The Judicial Committee of the Privy Council (the Board) recently delivered its judgment in Jardine Strategic Limited v Oasis Investments II Master Fund Ltd and 80 others (No 2) (Bermuda). The judgment abolishes the "Shareholder Rule", which had prevented companies from asserting legal advice privilege against their shareholders in litigation.
The Board was forthright in its views, Lord Briggs and Lady Rose declaring:
"The status-based automatic Shareholder Rule is therefore now, and in truth always has been, a rule without justification. Like the emperor wearing no clothes in the folktale, it is time to recognise and declare that the Rule is altogether unclothed."
The Board also made a Willers v Joyce direction so that the decision binds the courts of England and Wales, declaring that it: "should be regarded by courts in England and Wales as abrogating the Shareholder Rule for the purposes of litigation in those courts".
Background
The proceedings in Bermuda concerned the amalgamation of two companies in the Jardine Matheson group, which resulted in the cancellation of all the shares in one company and the formation of Jardine Strategic Limited (the Company). The Company was required to pay fair value for the cancelled shares to the shareholders who had voted against the amalgamation. These shareholders triggered the statutory appraisal mechanism under the Bermuda Companies Act 1981, asking the court to determine the fair value of their cancelled shares.
The shareholders sought disclosure of legal advice received by the Company in setting the price per share offered ($33 per share). The Company resisted this, on the basis that the advice was covered by legal advice privilege. The shareholders, however, asserted their right to rely on the Shareholder Rule. They argued that, as shareholders, they were entitled to see legal advice paid for out of company funds, except where the advice was obtained for the purpose of hostile litigation, and sought a discovery order in respect of it. The Shareholder Rule was applied at first instance and by the Court of Appeal of Bermuda. The Company appealed to the Privy Council.
The Shareholder Rule
Although the Shareholder Rule had formed part of the law of England and Wales for almost 140 years, it was recently criticised by Picken J in Aabar Holdings SARL v Glencore PLC & ors [2024] EWHC 3046 (Comm). Picken J had found the rule to be unjustifiable and considered that it should be abolished.
The Privy Council examined the origins and operation of the Shareholder Rule. The original justification for it was that shareholders, as the owners of the company's funds, had paid for the legal advice and therefore had a proprietary interest in it. However, the Privy Council held that this was wholly inconsistent with the proper analysis of a limited company as a legal person, separate from its members. This has been a principle of the company law of England and Wales since the case of Salomon v Salomon [1897] AC 22.
The alternative justification for the Shareholder Rule was that it was an example of a relationship covered by joint interest privilege (i.e. where one or more parties have a joint interest in the subject matter of a privileged communication). The Board noted that the courts had included the company-shareholder relationship in the joint interest privilege family "almost as an unthinking habit", but there was no principled reason for this inclusion. Counsel for the dissenting shareholders argued that in the case of a solvent company, most things which are good for the company's business will go to the value of the shares, and thus the interests of the company and its shareholders are generally aligned. The Board found that this was an oversimplification. The interests of different classes of shareholder will frequently diverge, and even a solvent company has several different stakeholders, other than just its shareholders, whose interests have to be taken into account. Many decisions as to how to balance those interests will benefit from candid, confidential legal advice.
The Bermuda Court of Appeal (Kawaley LJ) had tried to take a nuanced approach to the Shareholder Rule, requiring case-by-case assessment. The Board said that whilst this approach was intellectually sophisticated, it created unacceptable uncertainty. Directors deciding whether to seek legal advice need to know at the outset whether it will remain confidential. Under the approach taken by Kawaley LJ, directors would always face the risk that privilege would later be overridden by a court's retrospective assessment of the parties' interests. As result, directors would have to make the general assumption that they could not obtain legal advice in confidence, and this uncertainty would defeat the purpose of privilege – of encouraging frank legal consultation.
What impact will this have for companies and their legal advisers?
The decision is a clear acknowledgement of the reality in practice that the interests of companies and shareholders can, and often will, diverge. It means that directors of companies can obtain legal advice in confidence and secure in the knowledge that the advice will not be disclosable to shareholders, should litigation arise in the future. This will be particularly important for large companies with wide shareholder bases.
Conversely, shareholders bringing claims against companies will no longer be able to rely on simply having been a shareholder when advice was obtained in order to override privilege. They will need to prove a fact-specific joint interest, or target other routes to discovery.
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