Shareholder protection reloaded: redesigning the matrix of shareholder claims for reflective loss.

Author:Chaisse, Julien

The role of "reflective losses" is of considerable importance both to national company law and to international investment law. However, as a matter of practice and legal theory, domestic courts and international arbitration tribunals come to contrary conclusions as to whether shareholders can recover the loss of share values caused by wrongs done to the company. International arbitration tribunals tend to allow shareholders to recover loss of share value caused by states' breaches of investment treaties. Domestic courts generally bar such recovery under the "no recovery of reflective loss " principle. This Article provides an exhaustive account of investment awards that have dealt with the issue of "reflective losses " since 1998. It argues that allowing recovery for reflective loss is a sound legal principle from a practical, legal, and policy perspective and a key feature of international investment case law and should therefore be promoted. The ribunals ' approach is not necessarily worse than the approach adopted by domestic courts. The domestic courts' approach is based on policy considerations like prevention of double recovery, sheltering wrongdoers from multiple claims by shareholders, respecting the plaintiff company's business decisions, etc. However, tribunals are not obliged to adopt all these policies since policies reflect how different courts prioritize various interests. The tribunals can have different priorities and policy considerations because, by their nature, investment treaties are contracts through which states promise to favor foreign investment in exchange for more foreign investment. The arbitration tribunal is there to uphold party autonomy. This should become the premise of reflection and of solving potential practical problems caused by allowing such recovery.

INTRODUCTION I. BLURRING NORMATIVE LINES: THE REGULATORY OVERLAPS OF INTERNATIONAL INVESTMENT LAW AND DOMESTIC CORPORATE LAW A. Exploring the Contours of the Principle of Non-Reflective Loss in. Corporate Law. 1. Non-Reflective Loss in Civil Law Jurisdictions 2. Non-Reflective Loss in Common Law Jurisdictions. B. Conceptualizing International Law of Foreign Investment as Corporate Law 1. The Rise of the International Law of Foreign Investment: Importance of the Substantive Principles 2. The Capacious Scope of the Legal Concept of Foreign Investment: Shares as Foreign Investment. 3. Ubiquity of Shareholders: Subjects of Corporate and Investment Law. C. From Theory to Practice: What Are the Possibilities of Invoking International Investment Treaties to Obtain More Substantial Rights in Domestic Proceedings? II. UNVEILING THE SHAREHOLDER PROTECTION BY INVESTMENT TREATIES: THE TREATMENT OF "REFLECTIVE LOSSES" IN INVESTMENT ARBITRATION A. Shareholder Claims for Reflective Loss: Is There Case Law? B. The Centripetal Force of the Case Law. 1. The El Paso Energy International Company v. Argentine Republic Award (2011) 2. The European American Investment Bank AG (Austria) v. Slovak Republic Award (2012) 3. The Standard Chartered Bank v. Tanzania Award (2012) 4. The Urbaser S.A. and Consorcio de Aguas Bilbao Biskaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic Award (2012). 5. The ST-AD GmbH v. Bulgaria Award (2013). 6. The Postova Banka v. Greece Award (2015) C. Limits of the Centripetal Force: Not All Actions by the Host State Represent an Indemnifiable Treaty Breach. III. CRITICIZING THE INVESTMENT CASE LAW: REFLECTIVE LOSS SHOULD BE RECOVERABLE AS A POLICY DECISION. A. Policy Considerations Underlining the Non-reflective Loss Principle B. Understanding the Nature of Policy Considerations C. Refining Policy Considerations in the Context of International Investment. 1. Protecting Foreign Investment Should Be Adopted as a Policy Consideration 2. A Risk of Double Recovery Does Not Justify a Bar of Reflective Loss. 3. Tribunals Have Nothing to Fear from Opening the Floodgates to Claims. 4. Allowing Recovery for Reflective Loss Is Prejudicial to Nobody 5. If Inconsistency Is a Problem, the Non-reflective Loss Principle Is Not the Cure IV. SUPPORTING THE INVESTMENT CASE-LAW: LOSS RESULTING FROM DIMINUTION OF SHARE VALUE SHOULD BE RECOVERABLE AS A RIGHT ATTACHED TO SHARES A. Shares Merely as Contractual Rights B. Shares as Intangible Property V. RECONCILING PROS AND CONS: CREATING MECHANISMS TO RESOLVE PRACTICAL PROBLEMS A. Practical Solutions to Avoid Double Recovery B. Dealing with Multiple Claims (and Inconsistency) with Consolidation Mechanisms CONCLUSION INTRODUCTION

The legal concept of "reflective loss" is defined as the loss incurred by shareholders as a result of wrongs done to their company. It is called "reflective" because the shareholders' loss reflects the loss of the company, and in theory the loss can be made good if the company enforces its claims against the wrongdoer. (1) One typical example of reflective loss is the loss suffered by shareholders as a result of the diminution of share value caused by wrongs that decreases the company's asset value. (2)

The general applicable legal proposition in various domestic jurisdictions is that, in these cases, shareholders cannot recover damages from wrongdoers for loss in the value of their shares. This is known as the "non-reflective loss principle." However, decisions by international arbitration tribunals in adjudicating investor-state disputes contradict this rule. Tribunals have admitted investors' (e.g., shareholders') claims against the states and allowed investors to recover the loss caused by the diminution of share value. The tribunals' decisions are heavily criticized by legal scholars for lacking careful reasoning, for wrongfully interpreting the scope of the rights attached to shares, and mostly for disregarding as a whole the policy considerations which underlie the non-reflective loss principle. (3) The non-reflective loss principle is justified through various policy considerations and praised for helping courts achieve a good balance between the interests of different parties, including the shareholders, the company, the wrongdoer, and the creditor of the company.

This Article discusses the divergence at national and international levels, taking into account company law, administrative law and international investment treaties. It argues that allowing recovery for reflective loss is a sound legal principle from a practical, legal, and policy perspective.

The Article will contrast the approach adopted by domestic jurisdictions with the approach adopted by international arbitration tribunals. In order to do so, it will first explore the possibility of recovering reflective loss under company law and administrative law in national courts. Given the inability to recover reflective loss under domestic law, the Article will introduce the rise of international treaties as alternative routes for shareholders to recover their losses (I). The second Part exhausts the case law of international investment tribunals on the issue of reflective loss and examines the tribunals' reasoning in detail (II).

To understand and better evaluate the opposite approaches adopted by national courts and international tribunals, the third Part will examine in detail the policy considerations that justify the non-reflective loss principle and evaluate them in the context of international investment (III). It argues that allowing recovery for reflective loss has a sound policy basis. The fourth Part responds to the legal criticism that allowing recovery for reflective loss will undermine the "proper plaintiff' rule, namely, the rule that the company is the proper plaintiff with respect to its rights (IV). It argues that shareholders are the proper plaintiff in regards to rights arising from such loss.

The final Part proposes some procedural solutions for problems that may arise if reflective loss is recoverable, namely, the risk of double recovery and the risk of an unlimited number of lawsuits brought against the government (V).


    The concept of "reflective loss," whether it allows or prohibits shareholders to claim compensation for their losses, is central to company law and investment law. Before discussing the opposite directions taken by domestic and international norms, this section unpacks the issue at the intersection of national company law and international investment law in order to shed light on the practical and theoretical need to reflect on the divergence of these approaches.

    First, the Article summarizes the approach taken by various national company laws on the issue of "reflective losses" (including the United States, the United Kingdom, Hong Kong, France and Germany) (A). Second, it proceeds with an analysis of international investment law trends wherein investors obtain more substantial rights (B). Third, it discusses the possibility of invoking international investment treaties in domestic proceedings (C).

    1. Exploring the Contours of the Principle of Non-Reflective Loss in Corporate Law

      Broadly speaking, company law governs the formation, registration or incorporation, governance, and dissolution of a legal entity. Modern company law creates the notion of independent legal personality, (4) allowing a company to take on rights and liabilities. (5) On the other hand, shareholders suffering from economic loss in their investment in shares would always want to be compensated. Attempting to balance the conflict between the rights of shareholders and the core principle of modern company law gives rise to the discussion regarding allowing or disallowing reflective loss. There is no need to detail the reasoning by different jurisdictions since it is an accepted fact that different jurisdictions adopt this principle. (6) The details of the non-reflective loss principle differ slightly from jurisdiction to jurisdiction. We summarize the positions of...

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