Privilege series part 1: Privilege in shareholder disputes – is change afoot?

Our series focused on privilege considers issues encountered by practitioners across a range of dispute resolution specialities. This blog explores privilege in shareholder disputes.

Background

For over a century, it has been a well-established rule that a company cannot claim legal privilege against its own shareholders (Woodhouse & Co. Ltd v Woodhouse). This grants shareholders the right to access legal advice obtained by the company concerning its affairs. However, there is a recognised exception to this rule: if the legal advice pertains to actual or anticipated litigation between the company and the shareholder, the company can claim privilege.

This legal doctrine, known as the “shareholder principle,” was further clarified by the High Court in 2015 in Sharp and others v Blank and others. The court explained that the basis of this principle lies in the company-shareholder relationship, which has traditionally been compared to that of trustees and beneficiaries. This relationship suggests that shareholders should not be denied access to advice that was obtained at their expense and for their benefit—a rationale often referred to as the “common fund” argument, rooted in the Woodhouse case over a century ago.

Recent legal updates

The recent case of Various Claimants v G4S PLC has introduced a notable shift in judicial views on the shareholder principle, suggesting it should be reconsidered due to its "shaky foundation". This judgment emerged following the third case management conference, via an application by the Claimants challenging the Defendant’s assertion of privilege over certain documents. The Claimants, asserting their rights under the shareholder principle, argued that these documents should not be withheld.

The Claimants, consisting of both institutional shareholders and beneficial owners of shares in G4S Limited, contested the Defendant’s claim of privilege, which had been asserted some 20 months before the application. With only three Claimants directly registered as shareholders at the time the documents were created, the majority of Claimants were the ultimate beneficial owners of G4S’ shares through CREST, the ‘Certificateless Registry for Electronic Share Transfer’. CREST is the central securities depository for markets in the United Kingdom and for Irish stocks It operates an electronic system used to settle international securities, and crucially for the purpose of this decision, holds stock certificates on behalf of its customers.

Mr. Justice Green examined the applicability of the shareholder principle to these two distinct groups:

• On the question of privilege, Mr. Justice Green found that only the three directly registered Claimants were entitled to the documents in question.
• While previous case law, such as Sharp v Blank, granted non-registered shareholders access to privileged documents, Mr. Justice Green observed that there is no established authority supporting an extension of the shareholder principle to non-registered shareholders (such as shareholders whose shares were held via CREST).

The reasoning behind this decision rested on the notion that the shareholder-company relationship is no longer analogous to that of trustees and beneficiaries, which originally formed the basis of the shareholder principle. Mr Justice Green explained that a company is "totally separate from its shareholders and holds property for itself," with shareholders having "no direct interest in the company’s property," unlike trust beneficiaries.

Bound by precedents set in Sharp v Blank and Woodhouse, Mr. Justice Green expressed that broadening the “shaky” shareholder principle’s scope would be inappropriate, even while acknowledging the outdated nature of the trustee-beneficiary analogy. While the relationship has been extensively recognised in existing authorities, he suggested that only the Supreme Court could now overturn the shareholder principle due to its longstanding establishment in case law.

The 2024 case of Aabar Holdings S.À.R.L v Glencore PLC has brought fresh attention to the complexities surrounding the shareholder principle. In this instance, the Defendant informed the Claimants of its intention to seek a court declaration asserting its right to withhold privileged documents from them. The proposed declaration aimed to clarify that Glencore could indeed withhold such documents from its shareholders, unless privilege had been waived or otherwise forfeited.

Both Sharp v Blank and Various Claimants v G4S PLC were taken into consideration during the proceedings. With a two-day hearing scheduled to address this issue, we eagerly await the judgment on the implications for the shareholder principle.

In the meantime, companies and their legal advisers should continue to act with caution when it comes to the receiving and giving of legal advice, by always bearing in mind who it is for and for what purpose it is being obtained, and the risk that it may fall to be disclosed in the event of a shareholder dispute.

Update: Privy Council confirms the shareholder principle no longer applies in England & Wales.

Further information

If you have any questions regarding this blog, please contact Katie Allard in our Dispute Resolution team. 

About the author

Katie Allard is a Senior Associate in the Dispute Resolution Team. She has a wide-ranging commercial practice with particular interest and expertise in complex civil fraud and asset tracing investigations, boardroom and shareholder disputes, and breach of contract claims, acting for both claimants and defendants.