Live Forever? – The Privy Council finally calls time on the Shareholder Rule
Reflections on Jardine Strategic v Oasis Investments
(No 2)
In a landmark decision that will undoubtedly reshape how companies and shareholders interact in legal disputes, the Judicial Committee of the Privy Council has abolished the longstanding Shareholder Rule – a principle that’s been around for over 140 years.
The case in question? Jardine Strategic Limited v Oasis Investments II Master Fund Ltd and 80 others (No 2), heard in Bermuda and appealed to the final court of appeal for UK overseas territories and Crown dependencies.
What’s the story?
The story begins in 2021. Jardine Strategic Holdings Ltd (part of the Jardine Matheson Group) merged with JMH Bermuda Ltd. As part of the merger, all shares in Jardine Strategic were cancelled. Shareholders who didn’t vote in favour of the deal were entitled under Bermuda’s Companies Act 1981 to receive what is known as “fair value” for their shares.
Jardine Strategic offered US$33 per share, but more than 80 shareholders, including major investment funds, felt that wasn’t enough. They triggered the statutory appraisal process under section 106(6) of the Act and asked the Bermuda courts to determine the true fair value of their shares.
During the discovery phase of the proceedings, the dissenting shareholders asked the company to hand over legal advice it had received about the valuation and the merger.
The shareholders’ argument was based on the Shareholder Rule – a principle dating back to the 19th century under which a company cannot, in the course of litigation between it and shareholders or former shareholders, withhold documents from inspection on the grounds they are covered by legal advice privilege. The rule was justified on the basis that shareholders have a proprietary right to the company’s assets, and was a potentially powerful weapon in a shareholder’s arsenal.
Jardine Strategic pushed back on the shareholders’ request, claiming that the Shareholder Rule was bad law and that the advice was protected by privilege. Undeterred, the shareholders pressed on to Court.
What did the Bermuda courts say?
Both the first instance court and the Bermuda Court of Appeal sided with the shareholders, applying the Shareholder Rule in accordance with longstanding authority. Given the finding that the Shareholder Rule applied, the company had to disclose the legal advice.
Time for the Shareholder Rule to slide away?
However, on appeal, the Privy Council took a fresh look at the Shareholder Rule and delivered a unanimous judgment that – in sum – took it off the shelf, dusted it off, and put it in the shredder.
Describing the Shareholder Rule as “altogether unclothed”, Lord Briggs and Lady Rose stated that the idea that shareholders have a proprietary interest in the company’s legal advice simply doesn’t hold up in modern law. Companies are separate legal entities, and their assets, including legal advice, belong to the company, not the shareholders.
The Court also rejected an alternative “joint interest” argument that had been put forward by the shareholders, finding that merely because shareholders hold a general interest in the company’s affairs, does not mean that they share a legal interest in privileged communications.
Why does this matter?
Where any individuals run a company and are involved (or may become involved) in a dispute with their own shareholders, this decision marks a profound paradigm shift. Its implications strengthen the concept of legal advice privilege for companies – no longer can shareholders easily demand the legal advice that was provided to the company. Whilst this rule has long looked out of place in modern company law, it has until recently stood relatively unchecked. Crucially, the Privy Council also issued a Willers v Joyce direction, making the decision binding in England and Wales.
As we look to the future, this change provides a further degree of certainty, significantly reducing the risk for companies that advice obtained by them will be disclosed.
