Clifford Chance

In Aabar Holdings S.à.r.l. v Glencore plc and others [2024] EWHC 3046 (Comm), the Court found that shareholders are not entitled to override the company’s claims to privilege in reliance on the so-called "Shareholder Principle".

Background

Aabar Holdings S.à.r.l. ("Aabar") is one of a large number of institutional shareholders who have brought claims against Glencore plc ("Glencore") (and a number of former directors in respect of some of the claims) pursuant to s.90 and/or s.90A, Sch. 10A of the Financial Services and Markets Act 2000 ("FSMA"). Aabar alleges it has suffered loss as a result of misstatements and/or omissions in Glencore's prospectuses / published information, or its dishonest delay in publishing such information.

The recent judgment followed a hearing which took place on 15 and 16 October 2024 to address Aabar's claim that Glencore cannot withhold certain privileged documents on the basis of the so-called Shareholder Principle.

What is the Shareholder Principle?

The Shareholder Principle is the name given to the English law rule that a company cannot assert privilege against its own shareholders, except in respect of documents created for the dominant purpose of actual or threatened litigation between the company and the shareholders.

It has been said that the doctrine is well-recognised in English law, originating in the 19^th century case Gourard v Edison Gower Bell Telephone Co of Europe Ltd (1888) 57 LJ Ch 498. Historically, the rule had been justified by an analogy between the shareholder-company relationship, and the position of partners or trustees and beneficiaries. In the early cases, the justification for the Court's decision was that the shareholders should be entitled to see the company's privileged documents, in circumstances where the company had paid for the advice out of its assets, in which the shareholders had a proprietary interest. The Shareholder Principle was applied in the early 20^th century Court of Appeal decision in Woodhouse & Co Ltd v Woodhouse [1914] 30 TLR 559.

In recent times, the Shareholder Principle has achieved prominence in the shareholder group action context, having been applied in Sharp v Blank [2015] EWHC 2681 (Ch). More recently, in Various Claimants and G4S Limited (formerly G4S PLC) [2023] EWHC 2863 (Ch) ("G4S"), Mr Justice Michael Green questioned the Shareholder Principle. The issue arose in an application by the claimants, shortly before trial, for access to privileged documents that G4S withheld. While Michael Green J ultimately rejected the application on case management grounds, he did comment (obiter) that (1) the Shareholder Principle originated prior to the landmark decision of Salomon v Salomon [1897] AC 22, which established that a company has a separate legal personality that is distinct from its shareholders, and therefore had a "somewhat shaky foundation", and (2) if the Shareholder Principle applied, it might only apply to legal holders of shares, rather than beneficial owners. Those comments are practically significant because, under the UK CREST system of share ownership, most UK shareholders hold beneficial interests in shares through a chain of intermediated interests, rather than being a registered legal shareholder. Indeed, in G4S, only three of the c. 90 claimants that sought documents under the Shareholder Principle were registered legal shareholders. Consequently, if the Shareholder Principle continued to apply, legal and beneficial owners of shares might have rights to different documents in litigation with the relevant company.

Notwithstanding Michael Green J's comments, it must be noted that the Shareholder Principle has achieved positive commentary in appellate decisions, including the English Court of Appeal decision in Dawson-Damer v Taylor Wessing LLP [2020] EWCA Civ 352 (which was principally concerned with privilege in a trustee-beneficiary relationship), albeit not expressly in company law cases. Additionally, the Shareholder Principle has met with approval in the company law context in other Commonwealth jurisdictions, including a Bermuda Court of Appeal decision (Oasis Investments II Master Fund Ltd v Jardine Strategic Holdings [2024] CA (Bda) 7 Civ ("Jardine")). In Jardine, the principal basis on which the Court justified the Shareholder Principle was "joint interest" privilege, rather than on the proprietary basis. Jardine has been appealed, and a hearing on related issues is scheduled before the Judicial Committee of the Privy Council in March 2025.

Does the Shareholder Principle exist in English law?

In Aabar v Glencore, the key question before Mr Justice Picken was whether the Shareholder Principle exists. Aabar asserted that it was justified on the basis of joint interest privilege (rather than on the proprietary basis, arising from the 19^th century cases), whereas Glencore asserted that it was anomalous, unprincipled and should not apply. In support of its position, Aabar referred to several of the cases arising in other contexts, such as Dawson-Damer v Taylor Wessing LLP (trustee-beneficiary relationship) and CIA Barca de Panama SA v George Wimpey & Co Ltd (1980) 1 Lloyd’s Rep 598 (joint venturers), to justify an analogy between those contexts and the company-shareholder relationship.

Picken J concluded that the historic authorities justifying the Shareholder Principle were all based on the shareholders' proprietary interest in a company's funds. As that characterisation of the shareholder-company relationship had not survived the decision in Salomon v Salomon, there was no basis for the Shareholder Principle; nor was there any modern justification based on "joint interest", which Picken J described as an "umbrella term" for different situations, rather than a "freestanding concept".

While Picken J decided that the Shareholder Principle does not exist, he went on to comment on the scope of the Shareholder Principle if he was wrong and, in fact, it did exist. As to its potential scope, Picken J held that:

1. The Shareholder Principle could not extend to documents subject to without prejudice privilege, because without prejudice privilege engaged the interests of third parties, and not only the company and the relevant shareholder.
2. The Shareholder Principle could extend to ultimate beneficial owners who hold dematerialised shares (i.e., it would extend to shareholders via CREST).
3. The Shareholder Principle extends in principle to documents of the PLC, and to documents of the PLC's subsidiaries.

Comment

In Aabar v Glencore, for the first time, the High Court has found that the Shareholder Principle does not exist to provide shareholders with access to a company's privileged documents.

Picken J's clear reasoning in this judgment will be particularly relevant (and helpful) for issuers defending s.90 and/or s.90A FSMA claims or concerned by the risk of shareholder activism and securities group claims:

1. Directors may seek legal advice and/or engage in settlement negotiations on behalf of the company with greater certainty that the company's privileged materials are not prima facie disclosable to shareholders and might subsequently be used against the company.
2. Claimants in securities litigation will be deterred from or have limited scope to pursue opportunistic applications to access documents that are ordinarily protected by privilege.

Whilst this decision provides much-needed clarity, its practical ramifications are not radical.

1. Relatively few shareholders have sought to challenge claims to privilege by companies in the UK (or challenges have been brought very late in litigation and refused on case management grounds). This is one reason why it has taken until now for this issue to be addressed directly by the High Court.
2. The decision is also largely aligned with the prevailing position in other common law jurisdictions, including Australia, Canada and many states within the US.