Jardine Strategic: Privilege and the Shareholder Rule

In a Nutshell

The Privy Council (“PC”) has abolished the longstanding (but somewhat controversial) rule that a company could not claim privilege against its shareholders (the “Shareholder Rule”) in discovery proceedings. This decision brings welcome comfort to companies and directors who can now obtain legal advice with reasonable certainty that it will be protected by privilege in the event of future litigation with shareholders. This is a significant reshaping of the disclosure dynamics both in shareholder disputes and merger appraisal actions. This decision is binding on the Cayman Islands courts.

Background

This decision was from an appeal to the PC from a decision of the Court of Appeal of Bermuda. The appeal arose in the context of appraisal proceedings commenced pursuant to the Companies Act 1981 of Bermuda (the “Fair Value Proceedings”).

The issue on appeal was whether Jardine Strategic Limited (“Jardine”) could assert legal professional privilege against its shareholders over legal advice relating to the take private transaction that formed the basis for the appraisal proceedings. The dissenting shareholders claimed that it could not, relying on the “Shareholder Rule”.

The origins of the Shareholder Rule are found in Gouraud v Edison Gower Bell Telephone Co of Europe Ltd². The rule was found to exist by analogy to the relationship between trustees and beneficiaries; being that shareholders could be said to have a proprietary interest in the company’s assets, including legal advice obtained from use of company monies.

At first instance, relying on the Shareholder Rule, the Chief Justice of Bermuda dismissed Jardine’s claim for privilege provided that the plaintiffs were shareholders during the relevant time. The Court of Appeal of Bermuda dismissed Jardine’s appeal, holding that there was no reason for the Shareholder Rule not to apply in Bermuda.

On its appeal to the PC, Jardine not only challenged the transposition of the Shareholder Rule to Bermudan law but also argued that the Shareholder Rule should no longer be recognised as forming part of English law – i.e. that it should be abolished all together.

Issues

There were four issues that fell to be considered by the PC:

1. Whether the Shareholder Rule should continue to exist in some form (either in the traditional sense or to provide shareholders with a joint interest in legal advice obtained by the company in Fair Value Proceedings)?
2. Alternatively, whether a former shareholder has a right to rely upon such joint interest privilege in relation to advice obtained during the time when they were a shareholder?
3. Alternatively, whether such joint interest can be relied upon by:
   1. a beneficial owner without legal title to the shares; and/or
   2. an individual who acquired shares after the legal advice was obtained.
4. Whether the joint interest ceases to apply from the date when the company can establish a claim to litigation privilege, rather than from the date when the interests between the parties become adverse?

Decision

The PC abolished the Shareholder Rule. On the issues to be considered it held as follows:

Issue 1: The Shareholder Rule was without justification and should be removed. At [82] Briggs LJ and Rose LJ stated:

“The status-based automatic Shareholder Rule is therefore now, and in truth has always been, a rule without justification. Like the emperor wearing no clothes in the folktale, it is time to recognise and declare that the Rule is altogether unclothed.”

The rule had no proper legal foundation, mistakenly assuming shareholders have a proprietary interest in the company’s documents. The PC endorsed the reasoning of Nugee J (as he then was) in Sharp v Blank³, concluding that the original justification for the Shareholder Rule was one of proprietary basis, not joint interest. The PC found it untenable to adopt a rule that would automatically deny legal professional privilege in all cases between a company and its shareholders, particularly, as there is not always a clear community of interest between them, whether collectively or, a fortiori, individually. The PC concluded that such a rule should never have existed and allowed Jardine’s appeal, affirming that legal advice privilege applies fully in shareholder disputes, including appraisal litigation.

The PC also considered the scope (if any) of the joint interest privilege enjoyed by shareholders over legal advice obtained by Jardine. It held that the company shareholder relationship does not fall within the general principle of joint interest privilege, which prevents trustees or companies from asserting legal privilege against beneficiaries.

It was noted that, on its own, the company shareholder relationship does not provide a sufficient analogy with other fiduciary relationships (as one of a growing family including principal and agent, trustee and beneficiary, joint venturers and various insurance-based relationships) as to justify its inclusion within the joint interest family of relationships. It reasoned that the mutuality of interest between a solvent company and its shareholders was not exhaustive, on the basis that their aims are not necessarily ultimately aligned, especially among different classes of shareholders or other stakeholders that may have competing interests.

Issue 2: The PC did not make a final determination on Issue 2 because it concluded that the Shareholder Rule did not apply and that the plaintiffs (former shareholders) had no right of access to the privileged documents in this case. The question of whether, (in the absence of the Shareholder Rule), a former shareholder’s right to access privileged documents as a result of joint retainer privilege was left to be determined in the context of joint retainer privilege in a future case.

Issue 3: This issue raised several related questions concerning the scope of joint privilege (citing the Shareholder Rule) in the context of company shareholder relationships. Specifically, the PC was asked whether such privilege could be asserted by (i) beneficial owners lacking legal title and/or (ii) individuals who acquired their shares after the relevant legal advice was obtained. Given the abolition of the Shareholder Rule, these questions no longer required determination.

Issue 4: In light of the above, the question of the relevant cut-off for the application of the Shareholder Rule was rendered “otiose” by the PC.

The PC also made a Willers v Joyce⁴ direction so that the abolition of Shareholder Rule will be binding across the courts of England and Wales.

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¹ [2025] UKPC 34
² (1888) 57 LJ Ch 498
³ [2015] EWHC 2681 (Ch)
⁴ [2016] UKSC 44