Investment Treaties and Shareholder Claims for Reflective Loss: Insights from Advanced Systems of Corporate Law

Abstract

Corporate law in advanced domestic legal systems on the one hand, and typical treaties for the protection of foreign investment on the other hand, treat claims for damages by company shareholders differently. Advanced domestic systems generally bar shareholders from claiming for reflective loss – loss that arises from injury to "their" company (such as a decline in the value of shares). The claim for the loss belongs to the injured company and not to its shareholders. In contrast, shareholder claims for reflective loss have been widely permitted under typical investment treaties over the last 10 years. Ongoing OECD-hosted inter-governmental dialogue on investment law is considering whether there are policy reasons justifying the different approaches to shareholder claims for reflective loss.

This paper examines shareholder claims for reflective loss under investment treaties in light of comparative analysis of advanced systems of corporate law. It considers the impact of allowing shareholder claims for reflective loss on key characteristics of the business corporation. It also explores possible responses by different categories of investors to the availability of shareholder claims for reflective loss under investment treaties. The paper has been discussed by governments participating in an OECD-hosted investment roundtable.

Keywords: shareholders, comparative law, investment treaties, investment agreements, reflective loss, derivative loss, creditors, arbitrators, arbitration, corporations, business corporation, companies, entity shielding, competition, separate legal personality, foreign investment

JEL Classification: F21, F23, F53, F55, F63, G32, G34, G38, K23, K33, K41