The Emperor has no clothes: Privy Council strips down the Shareholder Rule and Hong Kong watches

The “Shareholder Rule”

The Shareholder Rule is a legal doctrine under which a company is generally precluded from asserting legal professional privilege to withhold documents from a shareholder in the course of litigation involving both the company and the shareholder, except where the document was created for the dominant purpose of litigation against that shareholder.

This rule was originally justified by an analogy to trust law—just as trustees cannot assert privilege against beneficiaries in respect of legal advice for running a trust which has been paid for out of the trust funds, companies were thought to be at a similar position in relation to their shareholders. For example, the Shareholder Rule allowed shareholders of a company access to legal advice obtained by the company, based on the idea that they had indirectly “paid for it” through their ownership. Over time, the justification for the rule evolved under the umbrella of “joint interest privilege,” but this concept also came under increasing scrutiny in England & Wales and the rule was described as having a “shaky foundation”.¹

Despite these developments, the Shareholder Rule remains good law in Hong Kong² for the time being, as confirmed in Re NDT (BVI) Trading Ltd [2009] 2 HKLRD 409, where the Court of First Instance adopted the Shareholder Rule and held that a shareholder in a company is entitled to disclosure of all documents obtained by the company in the course of the company's administration of its affairs, including advice by solicitors to the company, except where the advice relates to hostile proceedings between the company and that shareholder.

Background of Jardine Strategic Case

The Jardine Strategic Case  arose from a corporate restructuring within the Jardine Matheson group. Jardine Strategic Limited (Company) was formed through the amalgamation of Jardine Strategic Holdings Ltd (Jardine Strategic Holdings) and JMH Bermuda Ltd, resulting in the cancellation of all shares in Jardine Strategic Holdings. In exchange for the cancelled shares, the majority shareholder, Jardine Matheson Holdings Ltd, received shares in the newly formed Company, while dissenting minority shareholders were paid out at fair value of the cancelled shares.

Dissatisfied with the fair value offered for their shares, certain minority shareholders sought an appraisal by the Bermudian court and invoked the Shareholder Rule to gain access to legal advice obtained by Jardine Strategic Holdings concerning the determination of the fair value of their shares—advice that would have been protected by legal professional privilege in the absence of the Shareholder Rule and withheld from disclosure.

The Company resisted, asserting that the advice was protected by legal professional privilege. However, the Bermudian courts initially upheld the minority shareholders' position and ordered the production of the legal advice, prompting the Company to appeal to the JCPC.

The Decision of the JCPC 

Abolishing the Shareholder Rule in Bermuda

The JCPC unanimously held that the Shareholder Rule no longer forms part of Bermuda's common law. The JCPC emphasized that the rule's original justification—that shareholders have a proprietary interest in company assets—is incompatible with modern company law, which treats companies as legal persons separate from their shareholders. The idea that the company-shareholder relationship inherently involves a joint interest sufficient to override legal professional privilege was also rejected because there is not always a community of interest between every company and its shareholders. The JCPC considered that this broadly based exception from legal advice privilege between a company and its shareholders would discourage companies from obtaining candid legal advice in confidence, ignore the separate personality of the company and wrongly assume a simple coincidence of interests contrary to the typical commercial reality. This case serves as a prime example, where the interests of the Company and dissenting minority shareholders were clearly misaligned.

In a moment of judicial candor, the JCPC likened the rule to “the emperor wearing no clothes”—a doctrine accepted for generations without justification. As the JCPC observed, the time had come to unclothe the emperor.

Willers v Joyce Direction: From Bermuda to England and Wales

Although the JCPC is not a court of any part of the United Kingdom, it made a Willers v Joyce direction, declaring that its decision should be regarded by courts in England & Wales as abrogating the Shareholder Rule for the purposes of litigation in those courts. This means the Shareholder Rule is now also abolished in England & Wales, ending more than a century of precedent.

Implications for Hong Kong

The Hong Kong Court of First Instance has previously recognized and adopted the Shareholder Rule in Re NDT (BVI) Trading Ltd, following the line of English authorities supporting the rule. The Hong Kong Court of First Instance held that a shareholder in a company is entitled to disclosure of all documents obtained by the company in the course of the company's administration of its affairs, including advice by solicitors to the company, except where the advice relates to hostile proceedings between the company and that shareholder.

Although the JCPC's decisions on non-Hong Kong appeals—whether handed down before or after 1 July 1997—are not binding on Hong Kong courts³, they carry persuasive weight across all common law jurisdictions.

When the same issue arises again before the Hong Kong courts, the presiding judge(s) will be at liberty to either follow Re NDT (BVI) Trading Ltd or adopt the reasoning in the Jardine Strategic Case.

In light of the jurisprudential developments in other common law jurisdictions such as Australia⁴ and Canada⁵, and having regard to the persuasive authority of the JCPC's reasoning in Jardine Strategic, it would not be surprising if the Hong Kong courts increasingly align with that reasoning in future determinations. This would be a welcome development in Hong Kong as it aligns the law of privilege as it relates to companies and their shareholders with the longstanding principle that a company has a separate corporate personality.

We often see disclosure of companies' internal documents sought as part of litigation strategy  amid shareholder battles in Hong Kong. It usually puts the company in a very difficult position. This would go some way to fixing that.

Of course, there is always the possibility that a company may be aligned with one shareholder over another and so, in principle, the protection of privilege could be open to abuse but that will be a matter for the Hong Kong courts to address on a case-by-case basis in the usual way.

In the meantime, companies in Hong Kong would be well advised to exercise caution and ensure that documents containing legal advice, and indeed the obtaining of legal advice itself, are managed with an awareness of the potential reach of the Shareholder Rule.

Authored by Byron Phillips, Jonathan Lu and Nathan Ma.