The Judicial Committee of the Privy Council has delivered its judgment in Jardine Strategic Limited v Oasis Investments II Master Fund Ltd and 80 others (No 2) (Bermuda) abolishing the centuries old so-called “Shareholder Rule”, which prevented companies from asserting legal advice privilege against their own shareholders to avoid providing those documents in the context of a disclosure exercise in litigation (save where litigation privilege applied). 

The Privy Council held that the rule is unjustifiable and should no longer be applied. It has also made a Willers v Joyce direction that this decision should be followed by the courts of England and Wales.

Background

The case arose from the 2021 amalgamation of Jardine Strategic Holdings Ltd and JMH Bermuda Ltd, which resulted in the cancellation of all shares in Jardine Strategic and the formation of Jardine Strategic Limited (the Company). The Company was required to pay fair value for the cancelled shares to the shareholders who voted against the amalgamation. These dissenting shareholders, dissatisfied with the US$33 per share offered as “fair value”, triggered the statutory appraisal mechanism under the Bermuda Companies Act 1981, seeking a court determination of the fair value of their shares.

During the ensuing litigation, the dissenting shareholders sought disclosure of legal advice received by the Company in setting the $33 per share value. The Company resisted, asserting legal advice privilege. The shareholders, however, purported to rely on the Shareholder Rule, contending that, as shareholders, they were entitled to see legal advice paid for out of company funds, except where the advice was obtained for the purpose of hostile litigation.

Both the Chief Justice and the Bermuda Court of Appeal accepted the existence of the Shareholder Rule, albeit with some nuance, and ordered disclosure of certain privileged documents. The Company appealed to the Privy Council.

The origins of the shareholder rule

The Shareholder Rule has recently been criticised in the High Court judgement Aabar Holdings SARL v Glencore PLC & ors [2024] EWHC 3046 (Comm) (Aabar), in which Picken J found the rule to be unjustifiable and considered that it should be abolished (for further analysis of this decision see Privilege in corporate disputes: there is no "Shareholder Rule" ). Picken J had granted leave to leap-frog the appeal of his judgement to the Supreme Court, however the Supreme Court declined to hear the appeal because the Shareholder Rule was already due to be considered by the Privy Council in this appeal. 

The Privy Council examined the origins of the Shareholder Rule, analysing early case law from the 19th century, and found the original justification for the Shareholder Rule to be that the shareholders, as the owners of the company’s funds, had paid for the legal advice and were therefore entitled to see it (in other words, they had a proprietary interest in it). Following the same logic as Picken J in Aabar, the Privy Council gave short shrift to the proprietary basis, which they said was “wholly inconsistent” with the separate legal personality of companies established in Salomon v Salomon [1897] AC 22 and confirmed in BTI 2014 LLC v Sequana SA [2022] UKSC 25, [2024] AC 211. The fact that a company has separate legal personality to its shareholders means that the shareholders have no proprietary interest in the funds used to pay for the legal advice. 

Joint interest privilege: a flawed alternative

Counsel for the respondents (i.e. the dissenting shareholders) argued as an alternative basis for the Shareholder Rule that where the interests of a company and its shareholders are aligned, joint interest privilege applies. The respondent further submitted that, provided a company is solvent, most things which are good for a company’s business will go to the value of the shares and as such their interests will generally align. 

The Privy Council rejected this argument, finding it to be an inapt oversimplification. Shareholders themselves are not a cohesive group with aligned interests: in this case there was a clear divergence between the interests of the majority and the minority shareholders. Furthermore, directors increasingly have to consider the interests of other stakeholders such as the company’s workforce, suppliers, and customers. The Privy Council highlighted that when directors of large, modern corporations face difficult decisions which require balancing the interests of different stakeholders, it is key that they can obtain candid and confidential legal advice. 

Kawaley LJ in the Bermuda Court of Appeal had attempted to salvage the Shareholder Rule by presenting a more nuanced, fact-specific approach, requiring shareholders to demonstrate a sufficient joint interest in the subject matter of the legal advice on the particular facts. The Privy Council rejected this as well, holding that a fact-sensitive test would create unacceptable uncertainty in an area where there needs to be a bright line. Directors would never truly know if they could seek legal advice in confidence, without the risk that privilege will later be overridden by a court’s retrospective assessment of the parties’ interests and would likely take the blanket view that they could not obtain legal advice in confidence. 

Implications

Ultimately the Privy Council rejected the Shareholder Rule. They described it as a rule without any justification and “like the emperor wearing no clothes in the folktale, it is time to recognise and declare that the [Shareholder Rule] is altogether unclothed”.

This decision has practical consequences for both companies and shareholders.

• The decision brings much-needed certainty to the law of privilege in the corporate context, aligning it with the principle of separate legal personality and the modern commercial reality where directors are balancing the interests of multiple different stakeholders. 
• Directors of companies can now seek and obtain legal advice in confidence, without fear that such advice will later be disclosable to shareholders in unforeseen litigation with them. This is particularly important for companies with large, constantly changing shareholder bases, and for companies facing activist or adversarial shareholders.
• Shareholders bringing claims against companies will no longer be able to rely on the Shareholder Rule to access privileged legal advice obtained by the company. Their rights to disclosure of privileged documents in litigation will be limited to the usual exceptions to privilege.