The Shareholder Rule Under Scrutiny

The ‘shareholder rule’, a principle that a company cannot assert privilege against its own shareholders, save in certain circumstances, had been recognised in English law for over 135 years.

However, the English High Court in Aabar Holdings Sarl v Glencore plc & ors [2024] EWHC 3046  (Aabar decision) has held that the rule should no longer be applied as there is no justification for “a blanket-type rule which operates to prevent companies from asserting their fundamental right to legal professional privilege”.

In this latest article in our corporate disputes series (see our earlier briefings on derivative actions here and fiduciary duties owed to an employer here), we will consider the possible implications of the Aabar decision and the position in Ireland.

What is the Shareholder Rule

Under the shareholder rule, a shareholder is entitled to disclosure of confidential legal advice given to the company, unless that legal advice is in respect of threatened or actual litigation between the shareholder and the company.

Its original rationale was based on shareholders having a proprietary interest in company assets. However, more recently it has been applied on the basis that a company and its shareholders have a joint interest in communications relating to the administration of the company so that a ‘joint interest privilege’ applies preventing one from asserting privilege against the other.

Aabar Decision

The English Commercial Court found that there was no justification for the shareholder rule and it should no longer be applied. 

The court confirmed earlier authorities which held that the shareholder rule could not be justified on the basis of there being a proprietary interest as the company is a separate legal entity to its shareholders and holds property for itself.  

Significantly, it went on to find that the authorities did not support a finding that joint interest privilege exists as a standalone type of privilege but even if it does, there is no basis for it applying to the relationship between shareholder and company. In making this finding, the court observed that:

• there is nothing in the company/shareholder relationship to justify a conclusion that a company be deprived of the right to keep legal advice privileged. Shareholders have no proprietary interest in the company’s assets and it is not to the shareholders that directors owe their duties. It is to the company;

• arguments that a shareholder’s interests are in general aligned with the company’s or that the shareholders have a direct economic interest in the company’s performance are not sufficient to override a company’s fundamental right to keep its confidential legal advice private. If it were, a company would be unable to assert privilege in a variety of other situations and against numerous other parties;

• a shareholder’s legal and economic interest is comprised of its contractual rights against the company under the company’s articles of association and shareholders do not generally have any rights to access the company’s documents;

• from a practical perspective, large public companies (like the defendant in this action) will have thousands of shareholders, who constantly change and whose interests will vary widely. As such, it was difficult to fathom a joint interest between all these shareholders and between them and the company; and

• the shareholder rule risks undermining the public policy rationale for legal professional privilege as it would potentially discourage directors from seeking legal advice because of concerns that it might be seen by a large number of third parties whose identities may not even be known at any given point in view of the changing make-up of the shareholder community.

The court went on to make a number of further rulings if, contrary to its main finding, the shareholder rule did exist, namely in respect of inter alia non-registered shareholders and documents belonging to subsidiarity companies.  

Position in Ireland

The Irish courts have applied the concept of ‘joint interest’ when considering the question of whether shareholders are entitled to legal advice given to the company.

In Carlo Tassara Assets Management S.A. v Éire Composites Teoranta & ors [2016] IEHC 103, the High Court opined that in principle legal advice obtained by a company in respect of a proposed course of action, even if it is anticipated that those actions, if taken, might give rise to litigation, is advice which a shareholder who claims that such actions amount to oppression should be entitled to see. This is because a shareholder has a joint interest with the company, the directors and management, in obtaining such legal advice. However, legal advice sought after the actions in dispute have been taken and when proceedings are in contemplation is less likely to be of joint interest and so is more likely to attract privilege.

As such, the time at which the legal advice is sought is a crucial factor and the court held that where the company and the shareholder were “sundered” by litigation, the joint interest of shareholders and the company in accessing legal advice given to the company ceases to exist.

In The Matter of Brock Delappe Ltd [2023] IEHC 318 the defendant company and shareholders sought an injunction to prevent the plaintiff shareholder from using or disseminating certain documents over which they claimed privilege.  The court held that the plaintiff, as a director and shareholder, was entitled to see legal advice given to the company at a time when no proceedings between him and the company were threatened or instituted. The fact that the plaintiff may have considered joining the company to proceedings against the other shareholders for the purpose of making it amenable to a court order did not preclude the plaintiff shareholder from having an entitlement to access the advice given to the company. However, privilege did apply in respect of documents containing advice to the company on anticipated hostile proceedings against the company, while the defendant shareholders were entitled to claim privilege in their own right in respect of legal advice which they received in their personal capacities.

Implications of the Aabar Decision

The Aabar decision has not yet been considered by the Irish courts and indeed, it is under appeal in the UK. However, the judgment will be a concern for shareholders as it raises doubts as to their ability to access company documents, which may hinder their attempts to fully consider contentious company actions and decisions.

In Ireland to date, a split between a shareholder and the company being caused by litigation is the key factor in determining if privilege applies. This is consistent with the shareholder rule, as the exception to the rule allowed privilege to be maintained by the company where there was hostile litigation between the company and shareholder. However, if the Aabar decision were to be followed in Ireland, legal advice given to the company before this tipping point may also be denied to shareholders.

Shareholders will undoubtedly consider that this lessens transparency in terms of their ability to scrutinise the company, the result of which could be to undermine the ability of shareholders to take legal action against a company.

On the other hand, it is a well-established principle in Irish law that unless it is waived, legal professional privilege is absolute and the Aabar decision, if followed here, will strengthen its application and provide comfort for companies and their directors on the confidentiality of legal advice obtained.