Jan 27, 2015 immediate loss and reflective loss as a discrimen for claiming damages caused by third parties to corporate shareholders. Ronald jj wong and jeremy yeo wen an, reflective loss, reverse piercing and alter ego in koh kim teck v credit suisse ag, singapore branch 2015 sghc 52, singapore law blog 31 march 2015. Pdf shareholder protection reloaded redesigning the. Litigation by shareholders and reflective loss the. The principle of reflective loss states that that the company itself, as. The shareholders agreement a sample agreement note this is just a sample agreement set in the legal context of the united states to serve as food for thought. An example of an agreement form is the shareholder agreement form, a binding contract between the shareholders of a corporation, defining the shareholders rights, privileges, protections, and obligations. Our last article covered why and when to use a shareholders agreement. The hong kong court of first instance rules on whether the no reflective loss principle applies to a shareholders claim brought under a personal guarantee.
Effective shareholder or partnership agreements bdo canada. Pdf reconstructing the reflective loss principle researchgate. If a company is harmed by the behaviour of a third party, shareholders may suffer the economic consequences in the form of a reduction in the value of their shares. Shareholders agreement transit systems pty ltd 1 this agreement the agreement is entered into between. Jun 05, 20 the hong kong court of first instance rules on whether the no reflective loss principle applies to a shareholders claim brought under a personal guarantee. Next, shareholders may be barred from claiming damages if the loss flows to the company the reflective loss principle. 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.
Admissibility of claims for reflective loss raised by the. Enter the rule of reflective loss which has recently been extended by the english court of appeal in sevilleja garcia v marex financial ltd 2018 ewca civ 1468 to include shareholders and. The board shall at all times consist of insert number of directors members. The rule against recovery of reflective loss states that there should be no double recovery, so a shareholder can only bring a derivative action for losses of the company, and may not allege suffering a loss in a personal capacity for a personal right. Investment 201402 corporate law from advanced systems. This practice note considers the scope of the reflective loss rule. Use this agreement to name a managing shareholder, and define what corporate actions require the consent of the shareholders. Next, as shareholders agreements adhere to classical contractual law. It was decided that the exception is a narrow one and only applies where, as a. The shareholders have agreed to establish the company as a jointly owned company which is intended carry on the business of a holding company in the manner set out in this to agreement. Chris webber and michael davar commented that the principle of reflective loss was an important element of the concept that a company was a legal entity separate from its shareholders. The no reflective loss principle is a wellestablished common law principle based on english case law. In particular, for minority shareholders lacking the ability to change the companys board to one more amenable to suing on the companys behalf, the route to recovery is unlikely to be smooth, underlying the importance of gaining wherever possible the benefit of robust contractual rights pursuant to a welldrafted shareholders agreement and.
Shareholder protection reloaded redesigning the matrix of shareholder claims for reflective loss article pdf available in stanford journal of international law 521. Overcoming the principle of reflective loss uk finance. The rights of other stakeholders, such as employees, customers and wider society are given comparatively little protection. Reflective losswho is and is not excluded by the rule ucp. Insights from advanced systems of corporate law corporate law in advanced domestic legal systems on the one hand, and typical treaties for the protection of foreign investment on the other hand, treat claims for damages by company shareholders differently. Clarification of the rule against reflective loss in the. Nov 01, 2017 in an important recent decision the commercial court confirmed the availability of specific performance of a shareholders rights under shareholder agreements as a means to dodge the difficulties created for shareholders by the principle of reflective loss. However, with a shareholders agreement involving a characteristic. Cliffe dekker hofmeyr can a shareholder recover loss caused. Shareholder claims and the no reflective loss rule canada.
This article covers what issues you should consider and what the steps you will need to take to draw up an agreement. It was decided that the exception is a narrow one and only. Introduction the no reflective loss rule shareholder remedies. Shareholder protection reloaded redesigning the matrix of. This case is of interest since the court reached the conclusion that the reflective loss principle does not apply in respect of losses claimed by parties who are not shareholders at the time the claim was issued. While we have stated that it is relatively simple to prepare a shareholders agreement. Jun 05, 20 the no reflective loss principle is a wellestablished common law principle based on english case law. Jun 26, 2015 the claim for the loss belongs to the injured company and not to its shareholders. Each of the shareholders is the registered and beneficial owner of the number and class of shares in the capital of the corporation set out opposite such shareholders name below. The commercial court has ruled that a remedy of specific performance of shareholder s rights can be sought under shareholder agreements, enabling shareholders to circumvent the difficulties created by the reflective loss principle. In townsing, the court of appeal held that the plaintiffs losses were reflective losses of. Chief constable of norfolk illustrates the great difficulty shareholders face when trying to recover loss caused by a wrong done to a.
Financial sanctions for breach of shareholders duties. Template shareholders agreement product or high growth. A shareholder cannot make a claim for reflective loss even. Key issues to consider for a shareholders agreement. Thinking your way through shareholder agreements overview beyond the checklist handout o how to approach the process general principles o thinking your way through key substantive areas o thinking your way through key practical considerations ten 10 key general principles. Name number and class of shares y 25 common shares x 75 common shares.
The scope and rationale of the rule barring shareholders from bringing personal actions to recover. 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 companys asset value. If dividends are payable to shareholders, the agreement should set out a process for determining what dividends are payable. Company law, settlement of disputes between shareholders, social objective of exit proceedings, unfair prejudice procedure, fairness of the price for compulsory transferred shares, reflective loss features of small and microenterprises and the majority rule in the general meeting of shareholders as. A shareholder agreement is a contract between the shareholders of a corporation, which defines the roles of shareholders and specifies duties the corporation has to them. In united kingdom company law, reflective loss is the loss of individual shareholders that is inseparable from general loss of the company. Carlos sevilleja garcia v marex financial limited 2018 ewca civ 1468. The english court of appeal has clarified in garcia v marex financial ltd marex 2018 ewca civ 1468 that the rule against reflective loss does apply to claims by unsecured creditors who are not shareholders in the relevant company. Insights from advanced systems of corporate law by david gaukrodger, senior legal advisor, oecd investment division abstract corporate law in advanced domestic legal systems on the one hand, and typical treaties for the protection of. Reflective losswho is and is not excluded by the rule. Oceanic trans shipping est was one of three shareholders in two joint venture companies, who owned two very.
National and international law barring shareholder claims for reflective loss is often explicitly driven by policy considerations relating to consistency, predictability. Enforceability and effectiveness of typical shareholders agreement provisions 1155 agreements among two or more shareholders of a corporation are commonly used in connection with private equity and venture capital investments, joint ventures, and other corporate transactions. This article, taking a comparative law perspective, answers the question whether shareholders should be able to claim such a loss that is merely reflective of the companys loss. Under shareholder reflective loss, the foreign investor is able to initiate a claim on its own behalf. In particular, such claims are restricted due to the no reflective loss rule, which has traditionally prevented shareholders from bringing claims where their loss merely reflects the loss suffered by the company. Where the wrongdoer by breach of duty had disabled the company from pursuing its cause of action, a shareholder who also has a claim may bring proceedings for his own losses, including losses termed reflective losses attributable to the diminution in value of his shares. Shareholders reflective loss is incurred as a result of injury to their company, typically a loss in value of the shares. A discussion of the no reflective loss rule where a shareholders loss merely reflects the loss suffered by the company. Reflective loss impossibility and fraud claims trowers. A loss claimed by a shareholder which is merely reflective of a loss suffered by the company ie a loss which would be made good if the company had enforced in full its rights against the defendant wrongdoeris not recoverable by the shareholder save in a case where, by reason of the wrong done to it, the company is unable to pursue its. In townsing, the court of appeal held that the plaintiffs losses were reflective losses of the company.
The role of reflective losses is of considerable importance both to national company law and to international investment law. Mar 11, 2015 in shareholder claims for reflective loss, however, shareholders seek relief on behalf of themselves due to a reflective loss that they suffer due to a breach of the companys rights. Shareholder personal action in respect of a loss suffered by the company. The rule against reflective loss is a well established product of public policy. Management of the company is in the hand of the board of directors a. Overcoming the principle of reflective loss squire patton boggs. The court also considered whether the exception, recognised in giles v rhind 2002 ewca civ 1428, applied so that the rule of reflective loss does not bar a shareholder creditor from bringing an action against the wrongdoer where the company is unable to pursue an action itself. Broadly, in most jurisdictions, the basic principle is that, where the company suffers loss caused by a. Shareholder personal action in respect of a loss suffered. In shareholder claims for reflective loss, however, shareholders seek relief on behalf of themselves due to a reflective loss that they suffer due to a breach of the companys rights. Reflective losswho is and is not excluded by the rule ucp plc v nectrus ltd. In giles v rhind 2002 ewca civ 1428 giles, the english court of appeal applied an exception to the principle, by which the minority shareholder can seek compensation for such reflective loss where the company itself is unable to pursue an action against the wrongdoer and that inability was caused by the wrongdoer who in giles. The question for the court of appeal was whether the rule applies.
In a recent decision, the court of appeal has clarified the ambit of the socalled rule against reflective loss, which has traditionally operated to prevent shareholders from bringing claims where their loss merely reflects the loss suffered by the company. No 2 1982 1 ch 204, the rule prevents a shareholder from recovering damages for the diminution of the value of his shareholding where the company he has an interest in has suffered loss as a result of a third partys breach of duty. We recommend you obtain the help of a qualified lawyer to complete it. The hong kong court of first instance rules on whether the. The rule of reflective loss emerged in the early 1980s in the case of prudential assurance v newman industries no. Uk reflective loss rule impedes shareholder recovery.
Shareholder agreements in the first issue of our publication, we discussed the need and relative ease of. The emphasis of cayman islands company law is to protect the rights of creditors and members i. Company law, settlement of disputes between shareholders, social objective of exit proceedings, unfair prejudice procedure, fairness of the price for compulsory transferred shares, reflective loss features of small and microenterprises and the. Template shareholders agreement product or high growth companies this template document is provided for guidance purposes only. This document is intended to act as a guidance tool to make obtaining legal advice a more efficient and cost effective process. In an important recent decision the commercial court confirmed the availability of specific performance of a shareholder s rights under shareholder agreements as a means to dodge the difficulties created for shareholders by the principle of reflective loss background facts. The principle of reflective loss reflective loss is a legal principle of company autonomy. The company acquires causes of action for breaches of. Careful consideration still must be given to the contents of such an agreement, and it should be tailored. Chief constable of norfolk illustrates the great difficulty shareholders face when trying to recover loss caused by a. Immediate loss and reflective loss as a discrimen for. How to overcome the concept of reflective loss pannone. For ease of reference purposes, this standard form anticipates the. With each generation, the governance of the family business entity becomes increasingly more complex.
High courts recent decision in breeze and another v. Unanimous shareholder agreement this agreement,dated as of the. Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. It had been argued by the defendant that allowing former shareholders to claim for reflective loss left open the possibility that parties could deliberately circumvent the principle by divesting themselves of their shares before issuing the claim. Overcoming the principle of reflective loss insurance. Robertsons the reflective loss principle the principle. This article tackles the most crucial shortcomings both in practice and underlying policy of the new regulation. Jun 02, 2016 the agreement should set out if there is any financial information that is to be provided to shareholders, such as profit and loss statements. Shareholder claims and the no reflective loss rule. Second, the paper analyses the policy issues relating to consistency that are raised by shareholder claims for reflective loss in isds.
Shareholder protection reloaded redesigning the matrix. This template will alert you to typical issues that you need to think about in the context of the governance of your startup. The impact of investment treaties on companies, shareholders. However, tribunals have generally found that shareholders are. Oecd ilibrary investment treaties and shareholder claims. But it could and did, in certain instances, place individual shareholders under significant constraints. Such reporting will include an updated profit and loss as well as cashflow statements, full details on revenues and costs and current indications of prospective sales. All three of these financial tools grant foreign investors the opportunity to treaty shop, by selecting the trade agreement that offers the best chance of success with a claim. Shareholders agreement for equity partnerships 3 c. Investment treaties and shareholder claims for reflective loss. I propose a framework reconstructing the reflective loss principle as a priority rule under which resolution of the companys claim takes precedence over the shareholders personal claim. Where a company suffers a loss by a breach of duty owed to it, only the company may sue. Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate. Differing perspectives among shareholders, particularly at the sibling or cousin levels, can negatively impact the success of the business, the preservation of hardearned wealth and the strength of the family unit.
Key issues to consider for a shareholders agreement introduction the items set out below reflect some of the most important issues to be considered when contemplating entering into a shareholders agreement. Uk reflective loss rule impedes shareholder recovery law360. In contrast, courts in advanced systems of national corporate law generally reject shareholder claims for reflective loss largely for explicit policy reasons. According to this principle a shareholder may not claim for a loss that is merely reflective of a loss suffered by the company, ie, which is a loss that would be made good if the company had enforced its rights in full against its debtor. A shareholder of the company then brought an action against the wrongdoer, alleging breaches of the shareholders agreement, and claimed damages for loss. In an important recent decision the commercial court confirmed the availability of specific performance of a shareholders rights under shareholder agreements as a means to dodge the difficulties created for shareholders by the principle of reflective loss background facts. A shareholder cannot make a claim for reflective loss even if the company decides not to pursue its claim against the wrongdoer and the shareholder has their own valid cause of action this makes sense because it prevents double recovery company law 2012 reflective loss cannot be the basis for a members personal action 16 facts newman was a public listed company in which prudential. In contrast, shareholder claims for reflective loss have been widely permitted under typical investment treaties over the last 10 years. Proper plaintiff rule and no reflective loss principle. Oct, 2017 this article tackles the most crucial shortcomings both in practice and underlying policy of the new regulation. A quick glance at reflective loss and shareholder remedies. Pdf reconstructing the reflective loss principle alan k koh. What are the key clauses in a shareholders agreement. The idea is that a company, and not its shareholders, should have the right to recover the.
A claim for reflective loss is thus by definition a direct action, as opposed to a derivative action. The problem of overlapping claims and reflective loss in english company law giora shapira i. Investment treaties and shareholder claims for reflective. Court of appeal finds nonshareholder creditors claim. Shareholder claims and the no reflective loss rule global law firm. Generally speaking, however, claims open to shareholders in this scenario are not straightforward. Investment 201402 corporate law from advanced systems of. Oct 06, 2011 if a company is harmed by the behaviour of a third party, shareholders may suffer the economic consequences in the form of a reduction in the value of their shares.
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