knowledge 11 March 2016 |

Privilege: is a shareholder in dispute with a company entitled to inspect the company’s legal advice in relation to the dispute? 

 

Background

A disgruntled shareholder sought discovery from the company of legal advice it had received in connection with the dispute. The shareholder’s claim related to the provision of a loan by the shareholder to the company by way of a loan note in 2007. The loan note provided that in the event of default, the holder of the loan note, at its sole discretion, could convert the note into ordinary shares in the company.

The company said it had agreed with the shareholder that the loan note would be converted into shares, resulting in a 47% shareholding. There was also a ‘drag along’ right when a minimum of 50% of the shareholders decided to transfer their shares in a bona fide transfer for value. The fifth defendant had agreed to purchase the balance of the 53% shareholding, which would then drag the remaining 47% shareholding with it and thus end the plaintiff’s involvement in the company. The plaintiff denied any such agreement existed and challenged the lawfulness of the purported loan note conversion in 2014.

The shareholder wanted access to privileged documents which evidenced legal advice provided by the defendants’ solicitor to the company’s general manager in relation to the anticipated dispute with the plaintiff shareholder. The defendants asserted litigation privilege and legal advice privilege over the advice, but the shareholder contended that:

• it was entitled to discovery of legal advice received by the company during the period in which the plaintiff remained a registered shareholder;
• the documents were clearly not privileged against the shareholder; and
• one of the letters of advice was dated before the litigation privilege cut-off date.

Decision

Mr Justice Haughton recognised that there was no case law in Ireland on this point and held that, in principle at least, where a company obtains legal advice contemplating certain actions, even actions that might result in litigation, a shareholder should be entitled to discovery of the legal advice, irrespective of whether the shareholder alleged that those actions were wrongful. Relying on Passmore’s analysis² the court said a shareholder had a joint interest with the company, directors and management in obtaining the legal advice. The consequences flowing from that advice were secondary. When the actions of the company flowing from the advice were the subject of the litigation in question or an oppression application, both shareholder and director should have that advice. The court recognised that this analysis gives rise to two consequences. First, where legal advice provided to a company is not in the ‘joint interest’ of the shareholders and the company, the advice may still attract privilege but the disgruntled shareholder would not be entitled to receive the advice. Second, where the disputed actions have been taken by the company in relation to that shareholder, it is even less likely that a joint interest will arise as the advice is sought for the benefit of one side to the dispute.

The court applied the reasoning of the English High Court in CAS (Nominees) Ltd v Nottingham Forest plc³, which makes it clear that the point in time when the legal advice in question is received is the critical factor. In CAS, the court explained its reasoning by analogy with the law of trusts. It held that privilege could not be asserted between shareholders where they have a common interest in property. Critically, however, it held privilege could apply to a legal opinion obtained by one party where the parties are in opposition in litigation.

The Irish court’s decision in Carlo Tassara is a logical application of the rule that parties with clearly conflicting interests cannot share privilege in a document. The court’s obiter comments that a shareholder may be entitled to seek discovery of advice about an issue affecting both shareholder and company, where the subject of that advice could potentially give rise to litigation between the parties, suggest that joint interest may apply, where traditionally joint interest privilege has required a much closer nexus where there is no room for potential or actual discord. It is arguable that the relationship described by the court more appropriately falls under the rubric of common interest privilege, which does permit of some disharmony between the parties on matters that do not go to the heart of their common understanding.

Conclusion

The decision brings helpful clarity to Irish law on privilege where a shareholder is in dispute with a company and it gives comfort that a company will not be compelled to provide privileged material to a disgruntled shareholder if the material deals directly with the subject matter of the dispute.

This is the first time that the Irish courts have considered this point and the judgment broadly follows the approach taken by the English courts. It is noteworthy that the court would have been prepared to treat the shareholder and the company as acting jointly for the purposes of privilege had there not been a clear divergence of interests at a point in the dispute. This suggests that the Irish courts might be willing to entertain arguments to the effect that shareholders are not distinct from the company for the purpose of privilege in an appropriate case.