Shareholder rule overturned: companies can assert privilege in litigation

Insight

08.01.2025

Until now, when shareholders were involved in hostile company litigation, the shareholder rule meant they could access legal advice obtained by the company and other privileged company material. Over the years, the rule has been challenged without success, until now. In Aabar Holdings SARL v Glencore PLC & Ors [2024] EWHC 3046 (Comm), the High Court confirmed that there is no basis for the existence of the rule. As a result, companies involved in litigation with their shareholders can now more confidently assert privilege in legal advice and communications, as against their shareholders.

The shareholder rule evolved from the 19^th century position in trust law that trustees and beneficiaries share a joint interest. On that basis, neither could claim privilege against the other in trust documents. The courts then drew an analogy between the trustee/beneficiary relationship and company/shareholder relationship, therefore applying the same rule to the latter.

In the Aabar proceedings, Aabar Holdings S.à.r.l., is one of several claimants making s90 and s90A FSMA 2000 claims against Glencore Plc and certain individuals. The claims allege misconduct by Glencore subsidiaries which led to financial penalties and investment losses.

During the litigation, Glencore asserted privilege against the claimants under the shareholder principle and the court was asked to make a decision on the validity of the shareholder doctrine. It was accepted that the shareholder principle did not arise from a shareholder’s proprietary interest in the company’s assets, and therefore in the advice taken by the company. It has long been accepted that a company and its shareholders are separate legal entities.

The critical question for determination was therefore whether the shareholder principle should be founded on the basis of a joint interest between company and shareholder. Picken J concluded that a company and its shareholders do not have a joint interest akin to a trust and its trustees. As such, there is no basis for claiming that no privilege could be asserted by a company against its shareholders.

Joint interest privilege was held to be an umbrella term used to describe a variety of situations in which a party cannot assert privilege against another. The court set out specific examples where joint interest privilege might arise:

as between partners or trustees and beneficiaries on the basis of a proprietary right to the relevant documents;
in the trust context, on the basis of the court’s inherent jurisdiction to supervise the administration of trusts; or
in cases where a party has an express or implied contractual right of access.

In the judge’s view, these scenarios did not support the existence of a wide-ranging principle of joint privilege which would extend to companies and their shareholders. As a result, companies in litigation with their shareholders can now more confidently assert privilege in legal advice and communications, as against their shareholders.

This decision will have an immediate and significant impact on shareholder litigation and securities class actions, where it is common for claimant shareholders to use the shareholder principle to demand access to their company’s legally privileged documents in the course of disclosure. In most cases, shareholders should now expect to have no visibility over the company’s legal advice or material relating to company litigation – information which might otherwise be critical to their claims.

It should be noted that Aabar is a decision of the High Court and, whilst influential, does not create a binding precedent for other High Court cases or appeals. Given its revolutionary nature and its implications for some very significant claims, there is a strong prospect that it will be challenged on appeal or in future cases.

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