Court overturns privilege ‘shareholder rule’ in welcome development for companies

The judgment saw the Judicial Committee of the Privy Council unanimously overturn a long-standing principle known as the “shareholder rule” which prevented companies from asserting privilege against shareholders except in limited circumstances. The landmark ruling is likely to have important implications for corporates in both Bermuda, where the dispute arose, and the UK.

Tom Aries, commercial litigation specialist at Pinsent Masons, said: “Importantly, this decision recognises that shareholders will, at times, have diverging interests to those of companies. Companies must consider and balance the perspectives of different shareholders and of other stakeholders – such as funders, employees, and others – whose interests may not align with those of shareholders. The judgment therefore rightly underscores the separate legal identity of companies and highlights that continuing to apply the rule could have discouraged companies from seeking candid legal advice on complex decisions.”

The case stems from the 2021 amalgamation of two companies within the Jardine Matheson group – Jardine Strategic Holdings Ltd and JMH Bermuda Ltd. The merger resulted in the cancellation of all shares in Jardine Strategic Holdings, with the newly formed entity, Jardine Strategic Limited, obligated to pay “fair value” for those cancelled shares to dissenting shareholders under the Bermuda Companies Act 1981.

A total of 81 shareholders, including Oasis Investments II Master Fund Ltd, challenged the valuation of US$33 per share offered by the company. They initiated appraisal proceedings in Bermuda’s courts, seeking a judicial determination of the fair value of their shares.

As part of the litigation, the shareholders sought disclosure of legal advice received by the Jardine Matheson group during the valuation process. Jardin Strategic resisted, citing legal advice privilege. The shareholders, however, invoked the so-called “shareholder rule”, arguing that a company cannot withhold privileged documents from its shareholders in litigation concerning their rights as shareholders.

The central question before the Privy Council was whether the shareholder rule formed part of Bermudian law and, by extension, whether it should continue to be recognised in England and Wales. The rule, historically rooted in English case law, had allowed shareholders to access privileged legal advice obtained by a company, except where the advice was prepared specifically in contemplation of litigation against those shareholders.

At first instance, the chief justice of Bermuda sided with the shareholders, ruling that Jardine Strategic could not assert privilege. The Bermuda Court of Appeal upheld that decision. Jardine Strategic then appealed to the Privy Council.

In a unanimous decision, the Privy Council allowed the appeal, holding that the shareholder rule does not form part of Bermudian law and should no longer be recognised in England and Wales either. The judgment emphasised that legal professional privilege is a fundamental right that protects the confidentiality of legal advice, noting that the shareholder rule was an anomaly that undermined this principle.

Andrew Herring, commercial dispute resolution expert at Pinsent Masons, said: “The decision confirms a significant obstacle for shareholder claimants pursuing claims against companies, including securities litigation. By permitting companies to assert privilege against shareholder claimants, the ruling enables companies generally to withhold disclosure of sensitive internal material such as, in the case of securities claims based on statements in corporate published material, legal advice received during the period in which the relevant statements were made or shaped. This may significantly curtail the evidentiary access available to claimants and, in turn, narrow the scope of claimants’ potential claims.”

The Privy Council has notably held that the rule should no longer be recognised in England and issued a so-called “Willers v Joyce direction”, which makes the decision binding on courts in England and Wales.

Emilie Jones, litigation expert at Pinsent Masons, said: “This is a significant step for the Privy Council to take and underscores the importance of this development. The shareholder rule has been doubted in England for some time, and this decision is likely to end that debate.”

“The confirmation that companies can generally assert legal professional privilege against shareholders shows the power of privilege as a protection for sensitive communications. It should therefore serve as another reminder to companies to ensure that they have good processes and practices in place to ensure that, where the protection of privilege is available for their communications, those communications are created and handled with care so as to maximise the chances that privilege will apply and be maintained,” she said.