst this is not the first time the court has questioned the ongoing existence of the Shareholder Rule, the fact remains that this is a significant change from the established position, and previous courts have considered that this is a matter which should be left to higher courts to ultimately decide. If the decision stands, then it will have a substantial effect on the ability of claimant shareholders (at the very least in a claim under FSMA) to obtain disclosure of company documents they may have previously been able to obtain easily. We anticipate that this issue will remain a topic of litigation and only time will tell whether this will be the turning point for the Shareholder Rule.