In a landmark decision, the Commercial Division of the High Court of England and Wales held that the longstanding “Shareholder Rule” is unjustified and should no longer be applied in English law.
The Shareholder Rule in England
The Shareholder Rule was created over 100 years ago in the case of Gouraud v Edison Gower Bell Telephone Co of Europe Ltd,[1] and effectively prevented a company from withholding disclosure of documents from its shareholders on the basis of legal privilege, except where those documents came into existence for the purposes of litigation between the company and that shareholder. The primary rationale for this was that shareholders have a proprietary interest in the company’s assets, including the advice provided to it. This decision pre-dated the landmark House of Lords case Salomon v Salomon & Co Ltd,[2] which established that a company was a separate legal entity, distinct from its shareholders.
The case, Aabar Holdings SARL v Glencore Plc & Ors,[3] involved a shareholder group litigation claim – what in Canada is akin to a shareholder class action – brought by Aabar Holdings Sárl (Aabar) against Glencore plc and a number of its former directors. Aabar argued that the existence of the Shareholder Rule meant that Glencore could not claim privilege against its shareholders. While noting that, in earlier cases, the Shareholder Rule had been justified on the basis of shareholders having a proprietary interest in the company’s assets, Aabar put forward another newer rationale: the concept of joint interest privilege, which arises from joint retainers or joint interest in the subject matter of a privileged communication between the parties. Glencore, on the other hand, asserted that the Shareholder Rule should no longer be applied, with joint interest privilege being an unsuitable alternative justification for the rule.
The High Court found that the Shareholder Rule could not be justified on the basis of joint interest privilege and the idea that a shareholder has a proprietary interest in a company’s assets. Furthermore, joint interest privilege as a freestanding type of privilege was neither supported by the authorities nor warranted as a matter of principle. While there are cases that reference joint interest privilege in a shareholding context, the Court found that those cases did not address the application of the Shareholder Rule. Joint interest privilege is simply a blanket term used where one party is unable to assert privilege against another on narrower and more conventional grounds. Even if joint interest privilege were a freestanding species of privilege, there would still be no justification for applying it to the relationship between companies and shareholders so as to prohibit a company from asserting privilege against its own shareholder.
In the alternative, the judge held that even if the Shareholder Rule did exist, the Court still concluded that its application would be fact-specific as there is no absolute right for shareholders to access any legal advice provided to the company. It would only entitle a shareholder to documents that would otherwise be protected by legal professional privilege but would not extend to without prejudice privilege, because of the involvement of a third party in without prejudice communications – that is, even if the interests of a shareholder are aligned with those of the company, they may not be aligned with those of the third party. Additionally, a third party entering negotiations with a company would not usually have contemplated the possibility of the without prejudice communications being shared with shareholders. A party cannot unilaterally waive without prejudice privilege so extending the Shareholder Rule to without prejudice privilege would be inconsistent with the justifications for that type of privilege.
The High Court also found that the Shareholder Rule would not be restricted to current, direct and registered shareholders. As such, though Aabar was not and had never been, a direct or registered shareholder in Glencore, if the Shareholder Rule did exist it would extend to Aabar.
The Shareholder Rule in Canada
In contrast, Canadian courts have been more reluctant to recognize a common interest between companies and shareholders that would allow shareholders to access privileged materials. In McPherson v. Institute of Chartered Accountants (British Columbia),[4] the British Columbia Court of Appeal rejected the argument that shareholders were entitled to privileged opinions, finding that “a statutory corporation is a separate legal entity from its members and those members do not have a property interest in the property of the corporation.”
The risk is that if shareholders could claim joint interest in any communication made by the company, it would substantially undermine the strength of the privilege and impede a corporation’s ability to seek legal advice as well as counsel’s ability to openly discuss the legal risks of a proposed course of conduct with the corporation.[5] This was supported by the Ontario Superior Court of Justice decision, FCMI Financial Corp. v. Curtis International Ltd., which found McPherson and the previously decided Ontario decision McKinlay Transport Ltd. v. Motor Transport Industrial Relations Bureau of Ontario (Inc.) persuasive, agreeing that a corporation and its directors have an interest in obtaining confidential legal advice to assist in the operation of the corporation, but a shareholder has no proprietary interest in the assets or property of the corporation. As such, shareholders have no general right to access legal advice provided to the corporation and the Court decided not to follow the English cases cited against that proposition, including Gouraud.[6] The judge in the Aabar decision adopts a similar line of reasoning,[7] stating that extending joint interest privilege to the company-shareholder relationship risked undermining the public policy rationale for legal professional privilege. It could discourage directors from seeking legal advice due to concerns that the advice might be seen by a large number of third parties.[8]
In a more recent case, Ziegler Estate v. Green Acres (Pine Lake) Ltd., the Alberta Court of King’s Bench reviewed the law of joint interest privilege in England, the United States and Canada and concluded it did not apply in Canada as between shareholders and a corporation. The court reiterated that “Canadian jurisprudence eschews the notion that shareholders are privy to privileged communications between a corporation and its solicitor(s). It does so on the basis that such a finding would impede both a corporation and its solicitor(s)’ ability to function properly; to express and discuss legal opinions freely and openly.”[9]
Takeaways
The concept of the Shareholder Rule in its Canadian form faces greater resistance in this jurisdiction. The trend among Canadian courts is mainly grounded in the view that disallowing companies to assert privilege against its shareholders would dissuade companies from accessing legal advice and results in stronger protections for companies when they elect to do so. The High Court’s ruling is a major development in the law surrounding privilege relating to companies and their shareholders and brings English law closer in line with other jurisdictions like Canada, where courts have rejected the Shareholder Rule.
This judgment sways in favour of corporate entities, recognizing the need for confidentiality when companies seek advice on governance, asset sales or market disclosures, even if such decisions later lead to shareholder disputes. For shareholders, the decision impacts their ability to receive disclosure of key documents prior to commencing litigation against the companies in which they hold securities.
From a Canadian perspective, the decision in Aabar appears to align English law with the position adopted here. The case is useful in this jurisdiction for its insight into joint interest privilege. Despite conservatism towards that idea on both sides of the Atlantic, shareholders as litigants continue to raise it. The Shareholder Rule may be finished in most jurisdictions, but a parallel type of privilege might be in the process of forming as a legal concept. Time will tell.
For more information on this topic or any questions related to the legal implications of this decision on your business, please contact the authors, Brandon Barnes Trickett or Raphael Eghan. Thank you to our articling student Helen Wang for her contribution to this blog.
[1] 1888] 57 LJ Ch 498.
[2] [1897] A.C. 22, [1896] 11 WLUK 76.
[3] Aabar Holdings SARL v Glencore Plc & Ors [2024] EWHC 3946 (Comm).
[4] McPherson v. Institute of Chartered Accountants (British Columbia), 1988 CarswellBC 413 at para 15.
[5] McKinlay Transport Ltd. v. Motor Transport Industrial Relations Bureau of Ontario (Inc.), [1991] O.J. No. 1410 at para 5 (Gen. Div.).
[6] FCMI Financial Corp. v. Curtis International Ltd., 2004 CarswellOnt 1004 at paras 30-31.
[7] At paragraph 116.
[8] Supra note 1 at para 116.
[9] Ziegler Estate v. Green Acres (Pine Lake) Ltd., 2008 ABQB 552 at para 47.
