Can companies withhold legal advice from shareholders?

The recent High Court decision in Aabar v. Glencore marks a significant change in how companies manage legal advice. This ruling strengthens corporate confidentiality and provides clearer guidance for directors and shareholders.

We examine the consequences of the recent decision of the High Court in relation to what is known as the Shareholder Rule.

It is a fundamental right under English law that parties are allowed to keep communications with their lawyers confidential. It is justified on the basis that a party, whether it be a company or an individual, ought to be able to obtain and receive legal advice without fear that it may need to be disclosed to another party.

The Shareholder Rule operated as an exception to that fundamental right. First recognised by the English courts in 1888, it provided that a company is not permitted to assert privilege against its own shareholders. The only exception to that rule being where a company is engaged in hostile litigation with those same shareholders.

Although the Shareholder Rule had not been without its critics in academic circles, it was largely assumed to be settled law. However, in November 2024 the High Court held that the Shareholder Rule lacked any proper legal justification and should no longer be followed.

As recorded in the judgment of Mr Justice Picken, the Shareholder Rule has existed as part of English law for some 135 years and had been applied in a number of cases. As recently as 2024, the Bermudian Court of Appeal had held that the Shareholder Rule was “was well-established in English law.”

Yet English law is not immutable and in November 2024 the High Court took the opportunity to review the law and answer the question: Does the Shareholder Rule exist in English law?

What is the Shareholder Rule?

The rule had been understood as preventing a company from being able to use privilege as a basis for withholding legal advice received by the company from its own shareholders.

Under the rule, shareholders were legally entitled to call for that advice to be disclosed, unless the advice related to a dispute between the company and a particular shareholder, or group of shareholders, seeking disclosure. In those very limited circumstances, a company was entitled to assert privilege and withhold that legal advice from disclosure.

The judicial justification for allowing shareholders to have access to legal advice obtained by the company for its own purposes has changed over the years.

Initially, the rule appeared to have been justified on the basis that shareholders had a proprietary interest in the assets of the company.

More recently, it was justified on the basis that both the company and the shareholders had a joint interest in the subject matter of the advice and therefore the company could not assert privilege against its own shareholders.

The case: Aabar Holdings S.À.R.L. v. Glencore Plc and others [2024] EWHC 3046 (Comm)

The issues considered by the High Court arose in the context of a series of claims brought against Glencore Plc, and a number of its former directors, relating to alleged and admitted misconduct by certain subsidiary companies in Africa and South America. There was also admitted manipulation of the fuel oil market in the US.

This misconduct had, at the time of the judgment, already resulted in the confiscation of funds and the imposition of funds totalling in the region of US$1.4bn.

Aabar claimed that, as a result of the alleged and admitted misconduct, certain documentation issued by Glencore had contained material misstatements and/or failed to include information that ought to have been included.

Aabar brought a claim under section 90 of the Financial Services and Markets Act 2000 (FSMA) relating to a prospectus issued by Glencore in May 2011, and the contents of various annual reports, half-yearly reports and sustainability reports issued by Glencore between 2010 and 2019.

Claims were also brought for breach of contract, negligence and in the tort of deceit.

The proceedings were listed for a procedural hearing in May 2024. In the lead up to that hearing, a dispute arose between the parties as to whether (and if so, to what extent) Glencore was able to rely on privilege to withhold documents on the basis of the Shareholder Rule.

The Judge found that the proposition that the Shareholder Rule could be justified on the basis that shareholders had a proprietary interest in the company’s assets was wrong in law:

… it is clear that the Shareholder Rule is not (or can on longer be) founded on the principle that a shareholder has a proprietary interest in the company’s assets and, therefore, in the advice taken by the company and paid out of the company’s funds.

The Judge then went on to consider whether the Shareholder Rule was justified on the basis of joint interest privilege between the company and its shareholders.
Having carried out a thorough analysis of the relevant case law, the Judge came to the conclusion that there was:

No binding authority which decides that the Shareholder Rule can be justified on the basis of joint privilege. What there is, in truth, amounts to little more than passing (and anyway obiter) comment in cases where the Shareholder Rules was not in issue – often by reference to what is said about joint interest privilege in Thanki – The Law of Privilege – and without independent analysis of the underlying basis for the Shareholder Rule.

The Judge then considered whether joint interest privilege existed as a freestanding or standalone type of privilege. The Judge took the view that there was no support for that proposition within the authorities.

At best, there were cases where joint interest privilege had been found to exist as a consequence of matter specific factors, but there was no general overarching concept that would automatically apply to particular types of legal relationship.

The Judge concluded that even if he was wrong about that, in his view was that there was “no justification, as a matter of principle, for a conclusion that it applies, at least in any generalised sense, to the relationship between companies/shareholders.”

In other words, there is no general rule of law that permits shareholders to obtain access to otherwise privileged legal advice obtained by the company on the basis of joint interest privilege.

The judgment refers to a number of factors identified by the Judge that caused to him to reach that conclusion:

1. On a proper analysis, the earlier authorities provided no support for the proposition that the existence of the Shareholder Rule is, or can be, justified on the basis of joint interest privilege. The earlier cases appeared to accept the existence of the Shareholder Rule without identifying the specific legal justification underpinning the rule.

2. The suggestion that the provision of legal advice properly relates to the administration of the company’s affairs and is, therefore, for the “mutual benefit of both [the] company and its shareholders”, and that shareholders have a “direct economic interest in the company’s performance and the application of its assets”, were not a sufficient justification for overriding the company’s right to claim privilege in legal advice received.

3. There is nothing in the relationship between the company and its shareholders that justified depriving a company of its “inviolable right” to maintain privilege in its legal advice.

4. The fact that, when exercising their statutory duty under the Companies Act 2006 to promote the success of the company, directors were required to take account of the interests of its members as a whole, was not a sufficient basis for granting shareholders a general right to inspect otherwise privileged documents.

5. Shareholders do not have a general right to access company documents. The Judge noted that it was common for articles of association to contain a provision that no member of the company is entitled to inspect any book, document or account of the company, save as otherwise permitted by law, or authorised by the directors or the courts. The Judge said that it would be odd if that restriction could be avoided simply as a result of litigation having been commenced.

6. Particularly relevant to large companies, with large of numbers of shareholders, the make-up of which is potentially subject to constant change, it was difficult to see how a joint interest in the advice provided could be said to arise. The Judge concluded that it would be “startling to expect that a company would be unable to assert privilege against such a potentially vast and differing group of shareholders, subject only to operation of the ’litigation exception’.”

7. Extending joint interest privilege to the relationship between the company and its shareholders risked “undermining the public policy rationale for legal professional privilege.” It would dissuade directors from seeking legal advice if there were concerns that advice could be seen by a large number of third parties.

The conclusion

The conclusion is best left to the Judge, who succinctly said:

… my conclusion is that the Shareholder Rules is unjustifiable and should no longer be applied.

In doing so, the judgment appears to consign the Shareholder Rule to history. In the Judge’s view the Shareholder Rule does not form part of the English law and should no longer be followed in future cases.

It remains to be seen whether this decision will be followed by other courts and there remains the possibility of a higher court reviewing the law and coming to a different conclusion.

But, as matters stand, we have a clear and unambiguous judicial decision that companies are entitled to maintain privilege in legal advice and there is no automatic entitlement to seek disclosure of that advice, simply as a consequence of a person’s status as a shareholder of that company.

That said, pending the decision being confirmed by either the Court of Appeal or the Supreme Court, requests for disclosure should still be treated with caution and there remains the possibility of any decision to withhold legal advice being subject to challenge.

How can Morr & Co help?

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If you have any concerns or questions, please do not hesitate to reach out by calling our Dispute Resolution team on 01737 854500 or email info@morrlaw.com

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.