The Abolition of the ‘Shareholder Rule’ and Why it Matters

In July of this year, the Privy Council’s decision in Jardines Strategic Ltd v Oasis Investments II Master Fund Ltd & Ors abolished the ‘Shareholder Rule’.

To understand the case and the implications of this decision, it is important to first explore what English Legal Professional Privilege (LPP) is. LPP is a legal principle that protects privileged information and communications from disclosure in legal proceedings. In essence, it’s the rule that ensures clients that, when they receive legal advice, it will not be later revealed in court.

The Shareholder Rule, introduced in the late 19^th Century, understood that a company could not assert legal advice privilege against its own shareholders. More specifically, it allowed shareholders to access legally privileged advice related to the company obtained through the company's funds since they had a proprietary interest in its assets. This had some implications, including the fact that if the company sought legal advice on a shareholder dispute, the shareholders could demand disclosure of that advice, as well as conflicts with the separate legal personality doctrine. Nevertheless, this was the legal norm until Jardines Strategic.

In Jardines Strategic, the company was undergoing a corporate amalgamation and accordingly needed to buy back the shares of the dissenting shareholders. Citing the Shareholder Rule, Oasis Investments (the shareholders) requested the disclosure of the legal advice Jardines Strategic received regarding the share valuation. The dispute arose when the company declined to reveal the information, claiming that it was privileged.

The court found that the rule should be abolished following the belief that it was outdated and not in line with the separate legal personality doctrine, wherein the shareholders are viewed as a separate legal person from the company. As the court puts it, the rule “forms no part of the law of Bermuda, and that it ought not to continue to be recognised in England and Wales”. It should be noted that while the abolition came out of the Privy Council, it follows a Willers v Joyce direction, which is a UK Supreme Court ruling stating that if the Privy Council explicitly states that a judgment is to be binding, it will be.

Student Re-focus

Commercially speaking, the abolition represents a modernisation of privilege law, making it more coherent, predictable, and in line with current legal corporate principles. Additionally, the abolition represents a vital change in the conduct of mergers, takeovers, and buybacks, wherein companies can obtain legal advice on valuation or regulatory approval without risk of disclosure down the line.