Court rejects 'shareholder rule' in dispute with glencore

Aabar Holdings was the sole shareholder of Commodities, which in turn was the ultimate beneficial owner of shares in Glencore Plc.

Aabar, along with other shareholders, brought an action against Glencore and several of its former directors in relation to alleged widespread misconduct which occurred at Glencore’s subsidiaries. Aabar alleged that it suffered a loss due to Glencore’s failures to disclose its misconduct in public documents and brought a claim under Sections 90 and 90A of the Financial Services and Markets Act 2000, as well as claims in deceit and negligence.

A dispute arose as to whether Glencore would be entitled to assert privilege against its shareholders, including Aabar. In this judgment, the Court was asked to decide whether the so-called Shareholder Rule indeed exists in English law, and if so, its proper ambit.

What is the Shareholder Rule?

In this case, the Claimant submitted that there was a general principle of English law known as the ‘Shareholder Rule’. That rule, it submitted, meant that companies could not withhold documents from their shareholders on the basis of legal privilege, even in circumstances where the document would prima facie benefit from the protection of privilege.

The main exception to this rule was argued to arise when documents came into existence for the purpose of hostile litigation between the company and a shareholder.

Submissions

Counsel for Aabar distinguished two possible bases for the Shareholder Rule. The first possible basis was proprietary: that every shareholder has a proprietary interest in the company’s assets, so that when legal advice is paid for from the company’s funds, the shareholder has a proprietary right to see it. The parties accepted that, in light of company law as applied since Salomon v A Salomon & Co Ltd [1896] UKHL 1 (“Salomon”) (which held that a company is a legal entity distinct from its shareholders), that basis for the rule was no longer arguable.

In light of that acceptance, counsel for Aabar argued that the remaining basis for the Shareholder Rule was a joint interest basis – that where the relevant document was created in the joint interest of the company and its shareholders, neither party could assert privilege against the other party. Counsel for Aabar argued that the joint interest basis provided a solid foundation for the purported Shareholder Rule in English law.

Counsel for Aabar submitted that the Shareholder Rule, having been established in the High Court case of Gourad v Edison Gower Bell Telephone Co of Europe Ltd (1888) 57 LJ Ch 478, had received judicial approval in subsequent cases such as Various Claimants v G4S Plc [2023] EWHC 2863 (Ch) and in appellate cases such as Woodhouse & Co Ltd v Woodhouse (1914) 30 TLR 559 and CIA Barca de Panama SA v George Wimpey & Co Ltd (1980) 1 Lloyd’s Rep 598. 

Counsel for Aabar also submitted that the Shareholder Rule was acknowledged to be part of English law in the Bermudian Court of Appeal case of Oasis Investments II Master Fund Ltd v Jardine Strategic Holdings [2024] CA (Bda) 7 Civ.

Counsel for Glencore submitted, firstly, that the origins of the Shareholder Rule do not support the propositions advanced by Aabar; secondly, that the rule is anomalous, unprincipled and should no longer be applied; and, thirdly, that the concept of joint interest privilege cannot be relied on as an alternative or substitute justification for the Shareholder Rule.

Decision

Mr Justice Picken held that the Shareholder Rule does not exist in English law and that the authorities cited by counsel for Aabar did not set out any proper basis for it. As such, Picken J did not consider himself bound to apply the rule, despite Woodhouse and other judgments of the higher courts which appeared to have applied it.

Picken J first noted that the earlier cases cited by counsel for Aabar did not base the Shareholder Rule on the doctrine of joint interest privilege, but rather a proprietary interest in the company’s documents. He then noted that although several subsequent cases have identified the existence of the Shareholder Rule, many of these cases merely applied either the rule or its Litigation Exception without critically analysing whether the rule existed in the first place.

For example, while Woodhouse contained some support for basing the Shareholder Rule on the proprietary rights of the shareholder, the Court of Appeal in that case was primarily addressing the Litigation Exception. The discussion on the proper basis of the Shareholder Rule was therefore obiter. Similarly, in Barca, the Court of Appeal cited the Shareholder Rule in a case that was not between shareholders and a company, but rather between two former joint venture partners where the Shareholder Rule could not have been invoked even if it did exist. Therefore, the Court of Appeal’s limited discussion of the basis of the Shareholder Rule was also obiter.

In Jardine, the Bermudan Court of Appeal considered the basis of the Shareholder Rule at length and considered that the existence of any joint privilege arising between a company and its shareholders would be highly dependent on the circumstances. 

Picken J held that, even though Jardine was not strictly binding on him, it had simply assumed the existence of the Shareholder Rule and instead focused on discussing the scope of the rule. Further, Jardine did not decide that there would always be joint interest privilege between a shareholder and a company, but rather that the existence of any such privilege should properly be decided based on the circumstances in each case.

Picken J also noted that other judges had expressed reservations about the existence of the Shareholder Rule in cases where the rule was considered more critically. In G4S, Michael Green J criticised the proprietary basis for the Shareholder Rule, noting that Salomon had established that shareholders have no direct interest in a company’s assets. He therefore recognised that the Shareholder Rule was “anomalous and should no longer be followed” although he refrained from holding that it did not exist as there was insufficient time for that submission to be fully considered. 

Ultimately, Picken J did not agree that there was a freestanding concept of joint interest privilege in English law. However, he also considered whether, if such a concept did exist, the relationship between companies and shareholders would lead to it being applied in that context. The judge held that it would not, on the basis (among other reasons) that:

• the direct economic interest of shareholders in a company's performance is insufficient to override the company's fundamental right to privilege;
• that communications in cases of joint interest privilege are typically made for the benefit of both parties, which is not always the case in company / shareholder relationships; and
• that recognising such a rule could potentially discourage directors from seeking legal advice due to concerns that the advice might be accessible to large numbers of third parties, including unknown shareholders whose interests may not be aligned with those of the company.

Although the remaining issues in the matter did not strictly arise in light of Picken J’s ruling that the Shareholder Rule did not apply, the judge nonetheless considered those issues briefly. The judge held that if the Shareholder Rule did exist, it would extend to legal advice privilege and litigation privilege, but not to without prejudice privilege, as such documents would involve another party with no relationship to the shareholder. Furthermore, the judge held that the Shareholder Rule, if it existed, would not be limited to registered shareholders but would also apply to indirect shareholders; intermediated shareholders (including those holding their shares through CREST); and successors to the rights of a shareholder.

Aabar was granted a “leapfrog” certificate by the High Court under Section 12 of the Administration of Justice Act 1969 to appeal directly to the Supreme Court on the following grounds:

1. whether Aabar should be granted permission to appeal directly to the Supreme Court from a judgment of the High Court; and
2. whether there is a rule of English law which prevents a company from asserting privilege against its own shareholders

The Supreme Court subsequently refused to grant Aabar permission to appeal directly. It is expected that Aabar will now follow the usual appeal route i.e., to the Court of Appeal in the first instance. 

Implications

The outcome in Aabar is welcome news for companies undergoing or facing the prospect of litigation against their shareholders. Without being able to rely on the Shareholder Rule, shareholder claimants will be able to review a more limited scope of documents in any litigation against the company. 

However, it should be noted that even if the Shareholder Rule were held to apply in future cases, the Litigation Exception would still apply, preventing litigating shareholders from compelling the disclosure of documents created for the purpose of that very litigation.

Despite the good news, companies should still exercise caution for two reasons. First, the outcome of this case is still subject to the appeal process. 

It will be interesting to see how any appeal is framed given Picken J found that all of the cases in support of the existence of the Shareholder Rule were obiter dicta and instead approved the small number of cases which cast doubt on the rule, even though the judges in those cases had refrained from outright denying the existence of the rule. As Mr Justice Green held in G4S, it was arguably “ bold” of Picken J to suggest that all of the Shareholder Rule cases were mistaken, even if they do not contain much (or any) clear justification for the rule. It is also conceivable that, in the interim, the High Court may re-examine this principle and reach a different decision in future cases.

Second, documents relevant to matters in litigation against a shareholder that are not covered by privilege at all must still be disclosed to that shareholder. As such, companies should continue to remember the usual pitfalls of privilege claims. Those include (i) that companies can only claim legal advice privilege over confidential communications between lawyers and individuals within the company that are specifically tasked with obtaining legal advice on behalf of the company; and (ii) that they can only claim litigation privilege when litigation is in reasonable contemplation.