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Senior Associate, Dispute Resolution
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In this short article, a recent important decision will be discussed in which the Privy Council has declared that the “shareholder rule” in company law is no longer regarded as good law as it is inconsistent with basic company law principles, such as the separate corporate personality of a company.
Whilst Guernsey has its own distinct company law legislation and has a body of local company law decisions, the company law system applied in Guernsey has historically been essentially based upon English company law and influenced by company law decisions within the broader commonwealth legal sphere. Accordingly, the “shareholder rule” being well-settled in English law would have been considered to be to the same extent a principle applicable in Guernsey company law as between a Guernsey company and its shareholders. The abolishment of the shareholder rule, or rather the declaration that it was never good law, also has a corresponding impact on the Guernsey legal position in terms of the rights of a shareholder to demand disclosure of privileged documents or legal advice owned by the company in which they hold shares.
The shareholder rule was founded on the approach that a shareholder of a company had some indirect proprietary interest in the property of the company, as it had been the shareholders’ funds used to pay for the property purchased by the company. This was essentially the same idea as in the law of trusts, where a beneficiary always has a right to any document drawn up at the paid-for behest of the trustee acting as trustee, based on the beneficiary having a beneficial interest in all trust assets, including any such advice or document so drawn. Applying this to a company (the first error, as a company is not akin to a trust in this respect), it was held in the case of Gouraud v Edison that a shareholder had some level of proprietary interest in company assets precisely because the Court there viewed a company as being akin to a trust arrangement. This was decided some time before the law was made clear in Salomon v Salomon that a company was a fully-fledged legal person and the owner of its assets, and the arrangement was thus fundamentally different to a trust scenario in that a trust is not a legal person but is an arrangement between legal persons in which certain proprietary interests arise. It would be wholly wrong as a matter of principle to apply these to the case of a company.
Despite having no legal basis in principle and only a line of incorrect precedents to support it, the shareholder rule enured for about the last 135 years or so. Proving Oliver Wendell Holmes was right that the life of the law is not the life of logic, this rule was also followed in many English law based company law jurisdictions, and indeed generations of courts had found ways to justify this rule, using various juridical contortions to try to justify this patently incorrect principle. The simple fact is that shareholders of a company have no proprietary interests in the assets or property of the company, because the company is a legal person and it solely owns these things. The shareholder owns only his shares in the company, and that is the sole extent of his proprietary interest (and of his liability). In line with this, in the Privy Council in Jardine Strategic Limited v Oasis Investments II Master Fund Ltd confirmed that the Shareholder Rule had been wrong since inception, based as it was on the mistaken application of trust law proprietary principles in a company law context. In addition, the Privy Council made the point that to allow the shareholder rule to exist as a derogation from the general rules of privilege would have a chilling effect on the company’s ability to take privileged legal advice, which would be undesirable as a consequence. The validity of the shareholder rule had already been found to be lacking by the English High Court in the case of Aabar Holdings S.à.r.l. v Glencore Plc & Others for similar reasons, namely that the rule itself arose from a flawed approach to the nature of proprietary interests in a company.
Interestingly, the Privy Council made a so-called Willers v Joyce declaration that their abolishment of the shareholder rule represented not only the law of Bermuda (the law of the jurisdiction they had before them in the instant case) but also was the law of England. Accordingly, the decision carries correspondingly greater weight throughout the common law company legal world, including in Guernsey. It seems highly likely that other common law jurisdictions will adopt the same position as the Privy Council, as although it is not binding upon them, the reasoning is highly persuasive (if not inescapable).
The practical effect of this Privy Council decision in terms of any Guernsey shareholder is that such a shareholder no longer has any special right to have disclosure of privileged documents or legal advice owned by the company. Before this clear abolishment of the shareholder rule, there was at least a strong argument (based on years of precedent accepting and applying the shareholder rule) that a shareholder had a special right to such documents, which would override any applicable privilege governing such advice or documents. It has not been made clear that no such special right of a shareholder exists, and directors of a Guernsey company may now take legal advice resting more securely in the privileged nature of such advice, even vis-à-vis an activist or disgruntled shareholder.
