English High Court overturns ‘shareholder rule’ in landmark privilege case

The judgment addressed a number of important privilege-related issues, with a focus on the so-called shareholder rule. Those issues arose in the context of a securities litigation case against a UK listed company.

Under the shareholder rule, which originated in the late 19th century, it was considered that a company could not withhold documents from its shareholders on grounds of privilege, unless they were created for the purpose of a hostile dispute between the company and those shareholders. This rule has been questioned for some time, with another decision last year also casting doubt on whether the rule could be justified. The latest decision on this point has, for the first time, made a more definitive statement that the rule should no longer be followed. This strengthens companies’ ability to protect their confidential legal advice from being disclosed to shareholders.

Emilie Jones, litigation expert at Pinsent Masons, said: “As a result of this judgment, the starting point would be that companies in litigation with their shareholders should not be obliged to disclose to them the company’s privileged communications, even if they were not created for litigation with those shareholders.”

She said that this ruling is particularly important in the growing area of UK securities litigation, which, broadly speaking, involves shareholders suing listed companies for losses claimed to have been suffered in the value of their shareholding as a result of incorrect or missing information in the company’s public reports.

“If companies facing this type of claim cannot assert privilege against the shareholder claimants, they will potentially have to disclose greater amounts of sensitive corporate information, such as legal advice given to the company about issues it was navigating at the time of the statements in question, or about how to present those statements,” she said.

This is increasingly relevant in the ESG area, as large public companies are required to publish sustainability reports and conduct due diligence to comply with a growing number of regulations, including the EU’s Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D). Statements, or the absence of statements, by companies about ESG-related matters are expected to be fertile ground for securities claims. For example, a company that fails to make adequate disclosures about worker rights issues in its supply chain may face claims from shareholders if an investigation makes those issues public and there is a drop in the company’s share price.

“There is at least one case in which allegations along these lines are made currently before the English courts. If a company is not entitled to assert privilege against shareholders during such litigation, it may have to disclose, for example, legal advice which it received relating to its supply chain due diligence and disclosures.  Sustainability reporting and due diligence processes will generate significant amounts of internal communications, and companies will wish to preserve privilege in such communications where it exists, such as where the communications contain legal advice,” she added.

While this decision may be welcomed by companies, it may not be the final determination on this issue. According to Jones, an appeal is possible given the importance of the point, and there is also other ongoing litigation before the courts in which the shareholder rule is being examined.

“If the rule is found to continue to exist and apply contrary to this latest decision, further case law may provide clarity as to its scope. There have been several areas of uncertainty as to the application of the rule, such as whether the rule, if it exists, applies to indirect as well as direct shareholders. The judge in this case thought that it could do,” said Jones.

Given the continued uncertainty in this area, businesses, particularly those undertaking sustainability reporting and due diligence exercises, are advised to remain cautious and take steps to protect communications.

“Businesses should remain mindful that internal communications may be disclosable in any dispute and therefore maintain good processes and protocols around the types and contents of communications generated within the business. They should also put themselves in the best possible position to assert privilege over communications where this protection may be available, for example by escalating issues which arise to lawyers for their advice, swiftly and without potentially damaging subjective comment,” she said.