Privy Council abolishes the Shareholder Rule: the implications for Jersey
The Privy Council (on an appeal from Bermuda) has handed down a landmark judgment in Jardine Strategic Limited v Oasis Investments II Master Fund Limited [2025] UKPC 34 declaring that the Shareholder Rule (an exception that held that legal advice privilege did not apply as between a company and its shareholders when the these parties were engaged in litigation) was abrogated for the purposes of English law.
What is the so-called Shareholder Rule?
The Shareholder Rule had for decades been recognised in English Law as an exception to legal advice privilege which enabled shareholders to obtain copies of legal advice given to companies in which they held shares when in proceedings against the company.
This rule was established in 1887 and was further developed in the 19th century by analogy to the ‘Trustee Rule’, which provides that trustees could not clam privilege against their beneficiaries for material which they had obtained at the beneficiaries’ expense. The justification for the Shareholder Rule, in essence, was that a company (similarly to a trust) obtaining legal advice did so by using assets ultimately belonging to the shareholders (analogous to the beneficiaries of a trust), and as such it could not prevent its shareholders from viewing that advice.
An alternative justification emerged, namely that the shareholder/company relationship was one of joint interest and as such a company should not be entitled to withhold documents containing legal advice from its shareholders.
Privy Council Judgment
The Privy Council judgment emanated from a dispute relating to the amalgamation of Jardine Strategic Holdings Limited (Holdings) and JMH Bermuda Limited to form Jardine Strategic Limited (the Amalgamated Company).
Following the amalgamation, the Amalgamated Company was required to pay a fair value for the cancelled shares of Holdings to its shareholders. Proceedings were issued in Bermuda by a group of shareholders who were unhappy with the value offered by the Amalgamated Company (the Shareholders).
The Shareholders sought an order from the Amalgamated Company that it produce legal advice it had obtained when assessing the fair value of the shares to be cancelled. Documents containing legal advice would ordinarily be subject to legal advice privilege, meaning that the opposing party in litigation could not inspect such documents. The Shareholders sought to invoke the Shareholder Rule and or joint interest privilege.
The Privy Council observed that the original proprietary justification for the Shareholder Rule had not been followed in case law or in academic texts for some time.
As regards joint interest privilege, the Privy Council held that the company-shareholder relationship does not fit into the established family of joint interest privilege relationships primarily as many of the shareholders have divergent views and objectives.
The Privy Council further noted that allowing a broadly based shareholder privilege exception would be commercially impractical and create uncertainty for companies as it could discourage companies from obtaining candid legal advice in confidence.
What are the implications of this judgment in Jersey
Whilst the decision relates to matters of Bermudan Law and as such is not automatically binding in Jersey, the Privy Council made a direction that the decision is binding as a matter of English law by virtue of the Privy Council giving a Willers v Joyce direction to that effect. Given that Jersey’s company law and civil procedure is heavily influenced by English law, it means that this decision is likely to be persuasive before the Royal Court.
This decision provides clarity on the question of privilege between a company and its shareholders. Companies (acting through their directors) can now seek legal advice in relation to the running of a company without fear that, if a dispute arises between the company and its shareholders, that legal advice will need to be produced to the shareholders in any proceedings.
However, privilege over legal advice obtained by a company is not absolute. While the decision has abolished the Shareholder Rule, other exceptions exist, such as joint retainer privilege and the iniquity exceptions (such as litigation privilege).