Is the writing on the wall for the “shareholder principle”?

The concept of the “shareholder principle” in English law (also known as the rule in Sharp v Blank [2015] EWHC 2681, in which case the principle was applied) provides that a company cannot assert privilege against its own shareholders (unless the privileged documents in question were created for the dominant purpose of actual or threatened litigation between the shareholders and the company).  However, in a decision last November, in Various Claimants v G4S PLC [2023] EWHC 2863 (Ch), Mr Justice Michael Green, sitting in the High Court, suggested that the shareholder principle should be reconsidered due to its “shaky foundation”.

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 Court of Appeal case of Woodhouse and Co (Limited) v Woodhouse [1914] 30 TLR 559. However, the shareholder principle emerged before cases (namely Salomon v A Salomon & Co [1897] AC 22 and BTI 2014 LLC v Sequana SA [2022] UKSC 25)  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 judge’s words, “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 Supreme Court to overturn it.  Therefore, the issue for him 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 to the case

The case concerned a claim brought under section 90A and Schedule 10A of the 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).

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 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”.  While the shareholder principle was, in its view, “anomalous” and should no longer be followed, it appreciated this was not a question that could be decided at this hearing.  It argued, therefore, that the principle should be confined to directly registered shareholders, on the basis that only these shareholders have rights against the company. The defendant continued by contending that such shareholders should be registered shareholders of the company 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. Moreover, as an overarching point, the case management consequences of permitting the claimants’ application at such a late stage militated against their application being granted.  

The claimants relied on the fact that FSMA recognises that a claim under section 90A/Schedule 10A FSMA can be brought not only by registered shareholders, but also by ultimate beneficial owners through the CREST system.  This reflects the fact that this is the way the majority of shares are held these days and, if the principle was limited to registered shareholders, it would be denuded of having any practical effect.  Further, 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 from the company.  The claimants also suggested that any practical difficulties could be overcome by case management directions and the imposition of a confidentiality club – although they recognised that a potentially more viable solution may be to proceed only with those three claimants who were registered shareholders, and to hive off the other claimants to another trial.

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 did 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.  While non-registered shareholders may have the requisite interest in securities for the purpose of bringing a claim under section 90A/Schedule 10A FSMA, “it would be quite an extension to say that all such claimants are automatically entitled to privileged documents from the company”.  He held that the shareholder principle seemed, if anything, to be based on the relationship between shareholders and their company, and that the right of direct registered shareholders to such privileged material is a right that is an “incidence to the legal ownership of shares”. 

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 (and, even within these three claimants, they were entitled to different documents, given they each held shares for different periods of time).   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 confidentiality club would solve “this intractable problem”.  He commented that, had the claimants’ application been made earlier in the litigation, such as at the first case management conference, directions could have been made, perhaps to separate the claimants to preserve privilege, but that, unfortunately, “it was too late for that now”. Accordingly, he dismissed the claimants’ application.


This decision will be particularly relevant to banks and listed issuers facing disclosure applications in securities class actions under section 90A and Schedule 10A of FSMA. The implication is that claimants in such claims who hold shares indirectly, such as through the CREST system, will not be permitted to see the company’s privileged material (or, at least, will have a challenge on their hands). 

This raises case management issues for claims where claimants are both registered and unregistered shareholders (as acutely demonstrated in the present case) 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 claimants 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.  As the judge pointed out, “[i]t would require considerable contortions on [the] lawyers’ (and the judge’s) part not to take into account some of the material for certain claimants, whether in the course of cross-examination, reliance on the documents themselves, and in the course of making submissions (and for the judge, preparing a judgment)” – so any proposed solution would have to seek to minimise such “contortions”.

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 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.  

Next steps

If you would like to discuss this article, or any of the issues raised, please get in touch with any of the contacts listed, who would be happy to help.



Authored by Maeve Rowley-O’Donnell, Daniela Vella and Jennifer Dickey.


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