Shareholder disputes: a challenge to the established position on privilege?

For shareholders or directors on the receiving end of unfair prejudice petitions or claims for breach of fiduciary duty, news that they are expected to take their own legal advice and pay their own legal fees, separate from their company, can be unwelcome. A failure to respect these principles can result in the waiver of legally privileged material to the general shareholder body.

In this article, we examine two recent cases in which companies have been forced to hand over documents to shareholders, despite their protests that the documents were legally privileged. We also consider developments in the case of Various Claimants v G4S PLC [2023] EWHC 2863 (Ch), handed down in November 2023,whichpotentially invites the court to adopt a different approach in the future.

What does this mean in practical terms?

As a generally well-established rule, the Shareholder Principle provides that legal advice taken and paid for by a company is understood to be for the benefit of the shareholders as a whole, and that they are entitled to know what that advice says (Sharp v Blank and others [2015] EWHC 2681 (Ch)).

A company cannot, therefore, refuse to disclose documents to its own shareholders on the basis of privilege, except where those documents came into existence in contemplation of or for the dominant purpose of hostile proceedings between the company and its shareholders.

The implications of any substantive change to this widely held understanding could be significant and far-reaching. Given the court’s expression of concern regarding the validity of the Shareholder Principle in G4S, this will be an area to watch.

Pending any such developments, the prudent position is to assume that legal advice obtained by the company will be susceptible to disclosure to both current and former shareholders unless there is a very clear case that that advice concerns hostile litigation against the company in its own right (as opposed to other shareholders and directors).

Disclosure of company documents in the context of an unfair prejudice claim

Re Spring Media Investments Ltd [2023] 4WLUK 202 is a good example of a CEO (with a substantial indirect interest in his company) falling foul of these principles.

Litigation brought by a shareholder in Spring Media Investments Ltd raised concerns that, in breach of a Shareholders' Agreement and his duties as a director, the CEO and Chairman (Mr Costa) had tried to thwart a sale of Spring Media so that he could consolidate and augment his own control of the company. It was alleged that Mr Costa’s breaches of duty constituted unfairly prejudicial conduct of the company’s affairs.

In the early stages of the dispute, the company agreed to indemnify Mr Costa, having taken its own legal advice on the threatened claims. The company's lawyers proceeded to engage with the shareholder in correspondence, commenting on the allegations against Mr Costa and going as far as to assert that they lacked merit.

Was the litigation hostile against the company?

The shareholder sought disclosure of the underlying legal advice paid for by the company. The application was resisted on the grounds that the advice related to hostile litigation, which required the court to consider whether the litigation was against the company “in the true sense”. The judge’s decision, handed down in August 2023, listed the following points as relevant to the applicability of the Shareholder Principle.

• Was the company more than a nominal party? Namely, did it have an independent legal position in relation to the allegations which were made or threatened? In this case, Spring Media’s role in the litigation was limited to giving disclosure. The true allegations were as between certain shareholders and directors. As such, Spring Media was just a "nominal party".
• Who were the true "protagonists" in the proceedings? The protagonists in threatened unfair prejudice claims will almost always be differing factions of the shareholders and/or directors appointed by the shareholders.
• What was the context? A court is required to assess objectively the whole context of the case, in particular the documents over which a company wishes to assert privilege. In this case, the judge carried out an in-depth review of pre-action correspondence.
• Strict rules of privilege: The judge reiterated that the rules of privilege are strict and that companies must exercise caution when considering whether to press for any exception to the well-established rule that privilege cannot be asserted against its shareholders.

Ultimately, Spring Media was ordered to disclose copies of the legal advice it had received on the subject of the unfair prejudice petition, together with copies of documents relating to its board's decision to indemnify Mr Costa for his costs. 

Privilege as against former shareholders

In February 2023, the Supreme Court of Bermuda, applying English law principles, explored whether a company can assert privilege against its former shareholders (Re Jardine Strategic Holdings Limited [2023] SC (Bda) 8 (Civ)).

The substantive dispute concerned whether a fair and reasonable price had been paid in a compulsory buy-out of shares in the context of an amalgamation of a public company. Some of the shareholders were concerned that the price paid did not represent fair value, and applied for disclosure of legal advice obtained prior to the amalgamation. However, as the amalgamation had already completed, the applicants were no longer shareholders of the company. 

The company’s position was that the Shareholder Principle no longer applied as the shareholders’ entitlement to access its privileged advice stemmed from their status as shareholders. Following the transfer of their shares, the applicants no longer had any proprietary interest in the company’s assets, and it was therefore argued that they were no longer entitled to go behind the assertion of privilege. 

The company’s counsel also raised the policy concern that, particularly in the case of publicly traded companies, allowing former shareholders to inspect its privileged documents in litigation would lead to an ever-increasing pool of persons who could go behind the assertion of privilege.

The Supreme Court of Bermuda did not accept the company’s position, finding that a shareholder’s entitlement to access privileged documents in litigation derived not from a proprietary interest, but because the relationship between the company and the shareholder gave rise to a joint interest privilege as against the rest of the world. As a result, this privilege did not disappear when the shareholder ceased to be a shareholder. The company could not assert privilege against former shareholders in respect of the documents which they were entitled to access during their membership of the company.

A change in direction?

In a potentially controversial decision, the High Court in Various Claimants v G4S PLC [2023] EWHC 2863 (Ch) refused to apply the Shareholder Principle to non-registered shareholders and questioned the validity of the principle generally.  

An order was sought for the company to disclose legally privileged documents to a group of claimants including (i) three former shareholders; and (ii) the beneficial owners of shares held via custodians and sub-custodians. The company claimed privilege over the documents and submitted that previous case law had not considered the ambit of the Shareholder Principle in sufficient detail. In particular:

• Whether it should apply only to registered shareholders,
• Whether it should be limited to those who were still shareholders, and
• Whether the principle should cut through all types of privilege (including litigation privilege and without prejudice privilege) or whether it should only be applied to defeat claims of legal advice privilege.

The judge took a cautious approach. He considered that, as it was not possible to identify a precedent dealing with non-registered shareholders, he should not expand the boundaries of the Shareholder Principle by ordering that disclosure be made to this group of claimants. 

In relation to the three former shareholders, he indicated that he would have granted disclosure of documents subject to both legal advice and litigation privilege (consistent with Re Jardine) but he ultimately refused to do so on procedural grounds. The application had been made too close to trial, without justification for the delay, and giving disclosure at such a late stage would be impossible to manage and would potentially be highly disruptive to the imminent trial.

The case of G4S is interesting in that the judge raised fundamental concerns about the foundations and clarity of the Shareholder Principle. He commented that:

• The main authority for the principle was to be found in an ex tempore judgment delivered by a first instance judge in the context of a case management application. The judge noted that “it is a little surprising to me that such an apparently accepted doctrine has not received more consideration in the authorities”,
• The principle had a “somewhat shaky” foundation in the light of more recent case law, describing the previously understood basis for the rule as “dubious”, and
• He had “doubts as to the justification now for such a principle” but was not prepared to rule, after a short argument in a case management hearing, that the principle did not exist or should be “got rid of”, indicating that this would be a decision more suited to a higher court.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2023