Rupert Wheeler
The Shareholder Rule is dead. The longstanding exception to legal professional privilege – namely that it cannot be claimed by a company in litigation against its shareholders – has been abolished by the Judicial Committee of the Privy Council in Jardine Strategic Limited v Oasis Investments II Master Fund Ltd & Ors [2025] UKPC 34. Despite being a Bermudian case, the Board took the exceptional step of directing its decision to apply in England and Wales. The judgment consequently has broad implications and is vital reading for any company law practitioner.
Background
Two Bermudian companies within the Jardine Matheson group, Jardine Strategic Holdings Ltd (“Jardine Strategic”) and JMH Bermuda Ltd, amalgamated to form Jardine Strategic Limited (“the Company”). The shares in Jardine Strategic were cancelled, but shareholders who had objected to amalgamation (“the shareholders”) were entitled to receive payment of fair value from the Company in lieu. Following legal advice, the Company calculated the fair value to be USD$33 per share. The shareholders were unsatisfied with this figure. They applied to the court for determination of the fair value of the shares.
During the litigation, the shareholders sought disclosure of the legal advice received when assessing the USD$33 share value. The Company objected on the basis that the advice was protected by legal professional privilege. The shareholders submitted that they were exempted from the ordinary rules of privilege by virtue of the “Shareholder Rule”. In short, this exception to privilege was available where the party seeking access to the documents was a shareholder at the time the advice was sought or received.
Both the Bermudian Supreme Court (equivalent to the English High Court) and Court of Appeal upheld the shareholders’ contention that the Company was not protected by privilege. The Company appealed to the Board.
The Shareholder Rule
Woodhouse & Co Ltd v Woodhouse (1914) 30 TLR 559 contains the classic statement of the Shareholder Rule: “Where a company obtained [legal] advice in the common interest and paid for it out of the common fund, undoubtedly the shareholder would have a right to see it” (per Lush J).
The historic justification of the rule was proprietary: shareholders are entitled to see legal advice paid out of company funds because they contributed to that fund. This was by analogy to the Trustee Rule, whereby trustees cannot assert privilege against beneficiaries who have, indirectly, paid for the advice out of trust funds. Though the proprietary justification did not disappear, in recent decades the rule has also been justified due to a perceived joint interest between a company and its shareholders.
The Board’s Decision
The Board held that “the Shareholder Rule forms no part of the law of Bermuda” and “ought not to continue to be recognised in England and Wales either” (at [80]).
This was because (i) the proprietary justification is irreconcilable with the correct analysis that a company is a separate legal person with its own assets and liabilities (Salomon v Salomon [1897] AC 22), (ii) there is not an invariable common interest between a company and its shareholders that justifies an automatic exception to privilege based on the “shareholder” status, and (iii), in reality, there is often a divergence of interests between the company and its shareholders ([80]-[90]). Accordingly, the Shareholder Rule lacks a cogent justification and should be abandoned.
Comment
This judgment is of vital importance to practitioners representing litigants in shareholder disputes. Clients should be advised that the exception to privilege is no longer available. In addition to this significant practical change, the judgment has a number of other striking features.
First, the whole basis of the original proprietary justification has been exposed as shaky at best. It appears to have first been established in Gouraud v Edison Gower Bell Telephone Co of Europe (1888) 57 LJ Ch 498, where Chitty J applied the Trustee Rule by analogy, holding that it “applies as between a shareholder and the directors who manage his property, when the [advice is] paid for out of his property.” However, as the Board identified, Chitty J’s reasoning had no real basis beyond a sole obiter comment in Bristol v Cox (1884) 26 Ch D 678, where Pearson J speculated that such an argument might be viable on certain facts (which were not before him). Despite this, Chitty J’s judgment became a precedent relied upon without question for almost 100 years. This is difficult to understand in retrospect, especially when the case that led the Board to reject the rule – Salomon – was itself decided only nine years after Gouraud. It is surprising that the rule was not abandoned sooner.
Second, the Board took the unusual step of making a Willers v Joyce[1] direction, such that Jardine Strategic is now binding in England and Wales despite being a Bermuda case. This goes further to emphasise the rule’s flaws.
Conclusion
The abolition of the Shareholder Rule marks a sea change to this important area of company law. Some shareholders will doubtless mourn its loss. However, this would be shortsighted. The decision represents a strengthening of legal professional privilege which, as the Board made clear, is both a human right and “a fundamental condition on which the administration of justice as a whole rests” (at [20]). This enhancement should be welcomed.
[1] [2016] UKSC 44