Shareholder Claims for Reflective Loss: How International Investment Law Changes Corporate Law and Governance

Abstract

Scholarly debate on the legitimacy crisis of investment dispute resolution has focused on the ability of multinational corporations to interfere with the state’s right to regulate by challenging government measures in investor-state arbitration. Prior work has addressed the hybrid public-private nature of investment treaties that allow foreign investors to sue sovereign states and emphasized the role of multinational corporations in international lawmaking. The academic discourse misses entirely the fact that international investment law drastically impacts relationships within the corporation (between the shareholders, the management, and the board of directors) and alters the expectations about the corporation as a standard-form legal entity. Remarkably, international investment law allows shareholders to bring in arbitration claims for damages for “reflective loss” — that is, loss incurred by shareholders indirectly as a result of injury to their company. Shareholders can bring these claims without consulting with the company’s management and irrespective of any claims by the corporation. Thus, inherent in investment arbitration is the ability of individual shareholders to make decisions affecting the company and to benefit at the expense of the corporation, its creditors, and other stakeholders.

Drawing on case studies, this Article seeks to surface the extent of the impact of shareholder claims for reflective loss on corporate law and governance — the rules, structure, and processes of the management and control within the corporation. Having established the distortive impact of shareholder claims on the corporate legal entity, the Article further explores the ways to address the systemic problem of reflective loss claims. It makes a normative argument: in view of the policy goals of foreign investor protection, shareholder claims for reflective loss should be permitted in international investment law, but only in limited circumstances to curtail the disruption of corporate governance and to reduce the social costs of litigation. The Article concludes by offering a novel private ordering solution to the problem of reflective loss claims. It argues that the corporate distortion problem is best addressed at the level of individual corporations through targeted provisions in corporate charters and bylaws waiving the right of shareholders to bring reflective loss claims in investment arbitration.

Keywords: Corporate Governance, Corporations, Reflective Loss, Shareholder Claims, Investment Treaty Arbitration, ISDS, Investor-State Dispute Settlement, International Investment Law