Risks of advising companies in shareholder disputes

When a shareholder dispute is brewing, one obvious course is for the company to obtain legal advice.  It seems like a logical step and there are also tax advantages (not least in relation to VAT) if the company pays for advice rather than any individuals involved.  However, this can be a trap for the unwary. One of the dangers has been highlighted by a recent case, although the effect of that case means that it may in future be less of a concern.

There are two main dangers which arise from the company instructing lawyers to obtain advice on a dispute between shareholders.

The first is that using company money for the benefit of one group of shareholders as against another group of shareholders can be seen as unfairly prejudicial conduct.  This principle has been firmly established in case law. Such conduct can therefore give the aggrieved shareholders a right to seek relief under s.994 of the Companies Act.

It is rare that this type of conduct would be sufficient on its own to justify a petition, but it can often be seen as an add on to wider grievances and undoubtedly adds strength to any claim.

This is not to say that the company cannot obtain advice, but such advice must genuinely be for the benefit of the company (for example, on the ramifications of any dispute for the company) as opposed to being for the benefit of just one group of shareholders.  This can be a fine line to draw.

The second danger is that such advice may need to be disclosed to all shareholders.  This is because of the Shareholder Rule, a legal principle that has existed for over a century.  The rule is that a company cannot assert “legal professional privilege” against its own shareholder except in relation to documents relating to hostile litigation between the company and that shareholder.

To explain, parties to litigation must disclose documents relevant to a dispute to the other party.  On the face of it that would include advice obtained about the dispute from the party’s lawyers.  However, as a matter of public policy such advice is held to be privileged, which means that it does not have to be disclosed.  Thus, a party can obtain legal advice without fear of having to reveal it to the other party.

The Shareholder Rule means that the company cannot withhold this advice from shareholders, and this has been a useful tool in shareholder litigation.  The shareholders who did not commission the advice can require sight of it, which can then undermine the strength of any case being advanced (by highlighting weaknesses and concerns) and possibly give rise to a claim that the nature of the advice was that it benefitted a sub-group of shareholders rather than the company.

This is not the case for legal advice given directly to shareholders and in that capacity.  This advice would remain privileged and not disclosable to other parties.

Recent case law has cast doubt on the validity of the Shareholder Rule, culminating in the decision in the case of [2024] EWHC 2046 (Comm) Aabar Holdings SARL v Glencore that as a matter of law the legal principle underlying the Shareholder Rule does not exist.  This meant that the company could assert legal professional privilege in relation to advice given to the company.

This is a significant change to the established legal position and hence needs to be viewed with some caution.

What does this all mean?

It is legitimate for a company to obtain legal advice about what is essentially a shareholder dispute.  However, that advice must be for the benefit of the company.  If it is for the benefit of one group of shareholders, then it can amount to an improper use of company money.

Following the Aabar Holdings case, the company can now claim privilege in relation to such advice in subsequent shareholder litigation.  On that basis it may no longer be possible for shareholders to get hold of it and see what it says.

However, this is a first instance decision, likely to be appealed and which may well be reversed by the Court of Appeal.

On that basis, the cautious approach in the event of a shareholder dispute remains to obtain advice as a shareholder and pay for it personally, rather than obtain the advice via the company.  This avoids the risk of the advice being disclosed (although this is a reduced risk considering Aabar Holdings) and carries no danger of being used as an example of unfair prejudice.

How we can help

Our shareholder disputes team is experienced in the tactics and strategy of shareholder litigation and can ensure that you don’t fall into the traps set by such principles as the Shareholders Rule.