Reconstructing the Reflective Loss Principle
16 Journal of Corporate Law Studies 373-401, 2016
32 Pages Posted: 16 Jun 2018
Date Written: 2016
When a company suffers loss due to a wrongful act perpetrated against the company, the company’s shareholders suffer where the value of their shares or dividends decreases. However, in the UK and in Commonwealth jurisdictions, such shareholders have in principle no personal recourse against the wrongdoer because their loss is merely ‘reflective’ of the company’s loss; the loss is for the company alone to recover. This ‘reflective loss principle’ as it stands cannot be fully justified by the policy considerations offered in its support. I argue that the most convincing rationale for the principle is to preserve the primacy of the company’s internal governance arrangements in the corporate litigation context. I propose a framework reconstructing the reflective loss principle as a ‘priority rule’ under which resolution of the company’s claim takes precedence over the shareholder’s personal claim, but with an ‘exit exception’ that permits shareholders who exit the company to pursue their own claims. My proposal explains the seeming contradiction that while shareholders may not recover reflective losses via a personal claim, they may recover what are essentially reflective losses through a court-ordered buyout on an unfair prejudice petition, and brings much needed balance and clarity to the law.
Keywords: shareholder remedies; reflective loss; corporate litigation; unfair prejudice; priority rule
JEL Classification: K22, K12, K13, K40, K41, K42
Suggested Citation: Suggested Citation