Privy Council abolishes the Shareholder exception to Legal Advice Privilege

As a consequence, a shareholder will no longer be entitled to disclosure of a company's privileged documents when it is litigating against that company. This judgment will have a substantial impact on companies, shareholders and their advisors. 

What is the Shareholder Rule?

Legal professional privilege ensures that confidential communications between a lawyer and its client, the dominant purpose for which is the giving or receiving of legal advice, will be protected from disclosure.  

The Shareholder Rule has historically been recognised as an exception to that principle, enabling a shareholder in proceedings against a company to obtain privileged documents belonging to the company that came into existence before the litigation was commenced or was in contemplation. The traditional justification for the rule is that shareholders have a proprietary interest in the assets of the company and therefore are entitled to see legal advice paid for out of the company’s funds. More recently, a modern justification for the Shareholder Rule has developed – that shareholders and the company share a joint interest in legal advice taken by the company.

Background to the case

The case arose from the amalgamation of two companies within the Jardine Matheson group, which resulted in the cancellation of all shares in Jardine Strategic Holdings Ltd. Certain dissenting shareholders, unhappy with the offered price per share, applied to the Bermudan court for an appraisal of the fair value of their shares. In the course of those proceedings, the dissenting shareholders, relying on the Shareholder Rule, sought disclosure of legal advice given to the Jardine Matheson group when it set the amount to be offered.

At first instance, the Bermudan court found that the Jardine Matheson group could not assert privilege against the shareholders, and that decision was upheld by the Court of Appeal for Bermuda. The Jardine Matheson group therefore appealed to the Judicial Committee of the Privy Council, which is the final court of appeal for UK overseas territories. 

The Privy Council's decision

The Privy Council emphatically rejected the Shareholder Rule, noting with a certain colourfulness: “like the emperor wearing no clothes in the folktale, it is time to recognise and declare that the [Shareholder] Rule is altogether unclothed”.

The Privy Council held that the original justification for the Shareholder Rule is inconsistent with modern company law, which recognises the company as the sole legal and beneficial owner of its property. Furthermore, there is not always community of interest between a company and its shareholders, so any alternative justification for joint interest would also fail to justify the Shareholder Rule. In particular, the Privy Council noted that “shareholders are simply not a homogeneous block with a single shared interest which may coincide with, or diverge from, the interests of the company”, and that a status-based joint interest would “ignore the separate personality of the company” and “wrongly assume a simple coincidence of interests contrary to the typical commercial reality”. The Privy Council also made it clear that the company shareholder relationship should be distinguished from other types of relationships such as that of trustee/beneficiary and principal/agent, noting that ''when the company shareholder relationship is looked at squarely on its own, it is clear that there is no, or at least no sufficient, analogy with those other relationships to justify its inclusion within the joint interest family of relationships''.

The Privy Council held that legal advice must be candid and confidential if the directors and management are to act in a company's best interests, noting that “directors of a large modern sophisticated company have the constant and difficult task of finding their way to a reliable perception of their company’s best interests while paying appropriate attention to the interests and wishes of their many different classes of stakeholders, when making decisions, large and small, about the management and direction of the company’s business. Many of those decisions will need, or at least benefit from, candid, confidential, legal advice.” Otherwise, there would be a risk that the directors of a company would be discouraged from seeking privileged legal advice if there was a possibility that such advice could be accessed by shareholders in litigation, which in turn would lead to confusion and uncertainty.

Furthermore, the Privy Council gave an express direction that the domestic courts of England and Wales should treat this decision as also representing the law of England and Wales.

The Privy Council’s judgment can be accessed here: https://jcpc.uk/cases/jcpc-2024-0077

Implications of the decision

This judgment will come as providing clarity to companies in the face of ever-increasing shareholder activism. Directors can now have reasonable certainty that privileged legal advice obtained on behalf of the company will not be subject to disclosure obligations in the event of a subsequent dispute arising with shareholders. For now, shareholders will want to ensure, where possible, that any company advice is received expressly on a joint basis.

Furthermore, the judgment has significant implications for anyone acting in disputes between shareholders and companies. It reinforces the importance of absolute clarity when determining, at the outset of a retainer, and as a retainer evolves, who the client is within the corporate trinity of shareholder, director and company.