Has the English court signalled the end of the Shareholder Rule?

In a recent judgment¹ that will be of interest to companies and shareholders alike, the English Commercial Court held that the long-established Shareholder Rule is “unjustifiable and should no longer be applied”, which means that a company can now refuse to disclose documents to its shareholders on the basis of privilege. This also now brings English law into line with most of the Commonwealth.

What is the Shareholder Rule?

The Shareholder Rule was created over 100 years ago in the case of Gourand v Edison Gower Bell Telephone Co of Europe Ltd [1888] 57 LJ Ch 498 and effectively prevented a company from withholding disclosure of documents from its shareholders on the basis of legal privilege, except where those documents came into existence for the purposes of litigation between the two. The reasoning behind the Rule being that shareholders have a proprietary interest in the company’s assets, including the advice provided to it.

However, in the seminal case of Salomon v Salomon & Co Ltd [1897] AC 22 a decade or so later, the House of Lords held that a company was an entity in its own right – thereby having a potential impact on the Shareholder Rule, as the beneficial interest basis fell away. However, the court did not examine the impact on the Shareholder Rule, or in the cases that followed for nearly a century until very recently when doubt was cast on its continued application in the case of Various Claimants v G4S Plc [2023] EWHC 2863 (Ch). In this case, the claimants argued that the Shareholder Rule should be available to the owners or intermediated securities and in the context of ss. 90 and 90A Financial Services and Markets Act 2000 (FSMA) claims and not just to registered owners alone. In that case, the court concluded that the Shareholder Rule existed but declined to extend it beyond legal owners as it was for parliament rather than the judiciary to seek to legislate any changes in the law.

The case of Aabar Holdings SARL v Glencore Plc and others [2024] EWHC 3946 (Comm) is therefore the first time that the court has analysed and rejected the Shareholder Rule. 

Background

The claim was brought by Aabar Holdings S.à.r.l (Aabar), which was the sole shareholder of Commodities S.à.r.l. (Commodities), which in turn was the ultimate beneficial owner of shares in Glencore Plc (Glencore).  

Aabar, along with others, brought what was, in effect, a class action under section 90 and 90A FMSA against Glencore in connection with losses incurred as a result of alleged misconduct by Glencore’s subsidiaries in various countries and oil price manipulation in US ports, for which Glencore incurred some USD $1.4 billion in fines. Aabar claimed that Glencore’s misconduct had also led to mis-statements and omissions in Glencore’s public documents, causing losses on their investments.

During the course of the proceedings, Glencore claimed privilege over documents. Aabar argued that the Shareholder Rule did not apply, and that the documents should be disclosed. This was the issue before the High Court, and the subject of this article.

The parties agreed to have the issues of privilege determined at an interim hearing, which was heard in the specialist Commercial Court’s Financial List by Mr Justice Picken. At that hearing, the court determined a number of questions, the key points from which are, for the purposes of this article:

Whether the Shareholder Rule continues to exist in English law?

On this issue, the court decided that the Shareholder Rule does not exist under English law stating that it is ” unjustifiable and should no longer be applied”. This was on the basis that:

• the Salomon case established that a company is a separate legal entity and distinct from its shareholders; and
• there was no binding authority requiring it to hold that the Shareholder Rule could be applied via joint interest privilege, as between the shareholder and the company.

The court also held that if the Shareholder Rule did exist, that it would apply to investors, such as Commodities, in the same way it would to direct shareholders.

If the Shareholder Rule did exist, to which categories of privilege would it apply?

The court, by way of an additional comment (obiter), also took the opportunity to hold that if the Shareholder Rule did exist that it would only apply to legal advice and litigation privilege, and not to without prejudice privilege, which would involve a third party in addition to the company and shareholder. 

Joint Interest Privilege

The judgment also comments on the existence of joint interest privilege, which it notes is not supported by case law, and categorised it as merely an “umbrella term”, and not a concept in its own right. Further, that if it did exist, it would not apply to a situation between a company and its shareholder, as is the case here.

HFW Comment

This ruling is a major development in the law surrounding privilege relating to companies and their shareholders, with particular application to securities class actions. 

The change of direction in this judgment sways in favour of companies and may significantly impact shareholders being able to obtain disclosure of key documents prior to commencing litigation against companies.

However, this is a first instance court judgment reversing a rule that has been accepted law for over 100 years and, at the time of writing this article, is currently being appealed.

With thanks to Alexandra McCulloch for their contribution to this article.

Footnotes

1. Aabar Holdings SARL v Glencore plc and others [2024] EWHC 3946 (Comm)