The Emperor’s clothes: the ‘Shareholder Rule’ on privilege laid bare
A case before the Privy Council regarding a dispute over shareholders’ rights in Bermuda has confirmed that the "Shareholder Rule" should not continue to be recognised in England and Wales (and forms no part of Bermudan law). The decision included a Privy Council direction that the judgment would bind the courts of England & Wales.
This follows the English Commercial Court decision in Aabar Holdings SARL v Glencore PLC & Ors [2024] EWHC 3046 Comm which rejected the longstanding Shareholder Rule as an exception to the protection of a company’s legal professional privilege as against its shareholders (see our Law-Now on that case here). The High Court judge in that case gave permission for a leapfrog appeal to the Supreme Court, but the Supreme Court declined to hear the appeal, as it was aware this case was due to be heard by the Privy Council, which was likely to resolve or clarify the issue (and has now done so).
Background
Jardine Strategic Limited v Oasis Investments II Master Fund & others No 2 (Bermuda) [2025] UKPC 34 concerned a merger under Bermudan law, under which 15% of the shareholders in one of the merging companies were mandatorily paid out in cash instead of becoming members of the merged company. A large number of the 15% objected to the price per share and asserted that they were entitled to see the relevant legal advice given to the company concerning the price per share, as a result of joint interest privilege or the so-called “Shareholder Rule”. The Shareholder Rule has traditionally been relied upon to avoid a company asserting privilege against its own shareholders (save in relation to information that came into existence for the dominant purpose of actual or threatened litigation against such shareholders).
Issues before the Privy Council
The Privy Council was asked to consider various issues in relation to the shareholders’ asserted joint interest privilege in legal advice received by the company, also referred to as the Shareholder Rule. The issues included nuances as to the timing of the legal advice in question, its intersection with litigation privilege, and whether a former shareholder retains the right to claim joint interest privilege in advice given to the company during the period of their membership of the company.
The Privy Council’s reasoning and direction
The Privy Council considered the Shareholder Rule’s long history and more recent examples of comparable common law jurisdictions declining to apply the rule. Consistent with the Aabar decision, the Privy Council held that the proprietary interest justification was wholly inconsistent with the proper analysis of a registered company as a separate legal person from its shareholders. It was therefore not a valid justification to deny companies a fundamental right to seek and receive legal advice in confidence.
As to joint interest privilege, the Privy Council deemed it untenable that there would always be a community of (joint) interest between every company and its shareholders, whether collectively or individually. It also held that the company shareholder relationship did not form a sufficient analogy with other relationships that would justify joint interest privilege (Dawson-Damer v Taylor Wessing LLP [2020] EWCA Civ 352) overruled). In the context of a requirement for aligned interests for joint interest privilege to arise, the Privy Council observed that acting in the best interests of the company requires a sophisticated balancing of competing interests (which may not even be aligned within a category of stakeholders), and as such, there is an imperative for a company to be able to seek candid and confidential legal advice.
In a memorable passage, the judgment therefore recorded that “the status-based automatic Shareholder Rule is therefore now, and in truth has always been, a rule without justification. Like the emperor wearing no clothes in the folktale, it is time to recognise that the Rule is altogether unclothed.”
By virtue of the unanimous decision of nine Supreme Court Justices in Willers v Joyce (No 2) [2016] UKSC 44, the Privy Council can direct that domestic courts should treat its ruling as the law of England and Wales if it considers an earlier decision of the House of Lords, the Supreme Court or the Court of Appeal to be wrong. This was the case in Jardine Strategic, so the Privy Council has declared the ‘Shareholder Rule’ invalid as a matter of English law.
Comment
Companies now have certainty and greater confidence in asserting legal professional privilege as against their shareholders. On the other hand, shareholders deciding to pursue action against the company, for example for unfair prejudice or derivative actions, will need to be mindful that they will have less evidence at their disposal in doing so, specifically in terms of legal advice given to the company alone. It remains to be seen whether this factor may have a chilling effect on claims of this nature being brought.
The Privy Council declined to decide on the issue of joint retainer privilege in relation to shareholders following the cancellation of the shares in light of the decision on the Shareholder Rule. Joint retainer privilege applies where both parties agree to instruct a single lawyer to advise them, and this has not changed.
