A recent decision of the Privy Council has upended a long-standing principle of English law, fundamentally altering how companies and shareholders navigate disputes. The so-called “Shareholder Rule”, which allowed shareholders to access privileged legal advice obtained by a company, has been decisively abolished. This development has significant implications for corporate governance, litigation strategy, and shareholder rights to access critical evidence.
What was the Shareholder Rule?
The shareholder rule was an exception to legal professional privilege. It allowed shareholders to access legal advice paid for by the company, based on the notion that shareholders had a proprietary interest in the company’s assets. This principle, rooted in 19th-century case law, persisted for almost a century-and-a-half, despite evolving understandings of corporate legal personality: it has, for example, been recognised for at least 100 years that a company is both the legal and beneficial owner of its property.
The Jardine case: a turning point
Jardine involved a corporate reorganisation within the Jardine Matheson Group, involving the amalgamation of two Bermuda companies, including Jardine Matheson Holdings Ltd. Shareholders who dissented from the amalgamation sought access to legal advice obtained by the company. The company refused, citing legal privilege.
Initially, the courts in Bermuda upheld the shareholders’ right to access the advice under the Shareholder Rule. However, the Privy Council – Bermuda’s highest appellate court – reversed this, declaring the rule unjustified and outdated. In doing so, the court likened the rule to the famous emperor’s invisible clothes: it was a legal fiction without any sound rationale.
Why the Rule was rejected
The court rejected the Shareholder Rule on three fronts:
1. Status-based ownership: the idea that shareholders have a proprietary interest in the company’s legal advice was dismissed as incompatible with modern corporate law, which recognises companies as separate legal entities with their own property rights.
2. Joint interest privilege: the argument that shareholders and companies share a joint interest in legal advice was similarly rejected. The court noted that shareholders often have divergent interests and that companies must consider a broader range of stakeholders than just their shareholders.
3. Case-by-case disclosure: a version of the Shareholder Rule which provided for an assessment of whether a joint interest arose on a case-by-case basis was also rejected. The court emphasised the need for legal certainty, which a discretionary approach would undermine.
What this means for companies and shareholders
This decision restores a company’s right to assert legal privilege against its shareholders. This is a significant shift, particularly in shareholder litigation where access to internal legal advice could be the source of key evidence supporting a claimant shareholder’s case.
However, the ruling does not mean that a company’s legal advice is entirely off-limits to shareholders. Shareholders may still access privileged material under established exceptions:
- Waiver: if a company voluntarily discloses or relies on legal advice in wider correspondence, it may waive privilege.
- Inequity exception: privilege does not apply to advice obtained in furtherance of wrongdoing.
- Joint retainer: in certain corporate structures, typically where the directors are also shareholders, shareholders who were involved in instructing or paying for legal advice may still have access.
A step towards legal clarity
This decision aligns English law with other common law jurisdictions. Canada, for example, has already moved away from the Shareholder Rule, while others, such as Australia, have expressed doubt about the Rule’s justification.
For companies, the message is clear: the best way to maintain privilege is to ensure strict control over the distribution of legal advice and be cautious about referring it in internal communications. For shareholders, the path to accessing privileged advice is now significantly narrower.
