Down and (finally) out: The Privy Council confirms the end of the Shareholder Rule exception to privilege

The Privy Council has resolutely confirmed the end of the "Shareholder Rule" exception to legal professional privilege – a decision that may have a significant impact on shareholder claims in the English courts going forward.[1]

The Shareholder Rule

The Shareholder Rule previously prevented a company from refusing to disclose legal advice it obtained, to its shareholders, on the basis of privilege, except where the advice related to litigation with that shareholder (over which litigation privilege could be maintained). 

The Rule was historically justified on the basis that shareholders had a proprietary interest in the assets of the company, which paid for the advice - drawing an analogy with the relationship between trustees and beneficiaries. However, given the difficulty of reconciling this with the principle of separate corporate personality, applicants have more recently advanced it on the basis of a joint interest between the shareholder and the company.

Background

The underlying dispute in Jardine arose from the amalgamation of two companies in the Jardine Matheson group to form Jardine Strategic Limited (the Appellant), which involved the cancellation of shares in one company and triggered a statutory process under legislation in Bermuda for the purchase of shares from the shareholders who voted against the amalgamation, at fair value.  A number of those shareholders (the Respondents), dissatisfied with the Appellant's offer for the shares, sought the court's determination of fair value.

In the course of the proceedings, the Respondents sought disclosure from the Appellant of the legal advice obtained by the Jardine Matheson group when it was setting the fair value, on the basis of the Shareholder Rule, which the Appellant resisted.  The Shareholder Rule was applied by both the Chief Justice of Bermuda and the Court of Appeal of Bermuda, and the Appellant appealed to the Privy Council.

Decision

The Privy Council held that the Shareholder Rule was not part of the law of Bermuda and should no longer be recognised under English law.

The Privy Council considered that the original proprietary justification for the Shareholder Rule was "wholly inconsistent with the proper analysis of a registered company" and no longer supported in the authorities.

The Privy Council rejected the Respondents' arguments that there was always a joint or common interest between a company and its shareholders, or that there was an analogy, or a sufficient analogy, with the relationship between trustee and beneficiary. While the Privy Council accepted that, as long as the company is solvent, the company's interests are frequently aligned with those of its shareholders, it considered that to be a "serious oversimplification".  The Privy Council noted that the interests of a company's shareholders often diverge.  Further, a company must have regard not just to the interests of its shareholders, but also to those of other stakeholders, including the company's workforce and lenders.  It is because of this divergence of interests that directors, in particular of "large modern sophisticated" companies, need (or would benefit from) candid and confidential legal advice on how best to make decisions, without fear of disclosure of that advice to shareholders in future litigation.

The Privy Council also rejected the availability of a narrower exception to privilege in circumstances where a shareholder could, on the facts of the case, demonstrate a sufficient joint interest in the advice sought.  This would create too much uncertainty for directors and, in order for privilege to deliver its intended objective, there must be certainty.

Implications

The Privy Council's direction that Jardine should be regarded as abrogating the Shareholder Rule in England means there is no longer an automatic right for shareholders to see legal advice obtained by the company in proceedings in England and Wales.  In doing so, it effectively negates the outstanding appeal of Picken J's first instance decision in Aabar Holdings SARL v Glencore plc [2024] EWHC 3046 (Comm), [2025] 2 WLR 763, that the Shareholder Rule should be abandoned.

Against a backdrop of increasing demands on directors who need to have regard to a plethora of complex and often divergent interests, this decision should be of some comfort to directors as they can now seek full and frank advice without fear of disclosure to shareholders in future litigation.

Whether Jardine will slow, or even reverse, the rise in shareholder claims, particularly unfair prejudice petitions and claims under sections 90 and 90A of the Financial Services and Markets Act 2000, remains to be seen. It is also unclear how the decision in Jardine will be applied in the context of derivative claims brought by shareholders on behalf of the company itself, including under section 260 of the Companies Act 2006. There can be no doubt though that it will be an important factor for shareholder claimants to bear in mind when considering the extent of the evidence available to prove their case against the company and/or its directors. 

Going forward, it will be important for shareholders to scrutinise claims of legal advice privilege asserted by companies in litigation to ensure such claims are properly made, and to challenge them when it appears the protective powers of privilege are being exploited. Equally, companies need to ensure they are appropriately treating and labelling privileged communications so as to take advantage of this decision and ensure disclosure of legal advice can be resisted on a principled basis in future litigation.

There will of course remain instances where the disclosure of legal advice, and waiver of privilege, in proceedings is useful and even necessary. For example, to evidence that appropriate steps were taken by directors following the identification of a risk, or that directors acted and relied on legal advice in a decision made.  In those circumstances, caution must be exercised to avoid the inadvertent waiver of privilege more broadly.