A company is a legal person, distinct from its management and its owners, respectively the directors and shareholders. The company has its own legal rights and responsibilities. It can own property. It can enter contracts. It can even commit crimes. Therefore, it owns every document it generates or receives and can control its disclosure.
Almost all of these documents will be computer-generated, whether they be emails, reports, minutes of meetings, financial records and so on. Records going back many years must be retained by law and be available for disclosure.
Many company documents are commercially sensitive, so a question that regularly crops up is this: Who has the right to see these documents? Is every member of the board of directors automatically entitled to access? Do the shareholders have the same right – or does the answer depend on the size of a shareholder’s stake or voting rights? In what circumstances does an outsider have the right to see the company’s documents?
In this article, litigation partner Garry Turkie explains the issues directors should understand when disclosing company documents. He also explains the rights of directors, shareholders and third parties when requesting documents.
A common assumption is that a director has the right to see every company document, but the truth is not so straightforward. The principle here is that a director is only entitled to see and take copies of the company’s documents if the director requires them for the company’s purposes. In other words, if a director has an ulterior motive, then access can be refused. For example, if a director or shareholder is in dispute with co-shareholders, they can be denied access to company documents where their purpose is only to advance their interests in the dispute. For the same reason, where a director’s own conduct is under scrutiny, the director can be denied access to company documents that are concerned with his conduct.
It sometimes comes as a surprise to shareholders of small private companies to learn that their rights under the law are very limited. Essentially a shareholder has no right to see any of the company’s documents with a few statutory exceptions – for example, the registers of members and directors, minutes of general meetings, and the annual accounts. Voting rights and size of shareholding are immaterial. For any shareholder interested in getting to know how the company is being run, these documents are not going to help much.
That said, there is nothing to stop shareholders from negotiating more generous rights of inspection than the general law allows, by introducing suitable wording into the company’s Articles of Association or, more likely, into a shareholders’ agreement. In practice, however, this is uncommon.
An unauthorised release of company documents to a shareholder by a director could incur liability for breach of duty to the company where the company’s interests are damaged.
When would a third party be entitled to inspect the company documents? The answer is never, unless in the context of civil, regulatory, fiscal or criminal legal process (admittedly a wide exception). Obviously, the police and governmental bodies in their numerous guises have extensive powers to require production and sometimes seizure of documents.
In civil cases the court has equally robust powers to order a party in litigation to disclose documents to an opponent, including very commercially sensitive documents. Even a company that is an outsider to litigation can be compelled in some circumstances by the court to produce documents for the benefit of the parties to that litigation.
When does privilege apply?
There is one vital exception, however, to the duty to disclose documents for legal process and that is the doctrine of privilege. In short, a company involved in legal process can refuse to disclose any of is documents that are subject to privilege. The main types of privilege are legal advice privilege and litigation privilege.
Legal advice privilege attaches to documents whose main purpose is to seek or give legal advice. This is widely interpreted and largely covers all communications between clients and their solicitors.
Litigation privilege attaches to documents whose main purpose is the preparation of a case for litigation. So, these documents cover not only communications between clients and their solicitors, but also communications with witnesses, experts, witness statements and experts’ reports, and so on.
Privilege and the shareholder rule
There is an important exception to this doctrine of privilege. A company must disclose even privileged documents to a shareholder when disclosure is ordered during litigation. The litigation may exist either between the shareholder and other shareholders, or between the shareholder and the company. The rule conflicts with the doctrine that a company has its own legal personality, distinct from its shareholders. Logically the company should be entitled to assert privilege against a shareholder just as in any other case. Nevertheless, the rule is old and well established in law and is founded on the principle that the shareholder has indirectly paid for the advice.
The implications of the rule can be far-reaching. For example, suppose a company appoints its solicitors to advise on and implement an important transaction. The directors need to understand that the legal advice given might become disclosable to a shareholder one day in later proceedings. And it is not only the advice that may come under the microscope. So too may the company’s instructions to its solicitors and their contemporaneous communications, as well as internal board discussions about the advice.
The directors (and the solicitors) would be well advised not only to avoid unguarded communications, but also to make sure there is a paper trail evidencing the advice sought, the advice given and their adherence to that advice. Without taking care, the company may be disadvantaged upon finding months or years later that a shareholder is entitled to disclosure of all these communications pursuant to disclosure orders in litigation.
It makes no difference to the application of the rule that, for example, the legal advice was given jointly to the company and, say, its majority shareholder. The minority shareholder is entitled to disclosure of the advice, nonetheless.
An exception to the rule applies where the subject of the legal advice is given in the context of potential hostile proceedings between the shareholder and the company. As an example, where a shareholder is also an employee, the company may have taken legal advice regarding the shareholder’s potential dismissal as an employee. The company can assert privilege, in later litigation, against disclosure of that advice notwithstanding the general rule.
It is important for company directors to understand the issues surrounding disclosure and to manage sensitive company documents, particularly those documents entitled to privilege. Orders for disclosure of the company’s documents, once thought to be private, can seriously disadvantage the company’s commercial interests.
If you have any questions on the requirement to disclose company documents, please contact Garry Turkie.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.