Shareholder disclosure ruled out: Aabar Holdings S.A.R.L v Glencore Plc and others

An important High Court decision¹ has held that the so-called "Shareholder Rule", which prevents a company from asserting privilege against a shareholder save for certain limited circumstances, should no longer apply as a matter English law.

In doing so, the Court (at first instance) laid to rest a principle that has been a core feature of disputes between companies and their shareholders for 135 years on the basis that it rests on "shaky foundation[s]"² and appears out of step with modern law.

 

What are the key takeaways?

The so-called Shareholder Rule prevented a company from asserting legal professional privilege against a shareholder, except in circumstances where a document came into existence for the dominant purpose of litigation between the company and the shareholder.

The principle – first set out in in the nineteenth-century case of Gouraud v Edison Gower Bell Telephone Co of Europe Ltd³  – has largely avoided judicial scrutiny for 135 years. In a detailed judgment which surveyed and analysed the relevant authorities, Picken J considered the origins of the Shareholder Rule, as well its possible legal justifications, and concluded that it was "unjustifiable and should no longer be applied."⁴

The decision provides welcome clarification on a largely untested area of privilege and brings England and Wales into line with other Commonwealth jurisdictions.

The decision is good news for: (i) companies facing claims from shareholders (often with the benefit of third-party funding) who will now be better equipped to resist disclosure of its privileged legal advice; and (ii) company directors who previously may have refrained from seeking legal advice for fear that it might ultimately be disclosed to hostile shareholders. It is bad news for claimant shareholders who will find it much more difficult to obtain the company's privileged legal advice and probe its decision-making.

 

What has happened?

Aabar and others brought group claims against Glencore and others under sections 90 and 90A of the Financial Services and Markets Act 2000 ("FSMA") in respect of statements in certain public documents issued by Glencore (the "Substantive Proceedings").⁵

In the run-up to a case management conference in the Substantive Proceedings, a dispute arose in correspondence as to whether Glencore, as a defendant company, could assert privilege against the Claimant shareholders. The parties agreed to defer the consideration of various issues in respect of the Shareholder Rule to a hearing on the issue.

At the hearing, Picken J was asked to consider whether the Shareholder Rule existed as a matter of English law and, if so, whether the Shareholder Rule applied to each of legal advice privilege, litigation privilege, and without prejudice privilege. In addition, Picken J was asked to consider the applicability of the Shareholder Rule to the specific circumstances of the parties to the Substantive Proceedings.

In respect of whether the Shareholder Rule existed as a matter of law, Picken J first considered the historic rationale for the rule, namely the analogy between the position of shareholders to that of beneficiaries under a trust, first posited by Chitty J in Gouraud v Edison. Following a careful consideration of the authorities, Picken J held that it was "clear" that the Shareholder Rule could not – or could no longer be – justified on this beneficial interest basis⁶. In fact, that analogy had "ceased to exist"⁷ 127 years ago following the decision in Salomon v Salomon & Co Ltd⁸, in which the House of Lords held that a company is a separate legal entity, distinct from its shareholders.

Picken J further remarked that that the cases which considered the Shareholder Rule following the decision in Salomon v Salomon had not fully analysed the foundations of the Shareholder Rule, generally accepting it as well-settled. Instead, later authorities had largely focused on exceptions to the Shareholder Rule, ie the circumstances in which a company could assert privilege against its shareholders (namely when litigation against such shareholder(s) was in reasonable contemplation), rather than addressing the rationale for the Shareholder Rule itself.

Accepting that the beneficial interest basis could no longer be relied on as the basis for the Shareholder Rule,⁹ counsel for Aabar advanced an alternative argument that the Shareholder Rule could be justified on the basis of a "concept of commonality or joint interest privilege" (the "Joint Interest Basis").¹⁰ Picken J also rejected that argument for the following reasons:

(i) joint interest privilege was "merely an umbrella term" which described a number of fact-specific scenarios in which one party could not assert privilege as against another, rather than being a freestanding concept;¹¹

(ii) even if that analysis was incorrect, there was "no binding authority" which concluded that the Shareholder Rule could be justified on a Joint Interest Basis. Those authorities cited by Aabar in favour of the Joint Interest Basis "amount[ed] to little more than passing (and anyway obiter) comment in where the Shareholder Rule was not in issue";¹² and

(iii) there was "no justification, as a matter of principle"¹³ for a general concept of joint interest between a company and its shareholders which would override a company's otherwise "inviolable right" to keep its confidential legal advice private and privileged.¹⁴ To do so risked undermining public policy and could discourage directors from seeking legal advice due to the risk of potentially unknown third parties obtaining otherwise privileged information in proceedings involving the company.¹⁵

In reaching his conclusion, Picken J also considered public policy arguments and the realities and complexities of shareholdings in modern companies. Listed companies in particular can have thousands or even hundreds of thousands of dematerialised and frequently changing shareholders. In that context, it was difficult to justify how a joint interest between a company and any shareholders could be established or maintained as a matter of principle (or in practice). A particularly pertinent example of this arises in the case of political or activist shareholders whose interests will often actively diverge from that of the company.¹⁶

In the alternative, Picken J held that if he was wrong and the Shareholder Rule did exist as a matter of English law and on the joint interest basis:

• Its application would depend on the circumstances of each individual case;¹⁷ a shareholder could not assert a blanket application of the rule.
• The Shareholder Rule would entitle a shareholder to documents that would otherwise be protected by legal advice and litigation privilege, but it could not extend to without prejudice privilege.¹⁸
• The Shareholder Rule would not be restricted to a current, direct, or registered shareholder of the company.¹⁹
• The Shareholder Rule could not be invoked by a subsequent purchaser of shares in relation to documents created prior to the date on which the purchaser acquired its shares.²⁰
• The Shareholder Rule could extend to privileged documents belonging to subsidiary companies in a corporate group.²¹

 

Why is it significant?

This is the first English judgment to provide a detailed survey of the authorities on the Shareholder Rule and to probe its foundations, particularly in the context of modern company shareholdings. The comprehensive rejection of the Shareholder Rule will be welcome to companies facing shareholder actions, whether under section 90/90A FSMA or by political or activist investors, as well as by those in charge of seeking, giving or receiving legal advice in the ordinary course of business of a company. Aabar v Glencore is already being applied to resist the disclosure of otherwise privileged information, most recently in Allianz & Others v Barclays Plc²², which is awaiting a decision. The far-reaching implications of the decision and Picken J's extensive survey of the authorities suggest the decision may be considered by higher courts in the near future.