A recent change in the law relating to shareholders has created an opportunity for family-run businesses and other small and medium enterprises (SMEs) to rethink how they share information within their organisations. In this blog, I’ll explore how this shift creates an opportunity to enhance governance and streamline decision-making.

For 137 years, a peculiar rule in English law gave company shareholders the right to see the confidential legal advice a company had received. This principle, known as the "Shareholder Rule," often created uncertainty for directors, especially in family businesses and SMEs where shareholder relationships can be complex. Before this change, seeking legal advice on a matter that might later become contentious with shareholders was a bit of a gamble. There was always a lingering risk that the advice the company directors received could be handed over to the very people bringing a claim against the company.

But that uncertainty is now over. A court decision in July 2025 has abolished this long-standing exception. This is a significant shift, and, beyond the legal implications, this change presents a valuable opportunity for directors of small businesses to reflect on how information is shared with shareholders and to establish clearer, more structured governance practices.

Where Did the Shareholder Rule Come From?

Legal professional privilege is a cornerstone of our justice system. It ensures that conversations between a client and their lawyer remain confidential. This allows companies and individuals to seek candid legal advice without the fear that their words will be used against them later.

The Shareholder Rule was a notable exception. It was born from the Victorian-era idea that since shareholders are the ultimate owners of a company and its funds pay for legal advice, they have a shared interest in that advice. Consequently, in disputes between a company and its shareholders, the company was generally unable to claim privilege over most of its legal guidance -unless the advice was specifically sought to address that shareholder litigation.

This rule never sat comfortably with a core principle of modern company law: a company is its own legal person, separate from its shareholders. Shareholders own shares, not the company's assets or its confidential information. Despite this, for well over a century, the courts upheld this special right for shareholders – until now.

A Landmark Decision: A Rule Without Justification

The case that changed the rule was Jardine Strategic Holdings Ltd v Oasis Investments II Master Fund Ltd and others (No. 2) [2025] UKPC 34. Although the dispute originated in Bermuda, the Privy Council made it clear that its ruling now reflects the state of modern company law in England and Wales.

The court took a fresh look at the Shareholder Rule and concluded it had no proper legal foundation. The judges highlighted several key points:

• A company is not a trust: Unlike beneficiaries of a trust, who do have rights to see legal advice, shareholders do not have the same relationship with the company.
• Interests are not always shared: The court dismissed the old assumption that a company and its shareholders always have the same interests. In reality, their interests often diverge, particularly during a dispute.
• Good governance is paramount: The judges stressed that the rule could discourage directors from seeking timely legal advice on contentious issues for fear it would later be disclosed. This hesitation is detrimental to good governance and sound business practice.

With this decision, the Privy Council decisively scrapped the rule.

Why the Law Change Matters for Family Businesses and SMEs

Family-run businesses and SMEs often operate in environments where the roles of shareholder and director overlap, and there’s an expectation of greater transparency to maintain trust and avoid conflict. The now-abolished Shareholder Rule previously aligned with these expectations by allowing shareholders access to legal advice, fostering a sense of openness.

With the rule no longer in effect, directors can now seek legal advice with greater confidence, knowing that privilege will be preserved. This shift provides an opportunity to revisit and formalize internal processes for information sharing. By doing so, family businesses can better manage expectations, reduce the risk of misunderstandings, and support more structured decision-making.

Time for a Governance Health Check?

The end of the Shareholder Rule is a positive development that strengthens governance and clarifies the boundaries between a company and its shareholders. For family businesses and SMEs, this is the perfect time to:

• Review constitutional documents: Update articles of association and shareholders' agreements to clearly define expectations around information sharing.
• Seek legal advice on privilege: Understand whether sharing privileged information could waive confidentiality protections.
• Implement protocols for information sharing: Establish clear processes to manage how legal advice and other sensitive information are shared.
• Manage shareholder expectations: Proactively address assumptions about transparency to avoid future disputes.

Moving Forward

As is clear, there are several important points to consider with this significant development in the law, and careful legal advice should be obtained. If you are navigating a shareholder issue or simply want to ensure your company’s governance documents are robust and up-to-date in light of this change, a solicitor specialising in corporate and company law will be able to assist.

Legal disclaimer

The matters contained within this article are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to its’ accuracy, and no liability is accepted for any errors or omissions.

Before acting on any of the information contained herein, expert advice should always be sought.

© Melissa Worth, October 2025