Shareholder Rule Consigned to History as an ‘Emperor Who Has Worn No Clothes’
The long-established Shareholder Rule has been abolished, strengthening the separate identity and rights of a registered company as a legal person in its own right. So what does this legal ruling mean for directors and shareholders?
This is a landmark decision, in which the Judicial Committee of the Privy Council! unanimously concluded that the Shareholder Rule, an established principle of company law since 1888, is outdated - “like an emperor who has worn no clothes”.
The essence of the Shareholder Rule is that companies were prevented from relying on legal professional privilege against shareholders/former shareholders in the course of litigation, subject to exceptions.
What’s the background?
This case involved a shareholders’ rights dispute in Bermuda following the amalgamation of two companies. The shares in one of the companies were cancelled, and the new company was required to pay fair value for those cancelled shares to shareholders who had voted against the proposed transaction. Their shares were cancelled when the transaction was approved at a shareholders’ general meeting.
Some of the shareholders brought a claim under the Bermuda companies law arguing that they had not been paid fair value.
At issue for the Privy Council was whether the claimants were entitled to see the legal advice obtained by the new company when it set the fair value. This was important as the claimants were seeking disclosure of various documents; however the company asserted legal professional privilege, in particular by legal advice privilege, over the documents.
The Shareholder Rule
The scope of the rule, the Privy Council clarified, was:
Legal advice sought by the company once litigation is contemplated or underway is protected from inspection and not covered by the Shareholder Rule.
The Shareholder Rule would override privilege only in the context of a discovery exercise in litigation in which the company and the shareholders or former shareholders are involved.
There is no shareholder rule in Bermuda, but it was the view of the appeal court that there was no reason why it should not also apply in Bermuda.
The company appealed, arguing that the Shareholder Rule should no longer be recognised in English law. So, a key issue for the Privy Council was whether or not the Shareholder Rule should even continue to exist in some form.
In a unanimous decision, the Privy Council allowed the appeal. It confirmed that the Shareholder Rule does not exist in Bermuda; and went on to formally abolish it in England and Wales too.
The concept of legal professional privilege has long been held to be a fundamental to the administration of justice. The Privy Council stated that the 140-year-old justification for the Shareholder Rule – one of the few exceptions to privilege – reflected an antiquated principle that the shareholders have a proprietary interest in the assets of the company, and therefore have the right to see any legal advice funded by those assets and obtained prior to the dispute arising.
But such justification does not reflect the modern reality of corporate legal personality and the separate interests of the shareholders. In the corporate context, there is a fundamental right to seek legal advice in confidence.
The Privy Council made a declaration that its decision to abrogate the Shareholder Rule for the purpose of litigation should be regarded as binding on the courts of England and Wales.
What does this mean?
This is landmark decision abolishing a clearly outdated law for good reason. It means companies can be more confident in securing the legal advice they need to support future disputes involving shareholders, and provides greater certainty for directors.
But it means shareholders involved in litigation with the company have now lost a long-established right to disclosure of documents covered by litigation privilege. Even so, the decision places shareholders on a level playing field with any other party involved in litigation.
1Jardine Strategic Limited v Oasis Investments II Master Fund Ltd and 80 others (No 2) (Bermuda) [2025] UKPC 34
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