An examination of the recent case law considering the doctrine that restricts the ability of a company to assert privilege against its shareholders, and the practical considerations to be borne in mind by companies and shareholders who might encounter the issue in the context of section 90, section 90A and Schedule 10A FSMA claims.
The so-called shareholder principle provides that a company cannot claim privilege as against its own shareholders, save in respect of documents that came into existence in contemplation of, or for the dominant purpose of, proceedings between the company and its shareholders. The principle is a creature of long-standing case law, but the recent judicial examination to which it has been subject – both in this jurisdiction and others – has revealed uncertainty as to its ambit and even called into question its applicability in view of the principle of a company’s separate legal personality.
In the first part of this article, we examine two key recent decisions. In the second, we consider the practical issues that both companies and shareholders are likely to face when encountering the shareholder principle in the context of litigation, for so long as the law remains in a state of flux.
Recent Case Law
The shareholder principle was recently considered at first instance in this jurisdiction by Michael Green J in Various Claimants v. G4S [2023] EWHC 2863 (Ch) (“G4S“). In the G4S proceedings, institutional investors (the claimants) brought claims under section 90A and Schedule 10A FSMA against G4S Ltd (formerly G4S plc), a security company that was previously listed on the London Stock Exchange and Nasdaq Copenhagen, alleging that certain published statements made by G4S were falsified by dishonest conduct.
Section 90 of the Financial Services and Markets Act 2000 (“FSMA“) provides that any person who is responsible for listing particulars and prospectuses is liable to pay compensation to any person who has acquired securities to which the particulars apply and has suffered loss in respect of them as a result of any untrue or misleading statement in the particulars, or omission from the particulars of any matter required to be included.
Section 90A and Schedule 10A FSMA allow shareholders to bring actions against UK listed companies for including untrue or misleading information, or making dishonest omissions, in published information about listed securities.
Another article in this Yearbook, titled ‘UK Securities Litigation: Key Trends and Issues’, examines section 90, section 90A and Schedule 10 FSMA claims in more depth.
The issue arose when a sub-set of the claimants applied, in the course of the proceedings, for an order providing that certain documents withheld and/or redacted by G4S on the grounds of privilege should be disclosed to them. The documents in question had been created at the time of the alleged dishonest conduct and before the litigation was contemplated. The applicants were three claimants who held their shares as registered shareholders and a larger group of claimants who were the ultimate beneficial owners of shares in G4S through the UK electronic settlement system, CREST.
The claimants relied heavily on the most recent statement of the shareholder principle in Sharp v Blank [2015] EWHC 2681 (Ch), where Christopher Nugee J analogised the principle to trustees taking advice as to the running of the trust, paid for out of trust assets, who cannot assert privilege against the trust beneficiaries who have indirectly also paid for the advice. G4S argued that the importance of privilege to the administration of justice and the “shaky foundation” of the principle (on the basis that it was developed before seminal authorities on the separation of the company and its shareholders) should together influence how far the principle should reach. Michael Green J expressed doubts about the justification for the principle, but on the basis that only an appellate Court could determine whether the principle should be abandoned, he adopted the starting point that privilege should be preserved unless there is a good reason why it should not be.
Michael Green J then had to consider whether the shareholder principle applied on the particular facts. He held that:
- The shareholder principle applies to shareholders that held their shares as direct registered shareholders at the time the relevant documents came into existence.
- The shareholder principle covers both types of legal professional privilege (legal advice privilege and litigation privilege), but not without prejudice privilege.
- The principle does not apply in respect of non-registered shareholders. In the Judge’s view, the principle is a right that is “an incidence to the legal ownership of shares“, such that he could not say that the holders of a beneficial interest (i.e. the wider class of claimants who are entitled to bring claims under FSMA) are “automatically entitled” to access the company’s privileged documents.
- The three registered shareholders were also not entitled to access the privileged documents in question. This was on account of practical difficulties, including the implications for confidentiality arrangements at the trial (given that the application had been made at a very late stage in the proceedings) and complications caused by the claimants’ lawyers needing to compartmentalise documents for different pools of claimants, and even individual claimants.
Both the uncertainty of the terrain that shareholders and companies are having to tread, and the need for consideration of the principle at appellate level in England and Wales, are underscored by a decision of the Court of Appeal of Bermuda in Re Jardine Strategic Holdings Limited [2024] CA (Bda) 7 Civ. The issue in the underlying proceedings is whether minority shareholders are entitled to be paid fair value for their shares upon the amalgamation or merger of public companies, and the shareholder principle has arisen in the course of the litigation as an issue to be addressed.
The Court of Appeal upheld the first instance Court’s decision that the shareholder principle applied on the particular facts, finding – consistent with the G4S decision – that the shareholder must have been a shareholder of the company at the time when the documents in question were created in order to have a right to access them. However, in juxtaposition with Michael Green J’s reluctance to extend the principle beyond direct registered shareholders, the Bermuda Courts consider that the principle does not depend on a proprietary interest, but is instead based on the relationship between the company and shareholder which gives rise to a joint interest privilege. The Court of Appeal considered it “obvious” that this relationship between “a company and its shareholders was the same whether those shareholders were the beneficial owners of the shares, or whether they were held through nominees“.
a company and its shareholders was the same whether those shareholders were the beneficial owners of the shares, or whether they were held through nominees
Practical Considerations for section 90A (and schedule 10A) FSMA Claims
Categories of shareholders
Since most shares in listed companies are held in dematerialised form through CREST, the effect of the G4S decision is that most claimants in FSMA claims are unlikely to be able to rely on the shareholder principle to access privileged documents. The doctrine is very likely to receive further judicial consideration in the near future, so parties engaged in current proceedings, or shareholders contemplating bringing claims under the FSMA provisions, should keep an eye on the position.
Timing of applications in relation to privileged documents
It is clearly an issue for the company to consider whether it can assert privilege against its shareholders and, if it thinks it can do so, to consider which documents came into existence in contemplation of, or for the dominant purpose of, proceedings against those shareholders. In view of the criticism in the G4S decision of the delay in that case in the relevant application being made, the company’s legal representatives should consider whether (and if so, how) to raise the issue of privilege at an early case management conference at which practical issues are to be dealt with. If the company does not raise the issue, the shareholders’ representatives should consider whether they need to bring any application or ensure that the issue is raised (if necessary) before detailed trial arrangements are ordered.
Confidentiality arrangements
Both the company and the shareholders – together with the Court – will need to consider carefully (and as early on in the proceedings as is feasible) what confidentiality arrangements might be required. Even if the law changes in the future to provide that registered and non-registered shareholders should be treated the same, the issue of shareholders being permitted to access different privileged documents to one another may still arise in litigation involving a large shareholder group, because the principle only applies where the shares were held at the time the relevant documents came into existence. Consideration should accordingly be given to the timing of each shareholder’s acquisition (and if relevant, disposal) of its shares. Since the recipients of privileged material have a positive duty not to waive privilege further by allowing those documents to be shared with any wider audience, this issue is likely to present practical challenges that will be particularly acute in circumstances where one law firm is acting for all of the claimant shareholders. In Green J’s words, confidentiality arrangements that are instituted where the principle applies are likely to entail “considerable contortions on the lawyers’ (and the judge’s) part”.
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