Piggy in the middle: the role of the company in shareholder disputes

Posted: 24/01/2024

Most companies know that the legal advice they receive from their lawyers is privileged. But not all companies are aware that in company/shareholder disputes, their legal advice may not be privileged from disclosure to their shareholders.

This longstanding (but seldom litigated) rule has been in the spotlight recently. In Various Claimants v G4S PLC [2023] EWHC 2863 (Ch), the court cast doubt on the ‘apparent doctrine’ that a company cannot withhold documents from its shareholders on the grounds of privilege. While stopping short of overturning this principle, the court rejected the claimants’ contention that it applied in this instance. It also observed that the rule was based upon a ‘curiously insubstantial’ decision which has been subject to very little judicial consideration.

This article considers the primary position, the recent case law, and the practical impact for those involved in shareholder disputes.

Privilege between company and shareholder

Privilege cannot be asserted by a company against its shareholders when disclosure is ordered in litigation. This rule applies whether the litigation is between shareholders, or between a shareholder and the company. The rationale for the rule is that shareholders, indirectly, have paid for the legal advice the company receives.

In G4S, the court considered the history of the rule and the key authorities. In Woodhouse & Co v Woodhouse (1914) 30 TLR 559, the Court of Appeal referred to a ‘general rule’ that where a company gets legal advice and pays for it out of the company’s funds, a shareholder has a right to see it. In Re Hydrosan Ltd [1991] BCC 19 , the court confirmed: ‘There is no doubt that matters passing between solicitors to a company and a company are prima facie entitled to be produced to all shareholders of the company.’  

These decisions were approved in Sharp v Blank [2015] EWHC 2681 (Ch), where the court explained that the foundation for the rule is similar to the general principle that a trustee cannot assert privilege against the beneficiaries of a trust where the legal advice has been paid for out of trust assets.  More recently, in Saxon Woods Investments Ltd v Costa & Ors [2023] EWHC 2154 (Ch), the court approved the rule and granted the petitioner in a section 994 petition its request for additional disclosure, rejecting the company’s attempt to withhold relevant documentation from shareholders on the grounds of privilege.

When is a shareholder not a shareholder for the purposes of privilege?

In G4S, however, the court found that the ‘general rule’ did not apply in the specific circumstances of the case. Of possibly wider relevance, it observed that the rule itself had a ‘somewhat shaky foundation’, given the modern relationship between a company and its shareholders.

In this case, the claimants’ claims are brought under section 90A and Schedule 10A of the Financial Services and Markets Act 2000. The claimants are institutional investors in G4S, and the majority (apart from three) are not directly registered as shareholders.

In successfully challenging the claimants’ application for disclosure, G4S asserted that, (assuming the general rule should continue to apply), it had no application to:

(i) litigants who are at best former shareholders;

(ii) litigants who never had legal title to the shares in the relevant company; and

(iii) all forms of privilege, including legal advice privilege, litigation privilege and without prejudice privilege.

While accepting that the rule itself could not be overturned at first instance, G4S also argued that it needed to be reconsidered given the ‘modern’ interpretation of the relationship between a company and its shareholders. In particular, it argued that following the Supreme Court’s analysis in BTI 2014 LLC v Sequana SA [2022] UKSC 25, shareholders are clearly not in a similar relationship to that of trustee and beneficiary. It is therefore ‘anomalous’ for a general rule to be applied permitting a shareholder to see their company’s privileged documents on the basis that the relationship is similar to that of trustee and beneficiary.

The court’s decision

Given the weight of authority, the court concluded it could not overturn the general principle that there is no privilege between a company and its shareholder. However, it held that it would be better to err on the side of caution in relation to maintaining privilege. On that basis, the court restricted the application of the doctrine any further and held:

• the rule should only apply to direct registered shareholders;
• the rule should extend (where it applies) to both legal advice and litigation privilege;
• the rule should not extend to without prejudice privilege;
• the rule (if it exists) should apply to the time that the relevant documents came into existence, meaning that to benefit from the rule the claimant must be a direct registered shareholder at that time.

In relation to the three claimants who were direct registered owners of the shares at the relevant time (at least in relation to some of the documents sought), the court determined that while the rule might apply in those circumstances, it was not practical to permit disclosure at such a late stage in the litigation. In particular, the court considered that it would not be reasonable or proportionate to order the disclosure of the documents because of the case management implications, and because it was not evident how the claimants’ lawyers would be able to ‘compartmentalise’ the documents for the three claimants from the other claimants.

Implications for company/shareholder disputes

The relationship between a company and its shareholders has clearly evolved since the general ‘no privilege’ rule was established. While this case has placed some limits on the scope of the rule, it seems likely that a decision from the Supreme Court will be required either to dispense with the rule altogether or to reformulate it.

In the meantime, the status of legal advice to a company and the extent to which it may be privileged from disclosure to its shareholders remains highly contentious. Parties to litigation (or anticipated litigation) and their solicitors need to bear in mind the possibility that their legal advice may ultimately be disclosable to a much wider audience than originally intended. This will place directors under significant pressure, particularly if there is a risk of activist shareholders.

The safest option of directors seeking advice in their personal capacity is impractical in most circumstances and the alternatives of either not seeking advice or it being sanitised for a wider audience are problematic. For now, companies and their advisors need to exercise caution and consider the position at the time legal advice is given, rather than leaving it until a request for disclosure is made.

This article was co-authored by Harriet Campbell, senior knowledge lawyer.

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