In Jardine Strategic Limited v Oasis Investment II Master Fund Ltd & Ors the Privy Council (on appeal from Bermuda) held on July 24 that the so-called "Shareholder Rule" should be abrogated.

This rule provided that a company could not, in the course of litigation between a company and shareholders, withhold documents from inspection on the basis of legal advice privilege. The Board held that the original proprietary justification for the Shareholder Rule no longer exists and the company shareholder relationship is not one that falls into the joint privilege relationship family.

The Board also held, pursuant to its Willers v Joyce jurisdiction (where the Privy Council, not being a court of the United Kingdom but comprising the same Justices those who sit in the House of Lords and the UK Supreme Court, may direct that its decision also represents the law of England and Wales), that the domestic courts of England and Wales should treat this decision as binding and part of the law of England and Wales.

This decision is significant for common law jurisdictions – it is binding in Bermuda and England and Wales, and likely to be highly persuasive in other common law jurisdictions such as the Cayman Islands. It provides certainty to company directors seeking legal advice and, in the context of shareholder appraisal proceedings under section 106 of the Bermuda Companies Act (and likely also in the Cayman Islands in shareholder appraisal proceedings under section 238 of the Cayman Islands Companies Act), clarifies that companies are not required to produce legal advice obtained when setting fair value offered to dissenting shareholders.

This is the second decision of the Privy Council arising out of the amalgamation of two companies within the Jardine Matheson group and section 106 proceedings issued by the dissenting shareholders seeking a fair value appraisal by the Court.

In the present matter on appeal, the dissenting shareholders had sought discovery of legal advice that was given to the Jardine Matheson group when it was setting the $33 value which was offered as fair value to dissenting shareholders who had their shares cancelled.

The Company asserted that the advice was covered by legal advice privilege. The dissenters asserted that where a party seeking to access the documents is a shareholder, that will override the usual rules on privilege. They submitted that the Shareholder Rule was in reality a sub-set of joint interest privilege, such that it remains justified notwithstanding the fading away of the original proprietary basis for its creation.

The primary issue for the Board was whether the Shareholder Rule exists as a matter of Bermudian law.

At first instance, Chief Justice Narinder Hargun of the Court of Appeal of Bermuda rejected the Company's claim to privilege on the basis that the Shareholder Rule was a long established and complete answer to any assertion of legal professional privilege by a company against its shareholders.

The Company appealed the decision. The Court of Appeal of Bermuda dismissed the appeal.

Justice of Appeal Geoffrey Bell who gave the main judgment, recognised that the Shareholder Rule had not been applied in any decision in Bermuda but that the Court of Appeal had clearly operated on the basis that the rule did exist in at least one previous case. Justice of Appeal Bell regarded the rule, if it existed, as based on joint interest privilege and not 19th century case law (from which the rule originated).

Justice of Appeal Ian Kawaley reached a more nuanced conclusion. He rejected the traditional view that the company shareholder relationship was enough to establish an exception to privilege. Rather, it would depend upon all the circumstances and was a flexible and context-based rule rather than status-based rule.

President Sir Christopher Clarke agreed with both judgments and added that the joint interest principle, applicable to defeat what would otherwise be a successful claim to legal advic...