In a recent case, the High Court has made a notable change to the principle relating to legal privilege between a company and its shareholders known as the shareholder rule.
In this article, we review the background to the shareholder rule and the decision recently given in the case of Aabar Holdings S.à.r.l. v Glencore Plc and others.
Since the late nineteenth century, it has been held that a company may not assert privilege – the right to withhold production of certain documents, including legal advice – against its own shareholders, save in relation to documents that came into existence for the purpose of hostile litigation against those shareholders.
In this case, Aabar Holdings, together with other claimants, brought claims against Glencore, a global resources company, relating to alleged misconduct by Glencore’s subsidiaries in Africa and oil price manipulation in the United States. The claimants alleged that prospectuses and reports issued by Glencore contained misstatements and omissions, as a result of which the claimants sustained losses on their investments. While Aabar was not itself a shareholder in Glencore, it was the ultimate beneficial owner of Glencore shares held through another company.
During the proceedings, a dispute arose as to whether Aabar could compel Glencore to disclose certain documents to it, as required by the shareholder rule, or whether Glencore would be able to assert privilege against Aabar.
Giving judgment in the High Court, Mr Justice Picken held that, if the shareholder rule existed, then it would apply to both legal advice privilege and litigation privilege, but not without prejudice privilege, and it would extend to Aabar even though Aabar did not itself hold shares in Glencore. The shareholder rule would also apply to documents belonging to Glencore’s subsidiaries.
These conclusions were obiter, however, because in the main part of his judgment Mr Justice Picken held that, contrary to previous authorities, the shareholder rule does not exist in English law at all. Consequently, Glencore could assert privilege against Aabar, and Aabar had no right to see the documents in question.
Mr Justice Picken considered two possible arguments in favour of the shareholder rule, rejecting both of them.
The first argument was that a shareholder has a proprietary interest in the company’s assets and consequently in advice taken by the company and paid for from the company’s funds. This principle, however, was asserted before the landmark decision of the House of Lords in the case of Salomon v Salomon. Since the Salomon case, it is settled law that a company is a separate legal entity distinct from its shareholders and that shareholders have no interest in the property of the company.
The second argument was that there is a joint interest between the company and its shareholders which would give the shareholders the right to see the company’s privileged documents. The cases relied on in this connection, however, are concerned with the relationship between trustee and beneficiary, or between partners, rather than between a company and its shareholders. Shareholders do not generally have the right to access a company’s documents, and the directors owe their duties not to individual shareholders but to the company. A company may have many shareholders, with varying interests, and the register of members is subject to change from time to time, as shares are issued and transferred.
Mr Justice Picken quoted with approval these words of Lord Reed in the case of Sevilleja v Marex Financial Ltd: ‘A share is not a proportionate part of a company’s assets. … Nor does it confer on the shareholder any legal or equitable interest in the company’s assets. … A share is a right of participation in the company on the terms of the articles of association.'
Mr Justice Picken’s reasoning is persuasive, but as a judgment of the High Court his decision may be subject to appeal. While companies may now withhold privileged documents from their shareholders, they should be mindful that in future the Court of Appeal may take a different view.
Aabar Holdings S.à.r.l. v Glencore Plc and others [2024] EWHC 3046 (Comm)
For further information, please contact the corporate team.
