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Published online by Cambridge University Press: 11 November 2024
Shareholders are not allowed to bring actions for damages due to a fall in share value or loss of dividend, which are “reflective” of their company’s loss. Later, this principle also found its application to “reflective” losses of employees and creditors. The Supreme Court, however, in Marex Financial v Sevilleja, unanimously held that the principle would apply only to shareholders and not to creditors. The article argues that, while the majority opinion in the Marex decision is reasonably balanced, the minority opinion went a step further by even doubting the very existence of the no reflective loss principle without properly appreciating what shareholding entails. If the minority’s position becomes the law, it will jeopardise companies’ existence as separate legal entities with the capacity to decide with respect to their assets. Further, if the protection of the principle is removed, companies’ counterparties will have to worry constantly about facing numerous direct shareholders’ actions, whether they settle the dispute with the company or not. As a result, if the minority view becomes the law, it can potentially make the company a less dependable commercial partner.
The opinions expressed in the article do not represent those of my organisation. I thank the National University of Advanced Legal Studies and M/s. Menon & Pai, Advocates, Kochi, India for allowing unrestricted access to their vast libraries. I am also grateful to Prof. K. Balakrishnan, National University of Advanced Legal Studies, Kochi, India; Prof. Aloke N. Prabhu, Jindal Global Law School, Sonipat, India; and Prof. Dhanya K.A., Government Law College, Thrissur, India for their support. The comments of the anonymous reviewers on the earlier drafts greatly helped me in improving this article. There is no conflict of interest.
1 See Johnson v Gore Wood & Co. (a firm) [2002] 2 A.C. 1, 503–04, 521, 532–34 (H.L.); Prudential Assurance Co. Ltd. v Newman Industries Ltd. and others (No. 2) [1982] Ch. 204, 221–23 (C.A.).
2 Prudential Assurance v Newman Industries [1982] Ch. 204.
3 See e.g. Johnson v Gore Wood [2002] 2 A.C. 1, 56–68 (H.L.); Gardner v Parker [2004] EWCA Civ 781, [2005] 2 B.C.L.C. 554, at [140].
4 See M.J. Sterling, “The Theory and Policy of Shareholder Actions in Tort” (1987) 50 M.L.R. 468, 470–71; see generally B.J. de Jong, “Shareholders’ Claims for Reflective Loss: A Comparative Legal Analysis” (2013) 14 European Business Organization Law Review 97.
5 [2020] UKSC 31, [2021] A.C. 39.
6 See the minority’s opinion: ibid., at 82–122.
7 (1843) 67 E.R. 189.
8 Ibid., at 192–94.
9 Ibid., at 202.
10 Ibid., at 203–04.
11 See K. Wedderburn, “Derivative Actions and Foss v Harbottle” (1981) 44 M.L.R. 202, 211–12.
12 [1982] Ch. 204 (C.A.).
13 Ibid., at 208.
14 Ibid., at 222.
15 But see e.g. J. Lee Suet Lin, “Barring Recovery for Diminution in Value of Shares on the Reflective Loss Principle” [2007] 66 C.L.J. 537, 539–43. The author argues that apart from conferring a right to participate, shares are shareholders’ property.
16 Prudential Assurance v Newman Industries [1982] Ch. 204, 222–24 (C.A.). The court felt that Prudential was presenting a personal claim, in addition to a derivative claim, since it was challenging to establish the preconditions for a derivative action.
17 See de Jong, “Shareholders’ Claims for Reflective Loss”, 99–102; but see also P.L. Davies, Gower and Davies: Principles of Modern Company Law, 8th ed. (London 2008), 625–26 (arguing that the justifications supporting the no reflective loss principles may not be very sound).
18 [1998] 1 All E.R. 724 (C.A.).
19 Ibid., at 730 (Millett L.J.).
20 [1996] 1 N.Z.L.R. 273 (New Zealand Court of Appeal).
21 [2002] 2 A.C. 1 (H.L.).
22 Ibid., at 17–19.
23 Ibid., at 34–35.
24 Ibid., at 35 (Lord Bingham).
25 Ibid., at 36–38; the court also struck out other claims for mental agony and aggravated damages for other reasons.
26 P. Watts, “The Shareholder as Co-Promisee” (2011) 117 L.Q.R. 388, 389.
27 Johnson v Gore Wood [2002] 2 A.C. 1, 62 (H.L.) (Lord Millett).
28 Ibid., at 62–63.
29 Ibid., at 67.
30 Ibid.; for similar reasoning regarding the cause of shareholders’ loss, see also Gerber Garment Technology Inc. v Lectra Systems Ltd. and Another [1997] R.P.C. 443, 471 (C.A.).
31 Johnson v Gore Wood [2002] 2 A.C. 1, 66 (H.L.) (Lord Millett).
32 Ibid.
33 See E. Ferran, “Litigation by Shareholders and Reflective Loss” [2001] 60 C.L.J. 245, 246–47. See also G. Shapira, “Shareholder Personal Action in Respect of a Loss Suffered by the Company: The Problem of Overlapping Claims and ‘Reflective Loss’ in English Company Law” (2003) 37 The International Lawyer 137, 149–51; even when Giora Shapira argues that the no reflective loss principle is unrealistic, she concedes that the “policy considerations” behind Lord Millett’s reasoning “are compelling” (at 150).
34 See e.g. Lee Suet Lin, “Barring Recovery”, 537–58; Sterling, “Theory and Policy”, 490 (arguing that justifications in Prudential Assurance v Newman Industries [1982] Ch. 204 (C.A.) for the no reflective loss principle – double recovery, prejudice to the creditors and multiplicity of suits – are “overstated”). See also Watts, “Shareholder as Co-Promisee”.
35 [2002] EWCA Civ 1428, [2003] Ch. 618.
36 Ibid., at [34]–[40] (Waller L.J.).
37 [2004] EWCA Civ 781.
38 Ibid., at [60] (Neuberger L.J.).
39 Ibid., at [70] (Neuberger L.J.).
40 See de Jong, “Shareholders’ Claims for Reflective Loss”, 102–10; C.R. Yuan, “The Spectre of Reflective Loss” [2022] Singapore Journal of Legal Studies 309. In the US, the principle is known as the “non-conductor principle”: see Sterling, “Theory and Policy”, 474–79.
41 [2021] SGCA 116, [2022] 1 S.L.R. 884 (Singapore Court of Appeal).
42 See R. Cheung, “The No Reflective Loss Principle: A View from Hong Kong” (2009) 20 International Company and Commercial Law Review 223.
43 [2020] UKSC 31.
44 Ibid., at 57–58.
45 Ibid., at 58.
46 Ibid., at 61–62 (Lord Reed, with whom Lady Black and Lord Lloyd-Jones agreed).
47 Ibid., at 66–67; Johnson v Gore Wood [2002] 2 A.C. 1, 62 (H.L.) (Lord Millett).
48 Marex Financial v Sevilleja [2020] UKSC 31, 56, 75–77 (Lord Reed).
49 Ibid., at 63.
50 See P. Davies, “Reflecting on ‘Sevilleja v Marex Financial’”, available at https://blogs.law.ox.ac.uk/research-subject-groups/commercial-law-centre/blog/2020/10/reflecting-sevilleja-v-marex-financial (last accessed 1 May 2024) (arguing that the majority’s approach increases “the conceptual coherence of company law”).
51 Marex Financial v Sevilleja [2020] UKSC 31, 62 (Lord Reed).
52 Ibid., at 63.
53 Ibid., at 56; but see Davies, “Reflecting on ‘Sevilleja v Marex Financial’”, where it is urged that the rule is about organisations, not just companies.
54 Marex Financial v Sevilleja [2020] UKSC 31, 76 (Lord Reed).
55 Ibid., at 70–71.
56 Though Lord Kitchin, too, was junior to the other Supreme Court Justices, he chose to retire early in September 2023.
57 Marex Financial v Sevilleja [2020] UKSC 31, 82, emphasis added.
58 Ibid., at 120 (Lord Sales, with whom Lord Kitchin and Baroness Hale agreed).
59 Ibid., at 84.
60 Ibid., at 93–94.
61 Ibid., at 95.
62 Ibid., at 88, emphasis in original.
63 Ibid., at 85, 94–95.
64 See e.g. N. Molodovsky, C. May and S. Chottiner, “Common Stock Valuation: Principles, Tables and Application” (1965) 21 Financial Analysts Journal 104, 104; R.J. Fuller and C. Hsia, “A Simplified Common Stock Valuation Model” (1984) 40 Financial Analysts Journal 49; J. Laws, Essentials of Financial Management (Liverpool 2018), ch. 3, 57–70.
65 See Companies Act 2006, s. 830.
66 Marex Financial v Sevilleja [2020] UKSC 31, 99 (Lord Sales).
67 See ibid., at 110.
68 Ibid., at 66–69, 70–71 (Lord Reed).
69 Ibid., at 69.
70 Ibid., at 63 (quoting from Prudential Assurance v Newman Industries [1982] Ch. 204, 224 (C.A.)).
71 See Companies Act 2006, ss. 172(1), 172(3); see also L.A. Bebchuk and R. Tallarita, “The Illusory Promise of Stakeholder Governance” (2020) 106 Cornell Law Review 91, 164–68 (arguing that permitting the board to take into account other stakeholders’ interests, such as those of employees, customers, society and creditors, could reduce the shareholders’ ability to hold the board to account).
72 See BTI 2014 L.L.C. v Sequana S.A. [2022] UKSC 25, [2024] A.C. 211.
73 See Companies Act 2006, s. 168.
74 See ibid., ch. 4.
75 Ibid., s. 21.
76 See especially Marex Financial v Sevilleja [2020] UKSC 31, 63, 81 (Lord Reed).
77 See e.g. M.C. Jensen and W.H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Cost and Ownership Structure” (1976) 3 Journal of Financial Economics 305, 311; F.H. Easterbrook and D.R. Fischel, “The Corporate Contract” (1989) 89 Columbia Law Review 1416, 1426–28, for the nature of “nexus of contracts”.
78 Marex Financial v Sevilleja [2020] UKSC 31, at [159].
79 Ibid., at [161].
80 Ibid., at [161]–[162].
81 See A. Tettenborn, “Less Law Is Good Law? The Taming of Reflective Loss” (2021) 137 L.Q.R. 16, 19.
82 Yuan, “Spectre of Reflective Loss”, 309, 320–25.
83 C. Mitchell, “Shareholders’ Claims for Reflective Loss” (2004) 120 L.Q.R. 457, 469–75.
84 Lee Suet Lin, “Barring Recovery”, 557–58.
85 See Sterling, “Theory and Policy”, 470–71, 484, 488–91.
86 See A.K. Koh, “Reconstructing the Reflective Loss Principle” (2016) 16 Journal of Corporate Law Studies 373, 390–400.
87 P. Ireland, “Company Law and the Myth of Shareholder Ownership” (1999) 62 M.L.R. 32, 38–41.
88 [1925] A.C. 619 (H.L.).
89 Ibid., at 630 (Lord Sumner).
90 [1948] 1 K.B. 116 (C.A.).
91 Ibid., at 122 (Evershed L.J.) and also at 120.
92 [1953] 1 Q.B. 248, 276–77 (C.A.).
93 Johnson v Gore Wood [2002] 2 A.C. 1, 37 (Lord Bingham), 66–68 (Lord Millett).
94 Ibid., at 67 (Lord Millett).
95 Ibid.
96 Marex Financial v Sevilleja [2020] UKSC 31, at [81], [83] (Lord Reed).
97 [1983] B.C.L.C. 244 (C.A.).
98 [1983] B.C.L.C. 117 (Q.B.).
99 Jensen and Meckling, “Theory of the Firm”, 312–13.
100 Companies Act 2006, s. 260(1).
101 See also Watts, “Shareholder as Co-Promisee”, 390.
102 Miao Weiguo v Tendcare Medical Group [2021] SGCA 116, at [6].
103 Ibid., at [201], [202].
104 See Johnson v Gore Wood [2002] 2 A.C. 1, 36–37 (H.L.) (Lord Bingham).
105 [2022] EWHC 368 (Ch).
106 Ibid., at [33]–[34].
107 See S. Gee, “Asset Stripping Reflective Loss and Injunctions: Garcia v Marex” (2019) 2 Journal of Business Law 89, 93.
108 See Lee Suet Lin, “Barring Recovery”, 553.
109 See J. Armour, H. Hansmann, R. Kraakman and M. Pargendler, “What Is Corporate Law?” in R. Kraakman et al. (eds.), The Anatomy of Corporate Law: A Comparative and Functional Approach, 3rd ed. (Oxford 2017), ch. 1, 11–13, for a brief discussion on delegated management.
110 Scott v Scott [1943] 1 All E.R. 582 (Ch.D.).
111 See e.g. Automatic Self-Cleansing Filter Syndicate Co. Ltd. v Cuninghame [1906] 2 Ch. 34 (C.A.); John Shaw and Sons (Salford), Ltd. v Peter Shaw and John Shaw [1935] 2 K.B. 113.
112 See Companies Act 2006, ss. 171–177, 40.
113 See e.g. The Royal British Bank v Turquand (1856) 119 E.R. 886; Mahony (Public Officer of National Bank of Ireland) v East Holyford Mining Co. Ltd. [1874–80] All E.R. Rep. 427.
114 See Davies, Principles of Modern Company Law, 499.
115 Companies Act 2006, s. 40(2).
116 See M.A. Eisenberg, “The Conception That the Corporation Is a Nexus of Contracts, and the Dual Nature of the Firm” (1999) 24 Journal of Corporate Law 819, 825–26.
117 Proposals implementing fundamental changes, such as amending articles and mergers, require shareholders’ approval by special resolution/supermajority.
118 Companies Act 2006, s. 260(3).
119 See Explanatory Notes, Companies Act 2006, s. 260.
120 Companies Act 2006, s. 263(2)(a) read with s. 172.
121 For different valid reasons for which a company may refrain from suing a wrongdoer, see Davies, Principles of Modern Company Law, 605–06.
122 Companies Act 2006, s. 263(2).
123 Ibid., s. 172.
124 For example, executives, board members and employees who are also shareholders may resist an otherwise efficient takeover bid to protect their employment: see I. Anabtawi, “Some Skepticism About Increasing Shareholder Power” (2006) 53 UCLA Law Review 561, 586–88.
125 See D.S. Boss, B.L. Connelly, R.E. Hoskisson and L. Tihanyi, “Corporate Governance: Ownership Interests, Incentives, and Conflicts” in M. Wright, D.S. Siegel, K. Keasey and I. Filatotchev (eds.), The Oxford Handbook of Corporate Governance (Oxford 2013), ch. 11, 247–60; see also S. Cools, “The Dividing Line Between Shareholder Democracy and Board Autonomy: Inherent Conflicts of Interest as Normative Criterion” (2014) 11 European Company and Financial Law Review 258, 287. Shareholders – who are also suppliers, employees, customers and creditors – may vote to protect their interests as suppliers, employees, customers and creditors even if it may not be in their interest as shareholders: see H. Hansmann, The Ownership of Enterprise (Cambridge, MA 1996), 62.
126 See L. Enriques, H. Hansmann, R. Kraakman and M. Pargendler, “The Basic Governance Structure: Minority Shareholders and Non-Shareholder Constituencies” in Kraakman et al. (eds.), The Anatomy of Corporate Law, ch. 4, 79–88.
127 See Companies Act 2006, s. 172(1).
128 The priority of distribution in case of insolvency is the combined effect of different provisions of the Insolvency Act 1986: see In re Nortel GmbH (in administration) and related companies; In re Lehman Bros. International (Europe) (in administration) and related companies [2013] UKSC 52, [2014] A.C. 209, at [39] (Lord Neuberger).
129 It is beyond doubt that shareholders’ limited liability is critically important for companies to exist as a workable form for enterprises; see F.H. Easterbrook and D.R. Fischel, “Limited Liability and the Corporation” (1985) 52 University of Chicago Law Review 89, for a discussion of the advantages of limited liability; see also P. Halpern, M. Trebilcock and S. Turnbull, “An Economic Analysis of Limited Liability in Corporation Law” (1980) 30 University of Toronto Law Journal 117, 126–31, for discussion on how limited liability helps in the working of the capital market; H. Hansmann, R. Kraakman and R. Squire, “Law and the Rise of the Firm” (2006) 119 Harvard Law Review 1333, 1343–50. This article argues that limited liability can even work to creditors’ advantage by shielding a borrower’s assets from the creditors of companies in which the borrower holds shares.
130 See generally M.M. Blair, “Locking in Capital: What Corporate Law Achieved for Business Organizers in the Nineteenth Century” (2003) 51 UCLA Law Review 387, for an account of how “separate legal personality” has helped business organisers.