The emperor's new clothes: The death of the Shareholder Rule
In Jardine Strategic Ltd v Oasis Investments II Master Fund Ltd & Ors No 2 (Bermuda) [2025] UKPC 34, the Privy Council has abolished the Shareholder Rule, which had prevented a company in litigation with its shareholders from withholding documents from inspection on the basis that the documents were subject to legal advice privilege. The Board directed that its decision, which was made in the context of an appeal from the Bermudian Court of Appeal, should be regarded as abolishing the rule in England and Wales. In future shareholder disputes in the English courts, shareholders will be unable to access privileged legal advice upon which company directors have based contentious decisions.
Background
The issue arose in the context of shareholder litigation in the Bermudian courts. Jardine Matheson group is a multinational investment conglomerate. In April 2021, the Bermudian company, Jardine Strategic Limited (the Appellant), was formed by the amalgamation of two group companies. The result of the amalgamation was that all of the shares in one of the group companies were cancelled, and under Bermudian law, the fair value of those cancelled shares had to be paid to the shareholders who voted against the amalgamation. A number of those shareholders were not satisfied with the value offered and commenced proceedings in the Bermudian courts, challenging the company’s determination of fair value (the Respondents).
In those proceedings, the Respondents sought the disclosure of documents created prior to the filing of the proceedings, including legal advice given to the Jardine Matheson group when it was setting the fair value. The Appellant asserted that certain documents were covered by legal advice privilege and refused to make such documents available for inspection.
The Shareholder Rule: An exception to legal advice privilege
The Respondents accepted that the advice received by the pre-amalgamation companies would ordinarily be of the sort protected by legal advice privilege. However, they argued that inspection was required on the basis of a common law exception to the general rule: a company cannot assert legal privilege against its shareholders save in relation to documents created for litigation against that shareholder, commonly known as the Shareholder Rule. The first instance court and the Court of Appeal for Bermuda agreed with the Respondents that inspection was required. The Appellant appealed to the Judicial Committee of the Privy Council.
A rising tide of opposition
First reported in 1888, by 1914 the Shareholder Rule had become “accepted without question” and remained “unchallenged and therefore with no further examination of the justification of it”.
While other common law jurisdictions, notably Canada and Australia, had abandoned or questioned the validity of the Shareholder Rule during the 1980s and 1990s, it wasn’t until 2023 when the first “serious doubt” was expressed in England by Michael Green J in Various Claimants v G4S plc [2023] EWHC 2863. However, he considered the rule was well-established and was only capable of being set aside by the Supreme Court. Then in 2024, in a decision in litigation against Glencore plc, Picken J held that, contrary to the longstanding view, the Shareholder Rule does not exist in English law (see our summary here). Picken J gave leave for a leapfrog appeal to the Supreme Court, but the Supreme Court determined that such an appeal was unnecessary as this case was already before the Privy Council.
Privy Council’s analysis of justifications for the Shareholder Rule
The Board considered three possible bases for the Shareholder Rule (only the second and third were pursued by the Respondents):
- The original status-based rule;
- That the company-shareholder relationship is presumed to create a joint interest; and
- That the company-shareholder relationship may reach a threshold at which a joint interest is created.
1. A status-based rule
The Shareholder Rule was established in Gourand v Edison Gower Bell Telephone Co of Europe (1888) 57 LJ Ch 498, by Chitty J as he then was, who had reasoned that: “… a party cannot resist production of documents which have been obtained by means of payment from the monies belonging to the party applying for their production.”
In support of this interpretation, Chitty J cited an obiter comment in an earlier case, Mayor of Bristol,[1] in which the judge had suggested that if a claimant was a taxpayer in a city, they may be able to argue they were entitled to inspect the city’s documents. As justification for this proposition, the judge in that earlier case had cited the rule that trustees could not claim privilege against their beneficiaries over materials which they obtain by using the beneficiaries’ funds (the Trustee Rule).
The Privy Council noted that Chitty J had used Mayor of Bristol as a “stepping stone” to create an analogy between the Trustee Rule and a company-shareholder relationship. However, since 1897 it has been established that a company is a separate legal personality: capable of possessing both legal and beneficial ownership over its property.[2] Despite this inconsistency, the approach in Gourand had been accepted by the Court of Appeal in 1914[3] and the Shareholder Rule continued in law, justified on the basis of a proprietary right of the shareholder.
The Privy Council’s opinion was that the original basis for the Shareholder Rule was wholly inconsistent with the proper analysis of a registered company as a legal person separate from its members such that the members have no proprietary interest in the funds of the company used to pay for the advice.
2. Joint interest privilege
It was argued in the defence of the Shareholder Rule that although the original proprietary justification had fallen away, the Rule could now be justified on the basis of joint interest privilege, created by the company-shareholder relationship, i.e. a shared privilege between a company and its shareholders which arises by virtue of a shared interest in communications relating to the administration of the company. As it is a shared privilege, one party cannot assert it against the other.
The Privy Council’s opinion was that it could not be said that the interests of every company and all its shareholders are aligned. For example, some shareholders would favour long-term growth over dividend returns; some shareholders may support or oppose a merger (as was the case here). Even within small family-owned companies, there could be divergent approaches as to how to run the company. It considered the inclusion of the company-shareholder relationship in the list of qualifying relationships for joint interest privilege had been done as “almost an unthinking habit”. A broad-based exception from legal advice privilege as between company and shareholders founded upon a supposed joint interest would discourage companies from obtaining candid legal advice in confidence, would ignore the separate personality of the company and would wrongly assume a coincidence of interests contrary to the typical commercial reality.
3. A fact-dependent joint interest
At the first appeal before the Bermudian Court of Appeal[4], Kawaley LJ had suggested a formulation of the Shareholder Rule whereby there could be a threshold at which the company and shareholder would be deemed to have a sufficient joint interest (to be demonstrated by the shareholder).
The Privy Council rejected this alternative view, noting that it would create significant uncertainty. A company’s directors could not be sure whether the advice they were about to seek would be subject to privilege or not and would be forced to proceed on the general assumption that any legal advice would not be privileged. The need for certainty was paramount, as any rule which lacked a “bright line” would “fail to serve the objective of encouraging the taking of legal advice.”
Decision
Lords Briggs and Lady Rose’s opinion was that the Shareholder Rule lacks and always has lacked a justification. The time has come for the little boy in the crowd to say what everyone knows: that the emperor is not wearing any clothes.
The Privy Council issued a Willers v Joyce direction that their decision should be regarded as abolishing the rule in England and Wales.
Key takeaways
Most significantly, the demise of the Shareholder Rule will offer comfort to directors that the legal advice they receive will, subject to the normal exceptions, remain privileged from a company’s shareholders. The decision means that such advice can be more candid and practical without the risk of disclosure. On the other hand, shareholder claimants will no longer be able to obtain such legal advice to support their claims, for example in unfair prejudice petitions or actions for breach of directors’ duties where legal advice received and related communications can often help demonstrate the motives of the directors and their subjective intent.
The Privy Council’s opinion that the company-shareholder relationship does not automatically qualify for joint interest privilege may also require companies to reconsider their approach to document-sharing arrangements with their shareholders, in case they inadvertently lose confidence or waive privilege in a document.
With thanks to Adam Lee for his assistance in preparing this post.
[1] Mayor and Corporation of Bristol v Cox (1884) 26 Ch D 678.
[2] Salomon v Salomon [1897] AC 22
[3] Woodhouse & Co Ltd v Woodhouse (1914) 30 TLR 559.
[4] [2024] CA (Bda) 7 Civ.