English High Court criticises and clarifies the 'shareholder principle' of privilege

The "rule" that a company cannot assert privilege against its shareholders unless the documents relate to litigation between the parties (the "shareholder principle") has been a useful tool for litigating shareholders and companies alike: allowing shareholders access to company documents that would not otherwise be available to them, and allowing companies in dispute with shareholders to seek privileged advice in relation to that dispute without the threat of being required to disclose it.

However, in a recent decision in Various Claimants v G4S Plc [2023], the High Court has both clarified and criticised the shareholder principle, questioning its legal basis in light of the realities of modern shareholding and clarifying that "without prejudice" privilege will not be caught by it (although confirming that both legal advice and litigation privilege are).

The judge's comments cover: an indication of the vulnerability of the current law of privilege between companies and shareholders; to ensure that the law remains practical and fit for purpose; and the arguments that companies might raise to withhold their privileged documents in future proceedings.  

'Shaky' foundations

In G4S, Mr Justice Green was critical of the shareholder principle in general, but was particularly doubtful about what he described as its "shaky" foundations – being the trustee-beneficiary analogy established by earlier authorities.

Past decisions, followed by later authorities such as Sharp v Blank established that the relationship between a company and its shareholders was analogous to the relationship between trustees and beneficiaries: if a trustee obtained advice funded by trust assets, then the beneficiaries, having indirectly paid for it, were entitled to see it. Applying the same principle to companies and shareholders, directors could not prevent disclosure to members of privileged advice which was paid for out of company funds.

Mr Justice Green's view was that the trustee-beneficiary analogy is no longer relevant – a company is "totally separate from its shareholders and holds property for itself." He further stated that shareholders have "no direct interest in the company's property" (unlike the beneficiaries of a trust) and so there is no basis on which to claim a right to see privileged documents paid for using that company property – that is, company funds.

Despite these misgivings and the lack of recent higher court scrutiny of the principle, the judge accepted that he was bound by the prior authorities, noting that the principle was now so well established that a Supreme Court decision would be necessary to overturn it.

As such, he then went on to consider various arguments raised by the parties.

Legal v beneficial shareholders

The claimants in G4S comprised a small number of registered legal shareholders and over 80 non-registered "ultimate beneficial owner" shareholders who held shares via CREST.

Although most listed shares were, therefore, now held by beneficial owners in uncertified form, since previous authorities had referred to legal owners only, the judge said that he was unable to expand the shareholder principle to allow those with beneficial shareholdings to access company privileged documents. It is clear that the right to disclosure of privileged documents applies to legal "registered" shareholders only.

Shareholder principle's application

The defendants in G4S argued that the category of shareholders to whom the shareholder principle applies should include only those holding shares at the time that the disclosure obligation arose, thus excluding any legal shareholders that had sold their shares at an earlier stage. Mr Justice Green rejected this, stating that a claimant that was a legal shareholder at the time that the documents were created should be entitled to view them, whether or not that claimant remained a shareholder at the point of disclosure.

Without prejudice privilege

Mr Justice Green confirmed the position that without prejudice privilege is not covered by the shareholder principle. This is on the basis that it is complicated by the involvement of a third party, and no previous authority has extended the principle to apply beyond legal advice and litigation privilege.

Osborne Clarke comment

The rights of shareholders to receive disclosure of company documents in corporate litigation is almost inevitably a contentious issue. It is one which advisers to the company should always bear in mind when giving their advice. They need to be clear about both who is the client and who is paying for the legal advice which has been procured.

At the outset of his judgment Mr Justice Green commented that "it is a little surprising … that such an apparently accepted doctrine has not received more consideration in the authorities". True enough, and his judgment in G4S may now be a useful starting point for parties seeking to overturn or limit the shareholder principle, as well as encouraging requests for further judicial scrutiny.

It remains to be seen whether, if the chance arises, the higher courts will agree with Mr Justice Green and begin to alter the application of the principle, overturn it altogether, or simply seek to reaffirm it on a different basis. Whichever way the authorities go from here, it seems likely that a change may be on the cards.