When a client seeks legal advice from a lawyer, the confidential communications between them, which are made for the sole or dominant purpose of seeking and receiving legal advice, are protected by legal professional privilege. This means that, subject to some very limited exceptions, the legal advice is protected from disclosure to third parties. The law considers that legal professional privilege is fundamental for the administration of justice since it allows clients to obtain advice effectively and without fear that the same may be disclosed to others.
For many years, however, it was understood that a “shareholder rule” existed under English law so that a company could not assert privilege in company advice against the shareholder except in relation to documents that came into existence in connection with hostile litigation between company and shareholder. Accordingly, and particularly in a litigation context, company advice on matters that were relevant to the issues in dispute (but which was not obtained by the company in connection with the litigation) was said to be disclosable to the shareholder.
Within the past year, the courts have effectively snuffed out the “shareholder rule”, finding that it does not exist in any form under English law: See Aabar Holdings SÁRL v. Glencore PLC & Ors and the recent Privy Council decision in Jardine Strategic Limited (Appellant) v. Oasis Investments II Master Fund Ltd & Ors (Respondents) No 2 (Bermuda). In short, companies are entitled to assert privilege against their own shareholders to prevent information that is privileged to the company being disclosed.
What does this mean for UK companies and shareholders?
- Business as usual: A point noted in the recent decisions is that the relationship between company and shareholder is essentially one of contract which is set out in the company’s articles of association and any other contractual document made between them such as a shareholders’ agreement. Shareholders are, generally speaking, restricted in what information they can access from the company on a day-to-day basis either contractually — in accordance with the articles and/or shareholders’ agreement — or pursuant to shareholders’ statutory rights, which grant limited right of access to and/or inspection of company information such as directors’ service contracts and the register of members and a company’s annual accounts and reports. The “shareholder rule” being found to no longer exist does not affect the existing contractual and statutory rights that shareholders have to company information.
- Comfort for companies: As shareholders can no longer assert that the “shareholder rule” entitles them to disclosure of legal advice, companies can take comfort in knowing that they can generally seek and obtain legal advice as required without the risk that such advice may later need to be disclosed to shareholders (provided that privilege has not since been waived or otherwise lost).
- Share with care: Notwithstanding it being clear what information shareholders may access under the articles, any shareholders’ agreement, or pursuant to their limited statutory rights, shareholders may nonetheless seek access to information that is privileged to the company. In some circumstances, there may be good reasons for the company to share such information, but this warrants careful consideration, not least because of the risk that by sharing the advice with a shareholder, the company may effectively waive privilege in the advice as against third parties. If the company is content to share legal advice with a shareholder, then it can do so, but, crucially, any such sharing needs to be done in a controlled and careful way with restrictions on the use of the material in order to seek to preserve privilege as against third parties. This care should extend to situations in which legal advice may be discussed in board meetings when shareholder directors and/or observers are present.
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