Privilege unveiled: the Shareholder Rule is no more

Background of bribery allegations

The case arose from widespread bribery investigations involving Glencore in Africa and South America. Following Glencore's guilty plea in the UK and subsequent fines, investors, including Aabar, sued Glencore for misleading statements and omissions in its prospectuses and annual reports. The investors sought disclosure of Glencore’s legally privileged advice concerning the underlying investigation, leading to a battle over the existence and scope of the Shareholder Rule.

Summary

The court's decision was multifaceted, but this table summarises the key findings:

Analysis

In a forensic judgement the court looked at the full 135-year history of the Shareholder Rule. Its origins were as a proprietary right, by analogy with the position between a trustee and a beneficiary or between partners to a partnership: in other words the property in the legal advice given to a company somehow belonged to the shareholders because they had contributed, indirectly, to the cost of the legal advice being provided. By virtue of this property right, it was said, shareholders were entitled to see advice given to the company. However, this position was reached in the caselaw before the historic decision in Salomon v Salomon which said that a company is legally distinct from the shareholders. This fundamentally changed the nature of the relationship between a company and its shareholders meaning the latter did not have an automatic right to the former’s privileged advice.

Most of the cases discussing the Shareholder Rule were, the court observed, in fact not about the rule itself but about the exception to the rule: where there is litigation between the shareholder and the company, the shareholder is not entitled to see the company’s legal advice about that litigation. The cases rather assumed, without debate, the unassailable existence of the underlying principle. 

Since it was untenable, today (post-Salomon), to say that the rule was founded in property, Aabar had to argue that the rule represented a kind of joint interest privilege. So, it was not a company law principle as much as an emanation of a more general principle around the fact, Aabar asserted, that an investor and the company in which it holds shares have a joint interest in the running and success of it.

However, the court found that there was no binding authority on this point and, what is more, joint interest privilege itself is not a particularly rigidly defined concept to which any binding authority could easily attach. Ultimately, the court concluded that there was no overarching support for a joint interest existing, on such a broad basis, between a company and its shareholders, in privileged materials.

The court went on to outline why there was no justification, in principle, for there being a Shareholder Rule founded on joint interest: 

1. The authorities provide no support for this proposition.
2. The fact that legal advice may be for the mutual benefit of the company and the shareholder was not enough to override the general principles of privilege.
3. Shareholders do not have any proprietary interest in the assets of the company.
4. Shareholders do not have a general right of free access to the documents of the company (in contrast to the position for partnerships and trusts).
5. Directors owe their duties to the company, not to the shareholders (so, for example, a shareholder could not sue a director if the director was negligent in failing to obtain advice).
6. Shareholders and the company are both interested in the success of the company, but this is not enough to found a joint interest.
7. In relation to a public company, it is inconceivable that any shareholder from time to time has a right of access to privileged information: such shareholders could in theory represent a range of disparate and opposing interests.
8. Finding that the rule did exist may discourage directors from seeking legal advice.

Accordingly, the court held there is no Shareholder Rule. While there are other recent first instance decisions (e.g. Various Claimants v G4S and Sharp v Blank) which support the Shareholder Rule, this well-reasoned case means that if you are the company, you have good arguments for refusing to provide privileged materials to your shareholders. 

In the non-binding part of its judgment, the court looked at what the implications might be if it were wrong on the primary question and there was a Shareholder Rule. Uncontroversially, the court thought any rule would apply to both litigation and legal advice privilege as for these purposes the distinction between them was immaterial.  Without prejudice privilege was different since it involved third parties, whose interests were necessarily opposed (or else there would be no without prejudice privilege) to the company’s (and, by extension, the shareholders’). For this reason, the court did not think a shareholder had a joint interest in seeing those communications. 

Since, like most shareholders in public companies, Aabar held its shares through CREST it was not the registered legal owner of the shares. Instead, it was a beneficial owner. Were there to be a Shareholder Rule, the court did not think this mattered. If anything, a beneficial interest (as opposed to a mere legal interest) in the company tends to support the existence of a joint interest between them.

Finally, on the question of subsidiaries, the court held that if the Shareholder Rule did exist there was no reason in principle, provided there was a sufficient joint interest on the facts, for a shareholder in a parent company not to be able to get access to privileged advice of its subsidiaries. The joint interest would travel all the way up the corporate chain.

On 17 January permission was granted to a “leapfrog” appeal of this decision to the UK Supreme Court. Independently the Privy Council was already due, in Spring, to hear an appeal from the Bahamas on the Shareholder Rule.

Judgment: Aabar v Glencore