The Judicial Committee of the Privy Council (JCPC) has unanimously abolished the Shareholder Rule, which prevented a company from asserting legal professional privilege (LPP) against a shareholder, save for limited circumstances. The JCPC, which heard the case from the Bermuda Court of Appeal, was comprised of justices of the Supreme Court of the United Kingdom; in making a so-called Willers v Joyce declaration, the justices expressed their firm view that their decision is to be regarded as English law.
1. What are the key takeaways?
1.1 The decision in Jardine Strategic Limited v Oasis Investments II Master Fund Ltd puts to rest an almost “unthinking habit”1 of applying the Shareholder Rule in over a century of English case law.
1.2 The JCPC’s emphatic dismissal of the rule provides clarity from a higher court, following a recent High Court decision which held that the Shareholder Rule should no longer be considered good law2 (see our previous article here: Privilege in company/shareholder disputes: Aabar Holdings S.A.R.L v Glencore Plc and others).
1.3 The decision is good news for companies facing shareholder disputes who can now assert privilege against shareholders (past or present), provided all other LPP criteria are satisfied. Parties in shareholder disputes will want to ensure that their approach to LPP reflects the decision in Jardine. The decision is also welcome news for directors who may otherwise have refrained from seeking legal advice in the ordinary course of business for fear of potential disclosure of that advice in any future shareholder litigation.
2. Background to the Shareholder Rule
2.1 The Shareholder Rule prevented a company from asserting LPP against a shareholder, except in circumstances where a document came into existence for the dominant purpose of litigation between the company and the shareholder.
2.2 The rule was first reported in the 1888 case of Gouraud v Edison Gower Bell Telephone Co of Europe Ltd, which relied on an analogy between the relationship of companies and their shareholders, and trustees and beneficiaries (proprietary justification). Trustees cannot assert privilege against beneficiaries for materials obtained at the beneficiaries’ expense. Despite the fact that the 1897 case of Salomon v Salomon3 “trenchantly”4 stated that a company is both the legal and beneficial owner of its property and, with that, a separate legal entity from its shareholders, subsequent decisions on the Shareholder Rule still operated under the “misapprehension”5 that the proprietary justification for the Shareholder Rule was good law.
2.3 More recent justifications for the Shareholder Rule have generally accepted that the proprietary interest justification is no longer good law, and have sought to define the Shareholder Rule as a category of joint interest privilege.
3. What has happened in the current case?
3.1 Two companies in the Jardine Matheson group amalgamated in 2021, leading to the formation of Jardine Strategic Limited (the Company). All shares in Jardine Strategic Holdings Ltd (one of the companies subject to the amalgamation) were cancelled as part of the amalgamation. Under a provision of Bermudan company law, the Company was required to pay “fair value” for the cancelled shares to those shareholders who voted against the amalgamation. After the Company made the payment, certain shareholders brought proceedings in Bermuda under Bermudan law against the Company, alleging that the price offered to them did not represent the fair value of the shares.
3.2 In 2022, the claimants in the underlying proceedings applied for a summons to seek production of relevant legal advice obtained by the Company before the proceedings were started. The Company resisted disclosure on the grounds that the documents sought by the claimants were privileged. The claimants argued that the Shareholder Rule was a “simple, long-established and complete answer”6 to any assertion of LPP by a company against its shareholders outside of the context of litigation with the shareholders.
3.3 The judge in the first instance held that the Shareholder Rule operated to prevent the Company’s assertions of LPP. In addition, the Shareholder Rule was capable of applying to past shareholders. The Bermudan Court of Appeal agreed, adopting a “nuanced version of the joint interest justification.”7 Going further than the first instance judge, the Court of Appeal held that the Shareholder Rule could also apply to documents which came into existence before the shareholder requesting inspection became a shareholder in the company.
4. What was the decision?
4.1 In an unflinching judgment, the JCPC concluded that, in the century or so that followed Gouraud v Edison, the Shareholder Rule remained “generally… unchallenged” in spite of the fact that the original proprietary justification had “just faded quietly away, without anyone apparently noticing.”8 Turning to more recent authorities which questioned the application of the rule, the JCPC noted that the recent rejection of the Shareholder Rule in Aabar v Glencore – both on the basis of the proprietary justification and on a common interest basis must have come as a “considerable surprise9” after decades of entrenching an ill-conceived “general rule”.
4.2 Although the arguments put to the JCPC related to the joint interest basis for the Shareholder Rule, it took the opportunity to consider the rule in the round and the three possible grounds for the existence of the rule, namely:
(a) The traditional “status-based” Shareholder Rule, applied for over a century in England and Wales;
(b) The more “modern” joint or common interest interpretation, which, if correct would also apply to principals and agents; trustees and beneficiaries; joint ventures, and insurance relationships10; and
(c) A nuanced, circumstance-based argument centred on a starting position of joint interest, and approved by the Bermudan Court of Appeal.11
4.3 On all grounds, the JCPC held that it was satisfied that the Shareholder Rule formed no part of the law of Bermuda and no longer ought to be recognised in England and Wales; its only two advantages were its “ancient lineage and its creation of a bright line”12. Those advantages were easily trumped by two key disadvantages:
(a) The original proprietary justification is incompatible with the legal status of a company as separate from its members, who have no proprietary interests in the funds spent on legal advice. Whatever the more modern justifications for the Shareholder Rule might be, that was the original rationale for its existence.
(b) The joint interest rationale on the other hand, which has come to be relied on following the “collapse” of the original justification, “cannot sensibly justify an automatic status-based denial of LPP between every company and all its shareholders”13; it would also be a “serious oversimplification” to do so, as would be the assumption that there is always a same interest between shareholders whether in the same class or individually.14 To assume a “simple coincidence of interests” between shareholders and a company would be contrary to reality.15
4.4 The JCPC also dismissed a more narrow “threshold to entry” approach to the joint interest argument, which would assume that a joint interest existed between shareholders and a company, depending on the facts of the case and an “open-textured assessment” of whether the interests of the parties were in fact “joint”.16 The JCPC held that “a general rule that privilege would not be available, subject to fact-sensitive exception, would be even worse”17 than a blanket exception, as it would introduce a significant degree of uncertainty, with the effect that a director would not be able to seek legal advice with any confidence that such advice was protected by LPP from the outset.
4.5 The JCPC noted strong public policy reasons for abolishing the Shareholder Rule:
(a) Directors must be able to seek “candid, confidential, legal advice”, particularly when running complex and sophisticated businesses, with many competing stakeholder interests.18 Finding an exemption to the LPP on any of the grounds put forward by the claimants would discourage that.
(b) Further, the relationship between shareholders and a company is contractual. The documents that a shareholder is entitled to obtain from the company in the ordinary course of business are limited. It would be “strange” if a shareholder could be entitled to a potentially large suite of documents that they would not otherwise have sight of, because they are in litigation with the company.19
5. Why is it significant?
5.1 In Aabar v Glencore, Picken J gave permission to leapfrog the decision that the Shareholder Rule should no longer apply as a matter of English law to the Supreme Court. The Supreme Court declined the appeal, presumably in the knowledge that the same issue would be heard by the JCPC in Jardine. In the ordinary course, decisions by the JCPC are afforded “great weight” by courts at every level, although an English court cannot be bound by a JCPC decision in the event that it conflicts with a decision from an otherwise binding English authority. The exception to the otherwise absolute rule on the JCPC precedent is where the JCPC makes a Willers v Joyce declaration, as was the case in Jardine. Such a declaration – which comes into consideration if an appellant to the JCPC is asking (or could be asking) the JCPC to make a decision which runs contrary to an English Court of Appeal or Supreme Court decision, allows the JCPC to declare its decision binding on the courts of England and Wales. In Jardine, the members of the JCPC made such a declaration, and were “firmly of the view” that their decision should be regarded as abolishing the Shareholder Rule in England in Wales and accordingly “declare[d]” that to be the case.20
5.2 The JCPC’s decision has “unclothed” the Shareholder Rule and its shaky foundations, which no longer form part of English law. The decision placed great weight on the public policy reasons for directors to seek candid legal advice, and expressed a keen awareness of the commercial reality of operating a company – from smaller, family-run enterprises, to listed companies with complex shareholding structures. With this decision, the law of privilege has moved closer to reflecting the commercial reality in which modern companies operate, and in which they seek legal advice, and the importance of protecting such advice from inspection.
1At [91]
2Aabar Holdings S.A.R.L v Glencore Plc and others [2024] EWHC 3046 (Comm)
3[1897] AC 22
4At [31]
5At [31]
6At [64]
7At [45]
8At [33]
9At [41]
10The JCPC stressed that its decision should not be viewed as a comprehensive survey of the law of joint interest privilege; joint interest privilege was only considered in the context of the Shareholder Rule
11At [78]
12At [80]
13At [81]
14At [86]
15At [89]
16At [93]
17At [93]
18At [88]
19At [90]
20At [113]