Say goodbye to the shareholder rule

In this article, we discuss the impact that a recent High Court ruling will have on company shareholders’ rights and their ability to obtain a company’s privileged documents.

In the recent High Court case of Aabar Holdings S.à.r.l. v Glencore Plc & Others the Court considered the various circumstances whereby a company has the right to assert privilege against its own shareholders. Companies and shareholders will need to be aware of the significance of the judgment. 

Privilege 

In law, two types of privilege exist: legal professional privilege and litigation privilege. 

Legal professional privilege, or legal advice privilege, enables clients to talk to their lawyers in complete confidence; nobody, not even the court, can compel clients or their lawyers to reveal what has been discussed between them, or what advice a lawyer has given their client. The only exception is the iniquity exception, which means that legal professional privilege does not apply to protect communications between lawyers and clients that further a crime, fraud or equivalent conduct. Legal professional privilege does not apply to third party communications. 

Litigation privilege protects confidential communications between clients, lawyers, and third parties which is made for the dominant purpose of use, or potential use, in connection with litigation proceedings which are either existing or reasonably anticipated. 

The “Shareholder Rule”

Historically, the Shareholder Rule, which dates back to the nineteenth century, has prevented companies from claiming privilege against its own shareholders. As such, shareholders have been allowed to access company documents that would otherwise be protected by privilege. 

Cases which have successfully applied the Shareholder Rule have usually been decided because shareholders have a proprietary interest in the company and its assets, including an interest in any legal advice obtained using company funds. 

The exception to the Shareholder Rule is that shareholders are unable to access documents arising from or for the purpose of adverse litigation between the shareholder and the company.

Prior to the judgment in Aabar Holdings, passed down by Mr Justice Picken’s judgment on 27 November 2024, the Shareholder Rule was a well-known, commonly adopted principle. The majority of the judgment centred around whether the Shareholder Rule actually exists. 

Mr Justice Picken held that the Shareholder Rule does not exist and concluded that it “should no longer be applied.” The Judge’s conclusion was based on the fact that the historic justification for the rule, which had been based on the comparison between shareholders and beneficiaries of a trust, was no longer reflective of modern-day company law. 

Older case law which applied the Shareholder Rule were decided on the basis that shareholders have a proprietary interest in the company’s assets, however this is inconsistent with the House of Lords’ landmark decision in Salomon v Salomon and Co Ltd. The Salomon principle provides that a company is regarded as a separate legal person from its directors, shareholders, employees and agents, and as such, a company is able to own assets separately from its shareholders. 
Mr Justice Picken’s decision is a major one, which hugely impacts company law generally and in particular, shareholder actions under ss. 90 and 90A of the Financial Services and Markets Act 2000 (FSMA). 

Joint Interest Privilege 

The Aabar Holdings judgment also touched on the existence of joint interest privilege. 

Joint interest privilege is a concept which is said to arise where two or more parties jointly instruct the same lawyer, or where they have a joint interest in the legal advice at the time that it comes into existence.

Mr Justice Picken found that the concept of joint interest privilege is simply “an umbrella term” used to describe scenarios in which one party cannot assert privilege against another, and it does not exist itself as a concept.

As regards the interaction between joint interest privilege and the Shareholder Rule, Judge Picken held that, even if joint interest privilege were to exist, it could not be applied in support of attempting to apply the Shareholder Rule. 

Mr Justice Picken’s justification for this was, among other things, the fact that it is not justifiable to deprive a company of its right to keep its confidential legal advice private and privileged. Judge Picken also considered that, outside of the realms of litigation, it is the norm for shareholders to not have any rights to access a company’s documents. 

Conclusion 

At this stage, whilst companies and shareholders should be aware of and consider the Aabar Holdings decision, it is important to not assume that this is the final decision on the existence of the Shareholder Rule. Given the impact and significance of the Aabar Holdings judgment, it is likely that the decision will be appealed. 

However, in the event that there is no (or an unsuccessful) appeal, and the Aabar Holdings judgment stands, it will be significantly more difficult for shareholders to obtain a company’s privileged documents. As it stands, Mr Justice Picken’s judgment strips shareholders of a tool that is commonly leveraged to obtain access to privileged advice.

For further information on legal privilege, company and shareholders’ rights, or to obtain legal advice, please contact the Shoosmiths Dispute Resolution and Litigation team.