The foundation of the principle is that the relationship between shareholders and the company is analogous to that between a trustee and beneficiary: a trustee who pays for advice concerning his duties as to the management of a trust out of trust assets cannot assert privilege over this advice, as the beneficiary has indirectly paid for it.

This is widely known as the “common fund” rationale, and was first recognised in the 1914 English Court of Appeal case of Woodhouse and Co (Limited) v Woodhouse [1914] 30 TLR 559. However, the shareholder principle emerged before other English cases1 which have established that a company is separate from its shareholders, holds property for itself, and that shareholders have no direct interest in the company’s property, meaning this analogy is, in the words of Mr Justice Michael Green in Various Claimants v G4S PLC [2023] EWHC 2863 (Ch) last November, “now dubious”.

Although the judge suggested that the foundation of the principle might be open to attack now as there is no “common fund”, as such, to which shareholders are entitled - and because the analogy with trustees and beneficiaries is not a particularly strong one - he conceded that because the shareholder principle has become so well established it would be up to the United Kingdom Supreme Court to overturn it.

Therefore, the issue for the judge to decide was the breadth of the principle - namely, whether it should be confined to (i) registered shareholders only, or whether it extended to non-registered shareholders; and (ii) legal advice privilege only, or whether it extended to litigation privilege and without prejudice privilege.

Background

The case concerned a claim brought under section 90A and Schedule 10A of the United Kingdom Financial Services and Markets Act 2000 (FSMA). The claimants were, or claim to have been, institutional shareholders in the defendant, of which three were registered shareholders and 87 were non-registered shareholders (i.e. they were the ultimate beneficial owners of shares held in uncertified form through the CREST system, a centralised clearing and settlement system similar to the Central Clearing and Settlement System, CCASS, in Hong Kong).

The claimants issued an application seeking disclosure and inspection of the defendant company’s documents that had been withheld on the basis of legal advice privilege, litigation privilege and without prejudice privilege. They sought to rely on the shareholder principle, citing the cases of Sharp v Blank [2015] EWHC 2681 (in which the principle was applied) and Woodhouse. The application was issued around three months before the start of the six week trial.

The parties’ arguments

The defendant’s starting position was that privilege is “such a fundamental right that the court should be wary of making inroads into it”. It argued that the principle should be confined to directly registered shareholders who were registered shareholders at the time the obligation of disclosure arose or, alternatively, at the outset of proceedings. The defendant further argued that the principle should just apply to legal advice privilege - that is legal advice paid out of company funds - and not litigation privilege or without prejudice privilege.

The claimants relied on the fact that FSMA recognises that a claim under the relevant section of FSMA can be brought not only by registered shareholders, but also by ultimate beneficial owners through the CREST system. They said it would be odd if unregistered shareholders had a right to bring such a claim but did not have the right to privileged documents to assist them in the claim. The claimants also suggested that any practical difficulties could be overcome by case management directions and the imposition of a “confidentiality club”.

The court’s decision

The judge found that the shareholder principle entitles shareholders to company material that is subject to both legal advice privilege and litigation privilege, but does not extend to without prejudice privilege (i.e. communications between the defendant company and a third party, exchanged in an attempt to settle a dispute between the company and the third party). This is because the third party’s right to privilege must be respected.

Although the judge found that the principle could be applied to registered shareholders, he held it did not extend to the non-registered shareholders, who comprised the overwhelming majority of the claimants in this case. As to the question of timing, he decided that it made sense for the principle to apply to claimants who were direct registered shareholders at the time the privileged documents came into existence.

On the basis of the judge’s reasoning, only the three direct registered shareholders were entitled to disclosure of the privileged documents. That said, the judge considered that it would be impossible to manage disclosure of the material in question to such a small number of claimants and would potentially be very disruptive to the imminent trial and he was not convinced that a imposing confidentiality club would solve “this intractable problem”. Accordingly, he dismissed the claimants’ application.

Hong Kong

In Hong Kong, the shareholder principle was affirmed in Re NDT (BVI) Trading Ltd [2009] 2 HKLRD 409. The Honourable Madam Justice Susan Kwan dismissed counsel’s arguments that the English decisions had not been considered by a Hong Kong court and that the court should be “slow in adopting these decisions on a shareholder’s right to inspect privileged documents.” The judge said she did “not consider this to be a reason for not following the English decisions, provided of course the basis for the principle established is sound.”

Commentary

A shareholder generally has no right to access the privileged documents of the company. The right that arises from this line of cases has been described by Charles Hollander as “not a right of access but a disapplication of privilege” that only arises in the course of litigation.2

Shareholders posses a narrow common law right to inspect company documents where there is a dispute between the shareholder and other members, the dispute concerns a matter personal to the shareholder and access to the documentation is necessary to resolve the dispute. The company’s articles generally govern the position and Hollander notes there is “no modern recorded case of any shareholder successfully obtaining such access not provided for by statute other than in the course of disclosure in litigation against the company.” The English line of cases raise the hypothetical possibility that a shareholder could purchase a single share in a company and then claim the right to inspect privileged documents.

This decision in G4S, if followed in Hong Kong, will be particularly relevant to banks and listed issuers facing disclosure applications in securities litigation. The implication is that claimants in such claims who hold shares indirectly, such as through CCASS, will not be permitted to see the company’s privileged material (or, at least, will have a challenge on their hands).

There are also case management issues where claimants are both registered and unregistered shareholders (as acutely demonstrated in G4S) and the court reminded the parties that recipients of privileged material have a “positive duty not to breach that privilege further and not to allow those documents to go to any sort of wider audience”.

Legal advisers to potential plaintiffs therefore need to consider any logistical issues up front, well before trial, to try and find a solution that is workable, otherwise they risk an application for disclosure being refused on case management grounds, if G4S is followed.

Throughout the decision, the judge emphasised the fundamental nature of the right of privilege, stating that it is “an important substantive right” and “it is better to err on the side of caution and preserve privilege unless there is good reason not to”.

Higher courts in England and Hong Kong may, in time, agree with this sentiment and, picking up on the judge’s suggestion that the foundation to the principle is now “shaky”, may seek to re-examine it - and potentially do away with it altogether.