Since the 1800s, the ‘Shareholder Rule‘ in English law has prevented companies from asserting legal professional privilege against their own shareholders, except in specific cases involving hostile litigation. However, in a landmark judgment, the High Court in Aabar Holdings SARL v Glencore PLC & ors [2024] EWHC 3046 (Comm) has ruled that the shareholder rule is unjustifiable and should no longer be applied. This decision—if confirmed on appeal—could reshape boardroom relations and corporate governance.

What is this case about?

The case involved Aabar Holdings, a petrochemical company, and other shareholders bringing claims against mining giant Glencore and its former directors. These claims centred on alleged bribery and misconduct by Glencore’s subsidiaries in Africa and South America which VinciWorks has previously reported on. The claimants argued that Glencore’s IPO prospectus and other documents contained misstatements or omissions, breaching sections 90 and 90A of the Financial Services and Markets Act 2000 (FSMA). As a result, the claimants alleged they suffered financial losses.

A dispute arose during case management as to whether Glencore could assert privilege against the claimants regarding certain communications. The claimants argued that the shareholder rule prevented Glencore from withholding privileged documents unless they were created for the purpose of hostile litigation against shareholders. Glencore countered that the rule was outdated, unprincipled, and should no longer apply. The High Court agreed, and Mr Justice Picken stated that the Shareholder Rule is “unjustifiable and should no longer be applied.”

What is the Shareholder Rule and why did it come about?

The shareholder rule originated in 19th-century case law, which held that shareholders had a proprietary interest in a company’s assets, including privileged documents. This reasoning analogised the shareholder-company relationship to that of beneficiaries and trustees or partners in a partnership. The proprietary interest principle underpinned the rule for decades.

However, Mr Justice Picken in Aabar Holdings noted that this reasoning could not survive the House of Lords decision in Salomon v A Salomon & Co Ltd [1897] AC 22. Salomon established that a company is a separate legal entity, distinct from its shareholders, who have no proprietary interest in the company’s assets. Consequently, the proprietary interest principle was fundamentally flawed and could no longer justify the Shareholder Rule.

The claimants argued that the Shareholder Rule had evolved from the proprietary interest principle into a form of joint interest privilege. They contended that shareholders and companies share a mutual interest in communications related to the administration of the company, justifying the application of privilege.

Mr Justice Picken rejected this argument. He held that joint interest privilege is not an overarching principle but rather a shorthand term used to describe specific, narrowly defined relationships, such as trustees and beneficiaries or partners. Importantly, shareholders do not have a general right to access a company’s documents, nor do they share a proprietary interest in the company’s assets. Thus, the concept of joint interest privilege could not apply to the shareholder-company relationship.

What did the ruling hold?

While the ruling is set to be appealed, if it does stick, then this is a watershed moment for English company law. The ruling strengthens the ability of companies to protect confidential legal advice from being disclosed to shareholders. Without the ability to rely on the Shareholder Rule, it will be far more challenging for shareholders to obtain a company’s privileged documents.

The key points of the ruling are that:

• The shareholder rule is unjustifiable in modern law. Its original basis in proprietary interest was invalidated by Salomon, and no alternative justification—including joint interest privilege—exists.
• Even if the rule were to survive, it could not apply as a blanket principle. Instead, its application would depend on the specific circumstances of each case, requiring a demonstrable joint interest.

Without prejudice privilege

The court also considered whether the shareholder rule extended to without prejudice (WP) communications. The court held that if the rule existed, it could not override WP privilege, which is intended to encourage open settlement discussions. Allowing shareholders access to WP communications would undermine this public policy objective.

Documents of subsidiary companies

The court ruled that if the Shareholder Rule was to be applied, it could erroneously extend to privileged documents belonging to a company’s subsidiaries. This is because communications relevant to a subsidiary’s affairs are also relevant to its parent company and shareholders up the corporate chain. Invalidating the Shareholder Rule prevents subsidiary companies’ communications being subject to shareholder scrutiny.

Nominee shareholders

The claimants in this case—Aabar Holdings—were not registered shareholders but rather beneficial owners of shares. The court clarified that the shareholder rule, if it existed, could extend to beneficial owners, as the rule was not grounded in formal company law principles but rather in the nature of the relationship between shareholders and the company. Glencore successfully argued that the Shareholder Rule could not extend to nominee shareholders because only persons on the register of members, i.e. the legal owners of shares, are recognised as members of the company.

Implications for companies and shareholders

The abolition of the Shareholder Rule is significant for both companies and shareholders, particularly in the context of securities litigation under FSMA.

For companies: The decision reinforces the ability of companies to assert privilege over legal advice, reducing the risk of disclosure in shareholder disputes. This is particularly important for listed companies with thousands of shareholders, whose interests may not align with the company’s. The ruling provides clarity and ensures that directors can seek legal advice without fearing future disclosure to shareholders.

For shareholders: The ruling limits shareholders’ access to privileged information, which may make it more challenging to bring certain claims. Shareholders may have to rely on non-privileged evidence or demonstrate a specific joint interest in individual cases to access privileged documents.

What happens next?

The High Court’s decision is likely to be welcomed by companies and directors, but it could face challenges. Given the long-standing nature of the shareholder rule, an appeal or further litigation in related cases is highly likely. Companies and shareholders will need to navigate these issues carefully to ensure clarity and fairness in the evolving landscape of shareholder rights and corporate privilege.