Reconstructing the reflective loss principle. Issue 2 (2nd July 2016)

• Record Type: Journal Article
• Authors: Koh, Alan K.
• Is Part Of: Journal of corporate law studies. Volume 16:Issue 2(2016)
• Page Start: 373
• Page End: 401
• Publication Date: 2016-07-02
• Subjects: Corporation law -- Periodicals; 346.06605
• DOI: 10.1080/14735970.2016.1191298
• Languages: English
• ISSNs: 1473-5970

Abstract

ABSTRACT: 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.