England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
LLOYDS/HBOS LITIGATION

		Rolls Building Royal Courts of Justice
		Wednesday, 22nd July 2015

(Judgment prepared without access to some authorities and documents)

MR. JUSTICE NUGEE:

1. This is the first CMC in this action. One of the issues that I have to decide is whether the defendants are entitled to assert privilege against the claimants in respect of certain legal advice. The way in which it is formulated in the draft order put forward by the claimants is "legal professional privilege in respect of any legal advice received from or communications with Linklaters or any other legal advisers or any communications between Linklaters or other legal advisers and third parties, in relation to Lloyds' acquisition of HBOS and participation in the UK Government's Recapitalisation Scheme, the form and content of the Circular dated 3^rd November 2008 and the Prospectus dated 18^th November 2008."
2. I am not going to recite in this judgment the background facts which are well-known to the parties. I was referred to a number of authorities for the principles on whether a company is entitled to claim privilege against its own shareholders. The general rule is clearly established that it is not. A convenient statement of the principle can be found in the judgment of Simonds J. (as he then was) in Dennis & Sons v West Norfolk Farmers' Manure & Chemical Co-operative Co. Ltd. [1943] Ch. 220 in which he said this (at 222):

"The general rule, which applies equally as between a company and its shareholders and as between a trustee and his beneficiaries is thus stated at pp. 518 and 519 of the Annual Practice, 1943:

'A cestui que trust ... is entitled to see cases and opinions submitted and taken by the trustee for the purpose of the administration of the trust; but where stated and taken by the trustees not for that purpose, but for the purpose of their own defence in litigation against themselves by the cestui que trust they are protected... On the same principle a ratepayer would be entitled to see cases and opinions taken by the corporation on the subject of rates...So in Gouraud v Edison Gower Bell Telephone Co. Ltd, an action by shareholders against the company the plaintiffs were held entitled to seek communications between the company and their solicitors: but similarly a shareholder could not seek counsel's opinion taken by the company, in respect of the matter in dispute between them."

3. As that citation illustrates, there is a well-established exception to the general rule and indeed in that case Simonds J. went on to say (at 223):

"In the present case it seems clear that when, in January, 1938, the defendants instructed the accountants to make a report on the interpretation of the article, and, therefore, on the duty of the directors in administering the affairs of the company, they were doing something on behalf of all the shareholders. They were seeking to do no more than to perform their duty having regard to the difference of opinion which had arisen on the board, and they did not seek the report because some action was threatened against them. That being so, the plaintiffs, as shareholders, are entitled to see what the accountants reported regarding the rights and duties of the board."

4. Another example of the exception is provided by an earlier case and, as a decision of the Court of Appeal, it is binding on me. That is Woodhouse & Co. Ltd v Woodhouse [1914] 30 TLR, 559. In that case the headnote reads:

"The rule that where a company takes the opinion of counsel and pays for it out of the funds of the company a shareholder has a right to see it does not apply where the company has brought an action against the shareholder, even though the shareholder has set up a counterclaim alleging the invalidity of the resolution authorizing the action."

5. There were only two members of the Court of Appeal. Lord Justice Phillimore said that he had read the opinions, and refers to there being three opinions, two of them after the action began and the third in preparation for the action. He said that they had to consider the principle applicable where a shareholder was a plaintiff or a defendant in litigation with the company. To his mind whether he was plaintiff or defendant was immaterial. He thought that the principle was well settled in Brown v Oakshott, and was not affected by the decisions in Bristol Corporation v Cox or Gouraud v Edison Gower Bell:

"The principle was that if people had a common interest in property, an opinion having regard to that property, paid for out of the common fund, i.e. company's money or trust fund, was the common property of the shareholders or cestui que trust. But where the parties were sundered by litigation such an opinion obtained by one of them was privileged."

6. Mr. Justice Lush said that he thought there was no foundation for the respondent's claim to see these opinions.

"The effect of his contention would be to make it absolutely impossible for a company in litigation with a shareholder to obtain confidential advice. Where a company obtained advice in the common interest and paid for it out of the common fund, undoubtedly the shareholder would have a right to see it. But that did not apply where the interests of the company and the shareholder were adverse. The fact of a counterclaim alleging that the company's name ought not to have been used made no difference, if the opinions were obtained by the company to enable it to carry on the litigation."

7. Miss Davies QC, who appears for the defendants, submitted to me that the foundation of the principle could be seen, from the way in which it was expressed by Phillimore L.J. and Lush J. in Woodhouse, as being that the parties had a common interest. She said that the exception to the general rule applied where their interests were adverse. There are undoubtedly, as the citations I have read out make clear, references to "common interest in property" (Phillimore L.J.) and obtaining advice "in the common interest" (Lush J.)
8. However, this principle that a company is not entitled to assert privilege against its shareholders is not, to my mind, an example of what is usually meant by common interest privilege. As I understand the usual meaning of the term "common interest privilege", it is that which is referred to in Buttes Gas & Oil Co. v Hammer (No.3) [1981] QB 223.

"There is a privilege which may be called a "common interest" privilege. That is a privilege in aid of anticipated litigation in which several persons have a common interest. It often happens in litigation that a plaintiff or defendant has other persons standing alongside him - who have the self-same interests as he - and who have consulted lawyers on the self-same points as he - but these others have not been made parties to the action."

That is Lord Denning MR at 243. He concluded that each of those persons interested can avail himself of the privilege in aid of litigation. That seems some way distant from the principle lying behind the general rule.

9. The foundation, as I understand it, of the general rule is the same as the foundation of the similar general rule that applies in the case of trustees and beneficiaries. Just as a trustee who takes advice as to his duties in relation to the running of a trust, and pays for it out of the trust assets cannot assert privilege against the beneficiaries who have, indirectly, paid for that advice, so too a company taking advice on the running of the company's affairs and paying for it out of the company's assets cannot assert a privilege against the shareholders who, similarly, have indirectly paid for it.
10. The decision in Woodhouse does not, I think, give any support to the notion that the determining question of whether the general rule or the exception applies is whether the interests of the company and the interests of its shareholders are wholly aligned or not. Like all other judgments, statements of principle must be read on the basis of the facts in each case and on the facts of that case there had been actual litigation, and it is quite clear from the way in which Phillimore L.J. approached the judgment that the opinions were written in connection with the actual litigation either after it had been brought or in preparation for it. It is not surprising that in those circumstances he referred to the parties having been sundered by litigation, or that Lush J. referred to the parties' interests as adverse. The foundation of the exception is still, it seems to me, the existence of actual or threatened litigation, and the taking of advice in connection with the actual or threatened litigation.
11. It is not disputed that the exception goes beyond actual threatened litigation and encompasses litigation in contemplation. It was expressed by Blackburne J. in Arrow Trading and Investments & Anr v Edwardian Group Limited & Ors [2004] EWHC 13/9 (Ch) at [24] as follows:

"24. ... It is well established by authority that a shareholder in the company is entitled to disclosure of all documents obtained by the company in the course of the company's administration, including advice by solicitors to the company about its affairs, but not where the advice relates to hostile proceedings between the company and its shareholders: see Re Hydrosan Ltd [1991] BCLC 418 and CAS (Nominees) Ltd & others v. Nottingham Forest Plc & others ... The essential distinction is between advice to the company in connection with the administration of its affairs on behalf of all of its shareholders, and advice to the company in defence of an action, actual, threatened or in contemplation, by a shareholder against the company."

12. So far it seems to me that the authorities are all consistent. There is a general rule that no privilege can be asserted by the company against its shareholders. The general rule is subject to an exception where the advice taken by the company is in relation to litigation - that litigation being actual, threatened or in contemplation.
13. It is worth going back to the various phrases which run through the authorities that I have referred to which all consistently refer to the advice which is subject not to the general rule, but to the exception, as being advice in relation to the particular litigation in question. So starting with the earliest case, Woodhouse, Lush J. said that the effect of the contention would be to make it absolutely impossible "for a company in litigation for shareholders to obtain confidential advice" and referred later to "if the opinions were obtained by the company to enable it to carry on the litigation". In Dennis Simonds J. referred to a shareholder not being entitled to seek counsel's opinion taken by the company "in respect of the matter in dispute between them" and, later, on the fact of that case said that the directors "did not seek the report because some action was threatened against them" and, later still, says the report "was not a document obtained by the defendants for the purpose of defending themselves against hostile litigation". Then Blackburne J. in Arrow Trading, referred to "where the advice relates to hostile proceedings between the company and shareholders", and then to advice to the company "in defence of an action actual, threatened or in contemplation". Those citations are all, it seems to me, consistent statements to the effect that the foundation of the exception is the fact that not only the interests of the parties have diverged, but that litigation, actual, threatened or in contemplation, has caused the company to take advice in defence of, in connection with, or relevant to, that actual, threatened or contemplated litigation.
14. Miss Davies submitted that as soon as litigation was reasonably contemplated the interests of the company and the shareholders could be seen to diverge and thereafter the shareholders were not entitled to see any legal advice taken by the company. I do not accept this submission which seems to me contrary to the citations which I have made from those authorities, and also contrary to principle. Going back to the analogy with a trust fund, it is easy to contemplate a situation in which a beneficiary sues a trustee for a particular breach of trust. Suppose, for example, a pension scheme trustee who makes a refund of surplus to the employer in circumstances where the members say there was no power to do it. That no doubt prevents the beneficiaries from seeing counsel's opinion in relation to that dispute. But I do not see why it does or should prevent the beneficiary from seeing any other legal advice obtained by the trustee, for example in relation to powers of investment which have nothing to do with the dispute, but are part of the ordinary administration of the trust.
15. Miss Davies referred, and indeed it was really the foundation of her argument, to the decision in Re Hydrosan Limited, [1991] BCLC 418, a decision of Harman J. In that case Harman J. had to consider two questions of privilege, one of which I need not refer to, but the second of which concerned documents concerning a rights issue which had been proposed by the board in a circular of 26^th May. Harman J. said this, at p.422:

"The privilege here is claimed on the grounds that from the nature of the relations between the parties, it was reasonably to be contemplated that there would be litigation arising. Upon that the decision as to privilege which runs from the inception of the dispute for legal advice in connection with the dispute seems to me to be plainly applicable."

16. Pausing there, I see that formulation, "the privilege" "for legal advice in connection with the dispute" as entirely in line with the other cases which I have referred to. He then went on to deal with the decision of Malins V-C in Wilson v Northampton & Banbury Junction Railway Co. (1872) L.R. 14. Eq, 477, which he said was helpful on the point. He cited from the Vice-Chancellor's judgment as follows:

" 'Here is a contract entered into which has led to litigation, and how is it possible for anybody to point out the precise moment between the date of the contract and the filing of the bill when the dispute arose? In the present case it happens to be a long time which has elapsed - from 1863 to 1871 - eight years before the litigation commenced. How is it possible in the case to find out what is the precise date - not when the litigation commenced, for that would be the filing of the bill, but when the dispute arose and when the litigation became probable? I think it is impossible to say. It is of the highest importance as laid down in Greenhough v Gaskell, ... that all communications between a solicitor and a client upon a subject which may lead to litigation should be privileged, and I think the Court is bound to consider that every contract entered into for the sale of land or the making of a railway station such as this, or almost any contract entered into between man and man or between a man and a public body, may lead to litigation before the contract is completed. Any correspondence passing between the date of the contract which afterwards becomes the subject of litigation and the litigation itself is, in my opinion, on principle, within the privilege extended to the non-production of communications between solicitors and clients.'"

17. Harman J then continued:

"That may be a somewhat cynical view of human behaviour to consider that every contract is a cause of litigation. It may merely give grounds for hope to the Bar and the solicitors' profession that every contract will lead to litigation. I do not pause to consider whether that is so or not. It seems to me that it is a clear and precise view of principle which I would adopt and follow. In this case, it seems to me, the issue of the notice convening the extraordinary general meeting and of the circular explaining the nature of the business to be considered at the extraordinary general meeting was a date from which it plainly could be contemplated that there might well arise litigation. No communication between the client, that is I suppose the company, because the company would be the subject of the claim, and the solicitors after the date of the circular should be open to production. Down to that date I cannot think that there can have been contemplation of litigation because down to that date the company could have decided not to seek to make a rights issue, and there would never have been an occasion for litigation. It seems to me that the cut-off date, therefore, is the date of the notice of the circular convening the extraordinary general meeting. Down to that date the documents are within the general rule which I have already enunciated, that all documents concerning the administration of the company, being advice by solicitors to a company about its affairs are disclosable to shareholders; after that date litigation against the company in the true sense within the doctrine which I have already mentioned was in contemplation with the decision of Malins V-C and is not producible."

18. Miss Davies relies on that as enunciating a general principle that once the company is committed to a course of action, litigation is therefore really in contemplation. I am rather doubtful if that can be elevated into a general principle in the way she seeks to do. Again one has to read the decision of Harman J. on the facts, so far as it is possible to glean them from the report. There had been a previous s.459 petition and the shareholders were obviously parties who had been at loggerheads. As Mr. Steinfeld submitted, no doubt rightly, the rights issue was presumably designed in some way to prejudice the petitioner. It is perhaps not surprising that litigation was readily in contemplation, or that any advice about the rights issue could be seen to be advice in connection with that dispute which was then in contemplation.
19. On the facts here I am quite unpersuaded that there is any general principle which enables me to conclude today that litigation was actually or reasonably in contemplation on 18^th September 2008 - the date of the announcement which Miss Davies showed me as being when Lloyds announced that it had agreed with HBOS to form an enlarged group.
20. I was shown by her a question raised at a meeting, the Analysts Meeting, later that day, in which someone said: "Do you think your shareholders will be happy that you have taken on board £72 billion pounds of toxic mortgages and the highest arrears in the market?" to which the answer from Sir Victor Blank was: "I mean we would not do this unless we thought our shareholders would regard it as a very worthwhile exercise. As a very general answer of course we have done it because we think shareholders will be very supportive of it and will recognise the value that it will create." It is one thing to say the board could reasonably have expected some dissentient shareholders to be unhappy with a decision; it is quite another thing to say that litigation was in the circumstances reasonably contemplated. Whatever be Malins' V-C's view as to a contract for the sale of land or for building a railway station, I do not think it follows from the facts that an extraordinary general meeting here was being called in order to approve a transaction that the board was unanimously recommending that litigation could be said to be in reasonable contemplation. Even if it were shown that there were circumstances which made it appropriate to conclude that litigation was in reasonable contemplation on 18^th September or 8^th October (or any other date in 2008), it does not follow that all legal advice taken from that date by the board was advice in defence of or in connection with that contemplated litigation.
21. In my judgment, for the reasons I have sought to express it is only advice of the latter type, advice which was obtained by the company to enable it to carry on with litigation, advice which was in connection with that dispute, advice in defence of the contemplated litigation, which falls within the exception to the general rule, and that is privileged against the shareholders.
22. Mr. Steinfeld accepted that nothing I decide today can prevent the defendants from asserting such privilege, if upon the facts it can be properly asserted. Subject to that I accept his submission that under the general rule the sixth defendant is not entitled to claim a blanket privilege for all legal advice in the way in which the sixth defendant has sought to do so.
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