The “Shareholder Rule” in corporate disputes

In a previous Keynote, we discussed the existence of the Shareholder Rule (“the Rule”), a long-standing principle in English law. The recent case of Aabar Holdings SARL v Glencore PLC & Ors [2024] puts in doubt the very existence of the Rule, with potentially far-reaching consequences for companies. Essentially, the Rule prevents a company from withholding disclosure of privileged documents from its own shareholder. Thus, under the Rule, a shareholder can force the company to disclose confidential legal advice, unless the advice concerns litigation with the shareholder. The Rule can have uncomfortable consequences for company directors, for example in situations where their own conduct comes under scrutiny in proceedings by its shareholders.

As a result, this High Court judgment will be welcomed by company directors because it significantly limits the situations where companies may be compelled to disclose privileged information to shareholders.

The facts of the case

It was alleged that Glencore PLC and its former directors engaged in misconduct, including oil price manipulation and irregularities in its subsidiaries’ operations in Africa and South America. Aabar Holdings SARL and others claimed that Glencore’s IPO prospectus and subsequent disclosures were misleading, causing them investment losses. The claimants sought remedies under the Financial Services and Markets Act 2000.

The High Court had to answer whether Glencore could assert privilege over communications in these proceedings, or whether the Rule prevented this? Glencore challenged the Rule, arguing it was outdated, unprincipled, and should no longer apply.

Why did the Shareholder Rule not apply?

The Rule was based on the idea that shareholders held a proprietary interest in their property, and therefore the company could not withhold privileged communications from them.

Earlier authorities, such as Salomon v A Salomon & Co Ltd [1897], established that a company is a separate legal entity distinct from its shareholders. In Salomon, it was decided that this principle undermines the proprietary interest rationale, as shareholders no longer have ownership rights in the company’s property.

In Aabar Holdings SARL, Picken J reviewed previous authorities and concluded that the Rule was perpetuated without careful scrutiny and could no longer be justified on proprietary interest grounds.

He also rejected the argument that the Rule could be justified on the alternative basis that it was a standalone species of ‘joint interest privilege’. He added that “the concept of joint interest privilege as a freestanding or standalone species of privilege is not supported by the authorities”; and is an “umbrella term” or “convenient shorthand” that has been used in previous cases to describe a variety of different situations in which one party is unable to assert privilege against another party on narrower and more conventional grounds.

Even if there was a general concept of joint interest privilege, there was no justification for that concept to extend to the company/shareholder relationship, and to prevent a company from asserting privilege against its own shareholder.

The impact of this judgment

• Companies: the ruling will be a relief for companies, as it allows them to assert privilege over legal advice. It recognises the need for confidentiality when companies seek advice on issues such as governance, asset sales, or market disclosures, even if such decisions later lead to shareholder disputes.
• Shareholders: in disputes with companies, they will find it harder to access privileged documents. This could impact their ability to bring claims or challenge decisions through unfair prejudice petitions.

This decision strengthens protections for companies and highlights the evolving nature of shareholder litigation. It allows a balance between transparency and confidentiality.

If you have a question about shareholder disputes, please contact Garry Turkie.