Please cite this paper as:

Gaukrodger, D. (2013), “Investment Treaties as Corporate
Law: Shareholder Claims and Issues of Consistency”, OECD
Working Papers on International Investment, 2013/03, OECD
Publishing.
http://dx.doi.org/10.1787/5k3w9t44mt0v-en

OECD Working Papers on International
Investment 2013/03

Investment Treaties as
Corporate Law: Shareholder
Claims and Issues of
Consistency
David Gaukrodger

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 Abstract

Investment treaties as corporate law: Shareholder claims and issues of consistency
A preliminary framework for policy analysis
by
David Gaukrodger1
Claims by company shareholders seeking damages from governments for so-called "reflective
loss" now make up a substantial part of the investor-state dispute settlement (ISDS) caseload.
(Shareholders’ reflective loss is incurred as a result of injury to “their” company, typically a loss in
value of the shares; it is generally contrasted with direct injury to shareholder rights, such as
interference with shareholder voting rights.) This paper considers the consistency issues raised by
shareholder claims for reflective loss in ISDS.
The paper first compares the approach to shareholder claims in ISDS with advanced systems of
national corporate law (and other international law). ISDS arbitrators have consistently found that
shareholders can claim individually for reflective loss in ISDS under typical BITs. This can be seen as
a success story from the point of view of consistency of legal interpretation and improves investor
protection for potential claimant shareholders in many cases. In contrast, however, advanced national
systems and international law generally apply what has been called a "no reflective loss" principle to
shareholder claims.
Second, the paper analyses the policy issues relating to consistency that are raised by shareholder
claims for reflective loss in ISDS. National and international law barring shareholder claims for
reflective loss is often explicitly driven by policy considerations relating to consistency, predictability,
avoidance of double recovery and judicial economy. Limiting recovery to the company is seen as both
more efficient and fairer to all interested parties. In contrast, ISDS tribunals and commentators have
generally given limited consideration to the policy consequences of allowing shareholder claims for
reflective loss. The third part of the paper addresses the issue of company recovery (including two
different existing systems which expand the ability of foreign-controlled companies to recover in
ISDS) and its relevance to shareholder claims for reflective loss. The paper also contains a series of
questions for discussion and has been discussed by governments participating in an OECD-hosted
investment roundtable.

JEL Classification: F21, F23, F53, F55, F63, G32, G34, G38, K23, K33, K41.
Keywords: shareholders; stockholders; shareholder claims; shareholder rights; shareholder remedies;
stockholder remedies; reflective loss; reflective injury; derivative action; derivative loss; derivative
injury; consistency; consistency of arbitral decisions; double recovery; double jeopardy; multiple claims;
judicial economy; settlement; corporate law; company law; creditors; creditors’ rights; investor-state
dispute settlement; international arbitration; arbitrators; international economic law; comparative law;
domestic impact of investment law; international arbitration; investment arbitration; foreign investment;
international investment; international investment law; access to justice; level playing field; competitive
neutrality; treaty shopping; international investment agreements; investment treaties; bilateral investment
treaties.
1

David Gaukrodger, Senior Legal Advisor, Investment Division, OECD Directorate of Financial and Enterprise Affairs,
(david.gaukrodger@oecd.org). This paper does not necessarily reflect the views of the OECD or of governments that
participate in the OECD-hosted Freedom of Investment Roundtable.
Further information on investment-related work at the OECD may be found at www.oecd.org/investment.

3

 TABLE OF CONTENTS

EXECUTIVE SUMMARY ........................................................................................................... 7
A. INTRODUCTION ................................................................................................................. 11
B. SHAREHOLDER CLAIMS: DIRECT INJURY AND REFLECTIVE LOSS ..................... 13
C. COMPARATIVE LAW ........................................................................................................ 15
1. Advanced systems of domestic law ..................................................................................... 15
a. Shareholder claims for reflective loss are generally barred under advanced systems
of national law ................................................................................................................ 15
b. The analysis frequently focuses on the nature of the loss rather than whether there
is a separate legal basis for the claim ............................................................................. 18
c. The no reflective loss principle is based on the assumption that the company has or
had the power to recover the loss. .................................................................................. 19
d. Shareholder derivative actions ....................................................................................... 19
e. Exceptions to the general bar are policy based and carefully defined ............................ 20
2. General international law..................................................................................................... 21
a. Direct injury to a shareholder’s rights can form the basis of a claim. ............................ 21
b. Claims based on reflective injury to shareholders are generally barred. ........................ 22
c. The ICJ has recognised that specific treaties may apply different rules. ........................ 23
3. European Convention on Human Rights ............................................................................. 23
4. Conclusions with respect to comparative law ..................................................................... 24
D. SHAREHOLDER CLAIMS IN ISDS ................................................................................... 25
1. Investment treaties ............................................................................................................... 25
2. ISDS case law ...................................................................................................................... 25
a. Admissibility of shareholder claims for reflective loss in ISDS .................................... 25
b. Recovery of reflective loss by the shareholder rather than the company ....................... 26
c. ISDS tribunals have found the separate cause of action (in the treaty) rather than
the nature of the loss to be determinative. ...................................................................... 26
d. The focus on the treaty cause of action leads to the conclusion that shareholder
claims for reflective loss are autonomous from the company’s claims. ......................... 27
e. ISDS tribunals have given limited consideration to the policy aspects and
consequences of shareholder claims. .............................................................................. 29
E. PRELIMINARY POLICY ANALYSIS ................................................................................ 32
1. Impact of the admissibility of shareholder claims on predictability and legal
uncertainty......................................................................................................................... 32
a. Shareholder claims are likely to be less predictable for governments than claims by
the injured company. ...................................................................................................... 32
b. Treaty shopping is facilitated if shareholder claims are admissible. .............................. 33
c. The ability of shareholders to claim for reflective loss may make it harder to settle
cases................................................................................................................................ 33
2. The risk of double recovery ................................................................................................. 34
3. Multiple claims and inconsistent outcomes ......................................................................... 37
a. The interest in judicial economy and the issue of costs.................................................. 37
b. The risk of inconsistent outcomes rises with multiple claims ........................................ 41
c. A single beneficial owner of shares may be able to bring essentially the same case
twice. .............................................................................................................................. 43
5

 4. Consistency concerns could be exacerbated if creditors, at risk of injury from
shareholder claims for reflective loss in ISDS, also seek to bring reflective loss
claims in ISDS .................................................................................................................. 44
a. Shareholder claims for reflective loss put creditors at risk............................................. 44
b. Creditors may seek to bring ISDS claims for their reflective loss ................................. 45
5. Multiple shareholder claims: shareholder interests and incentives ..................................... 47
a. Different types of shareholders will likely have different interests ................................ 47
b. Shareholder and company behaviour may be difficult to predict in a regime where
shareholder claims are admissible. ................................................................................. 48
F. THE ISSUE OF COMPANY RECOURSE ........................................................................... 52
1. Two existing systems which expand the ability of companies with foreign
shareholders to recover in ISDS........................................................................................ 52
a. NAFTA........................................................................................................................... 52
b. ICSID art. 25(2)(b) ......................................................................................................... 56
2. The variety of company situations in ISDS ......................................................................... 58
G. CONCLUSION ..................................................................................................................... 60
Boxes
Box 1. Shareholder derivative actions ........................................................................................ 20
Box 2. Impact of shareholder claims for reflective loss in ISDS on a level playing field
between foreign and domestic shareholders ................................................................... 49

6

 EXECUTIVE SUMMARY

Claims by company shareholders seeking damages from governments for so-called "reflective
loss" now make up a substantial part of the ISDS caseload. (Shareholders’ reflective loss is incurred as
a result of injury to “their” company, typically a loss in value of the shares.) A rough count suggests
that there are easily more than 40 decisions involving shareholder claims and numerous pending cases,
many of which involve claims for reflective loss.
While governments have challenged these reflective loss claims in a number of cases, many ISDS
arbitral tribunals have found that shareholders are entitled to recover for reflective loss in ISDS. This
can be seen as a success story from the point of view of consistency of legal interpretation. A number
of commentators reviewing the case law have treated the issue as one of settled law under a typical
BIT. This case law also allows for and improves investor protection for potential claimant
shareholders in many cases.
Courts in advanced systems of national corporate law, however, generally reject shareholder
claims for reflective loss – largely for explicit policy reasons relating to consistency, predictability,
avoidance of double recovery, and judicial economy. Shareholders are permitted to bring cases for
direct injury – for example to their voting rights as shareholders – but not where they suffer reflective
loss due to an injury to the company. Only the directly-injured company can bring the claim, a
solution that is seen as both more efficient and fairer to corporate stakeholders including creditors and
all shareholders.
This background paper seeks to assist governments in analysing the consistency issues raised by
shareholder claims for reflective loss in ISDS. The issues are challenging because they involve the
relationships between different stakeholders in the company – principally shareholders and creditors2 –
as well as their relationships with the company. They also involve the relationship between ISDS and
domestic recourse. It is accordingly proposed to proceed by stages.
This paper seeks to set out a preliminary framework for analysis of the consistency issues raised
by claims by shareholders for reflective loss in ISDS. To provide an initial basis for policy analysis,
the paper reviews comparative law sources, and compares ISDS outcomes and approaches. It then
engages in preliminary analysis of consistency policy issues raised by such claims. The paper then
considers the question of company recourse.
Comparative Law
Shareholders in companies can be harmed in two broadly different ways. First, they can suffer
direct injury to their rights as a shareholder, such as the right to attend and vote at general meetings.
Shares may also be expropriated. Second, shareholders (and others) can suffer so-called "reflective
loss" through an injury to the company: the market value of the company’s shares and/or bonds may
fall.
For a shareholder, both direct injury and reflective loss cause loss. However, for policy reasons,
advanced national legal systems, both common law (United States, Canada, United Kingdom,
Australia, Hong Kong), and civil law (Germany, France), generally apply a "no reflective loss"
principle: shareholders generally cannot recover damages for reflective loss. As a general rule, only
2

Creditors are broadly defined to include contractual claimants on the company, including bondholders and
other lenders, employees, suppliers and others.

7

 the company can sue to recover the loss. The same approach applies in general international law and
under the European Convention on Human Rights.
The no reflective loss principle is based on the view that limiting recovery to the company is both
more efficient and fairer to all interested parties. It avoids multiple high-cost claims for the same
injury; potentially inconsistent results; complex and expensive efforts to allocate the reflective losses;
and risks of double recovery. With recovery by the company in a single case, all interested parties who
suffer reflective loss will automatically benefit in accordance with their relative interests in any flow
of assets to the company. The no reflective loss principle is based on the assumption that the company
has the power to recover the loss (although it may not do so for a variety of reasons) and is better
placed to do so.
The treatment of shareholder claims in ISDS, largely derived from case law, contrasts with this
approach. It appears that most investment treaties do not expressly address the issue of the scope of
shareholder claims. Typically, the only reference to shares in a BIT is a clause that clarifies that shares
are assets that qualify as an investment under the treaty definition of investment. Creditor interests in
companies, such as bonds, are also frequently included in such lists, sometimes with qualifications.
NAFTA and some other treaties establish explicit regimes for shareholder claims, including a form of
derivative action. (The main discussion principally focuses on the typical shorter BIT; NAFTA is
addressed separately.)
While treaty provisions in the typical BIT are reduced to a minimum, they have been interpreted
in the case law as having an important impact on corporate law principles. The consequence is three
outcomes with regard to shareholder claims that contrast with domestic law.3 First, shareholders have
generally been able to claim for reflective loss in ISDS whereas such shareholder claims are generally
barred in national law. Second, ISDS tribunals have awarded recovery of reflective loss to
shareholders rather than to the company as under domestic law shareholder derivative action
procedures (which exceptionally allow shareholders to bring claims for reflective loss, but with
recovery for the company). Third, ISDS tribunals have found shareholder claims for reflective loss to
be autonomous from those of the company in ISDS so that both claims can co-exist; this cannot occur
under general domestic law principles.
These differences in outcomes are in turn related to two broad differences in approach between
national courts and ISDS tribunals. First, as noted in domestic law and general international law, “[t]he
disallowance of the shareholder’s claim in respect of reflective loss is driven by policy
considerations” 4; cases routinely consider the consequences of allowing shareholder claims as part of
their analysis. In contrast, ISDS tribunals have given limited consideration to policy aspects and the
consequences of allowing shareholder claims for reflective loss.
Second, for policy reasons, national courts frequently focus primarily on the nature of the
shareholder’s loss. If the loss is reflective and the company has or had the power to claim, the
shareholder claim can in general be dismissed regardless of whether the shareholder can identify a
separate cause of action (legal basis) for a claim. In contrast, ISDS tribunals have concluded that a
separate cause of action created by the treaty is determinative. Whether the company can also recover
the loss becomes immaterial to the admissibility of the shareholder claim.

3

The focus here is on general trends for policy analysis rather than the details of the case law. The paper takes
no position on whether these ISDS interpretations are correct with regard to BITs in general or any particular
treaty.

4

Johnson v. Gore Wood & Co., (2002) 2 AC 1, 66 (House of Lords) (Lord Millett).

8

 Preliminary Policy Analysis
For purposes of preliminary policy analysis, an expansive regime allowing shareholder claims for
reflective loss is assumed. The policy analysis first addresses the general impact of the admissibility of
shareholder claims on predictability and legal uncertainty. Shareholder claims are likely to be less
predictable for governments than claims by the injured company because company nationality is both
known and hard to change; in contrast, the identity of shareholders is both more likely to change and
frequently hard to monitor. For similar reasons, treaty shopping by investors is facilitated if
shareholder claims are admissible. It may also be harder to settle cases. Under the no reflective loss
rule in domestic law, a government–company settlement can resolve the dispute. In contrast, where
shareholders can claim autonomously for reflective loss, a settlement with the company may be of
little value to the government (and thus to the company and its creditors). Shareholder consent to the
settlement may be hard, expensive or impossible to obtain.
Second, as the UK House of Lords and other appellate courts have underlined, shareholder claims
for reflective loss raise serious concerns about double recovery. Some ISDS investment tribunals have
dismissed the problem as a non-issue without explanation; others have addressed it in more concrete
terms by using creative remedies, such as fixing a price for a government acquisition of the claimant's
shares. This goes beyond compensation and can involve high costs for governments.
Third, national courts have frequently underlined that the no reflective loss principle serves the
societal interest in “judicial economy” by reducing the number of cases needed to address the harm.
Where each shareholder (or other sufferer of reflective loss) can claim separately, multiple claims are
more likely, raising costs. Multiple claims also create a risk of inconsistent results.
Fourth, consistency concerns could be exacerbated if creditors also seek to bring reflective loss
claims in ISDS. A core policy reason for the bar on shareholder claims for reflective loss is that they
can injure creditors of the company: such claims can allow shareholders "to bypass the corporate
structure and effectively preference themselves at the expense of other persons with a superior
financial interest in the corporation".5 Creditor claims arising out of the same underlying injury, on top
of shareholder claims, could exacerbate consistency-related concerns.6
Fifth, the paper preliminarily analyses the variable shareholder interests and incentives with
regard to shareholder and company claims. Some shareholders are “likely claimants" in ISDS who can
decide between supporting company action or their own claim or both - these may be the principal
beneficiaries of an expansive regime for shareholder claims. Others may be “potential but unlikely
claimants”, due to the size of their investment or diversified investment strategy - their fortunes may
lie primarily but not exclusively with company remedies. For a third group of shareholders, the
"excluded claimants", their fortunes lie solely with company remedies. Creditors can be divided into
similar albeit somewhat different categories.
Company Recourse
As noted above, the no reflective loss principle in domestic law is based on the assumption that
the company has the power to recover the loss (although it may not do so for a variety of reasons) and
is better placed to do so. It is clear that in a substantial number of ISDS cases, the operating company
may not have access to effective recourse due to, for example, a denial of justice (eg. government

5

Gaubert v. United States, 855 F.2d 1284, 1291 (5th Cir. 1989).

6

No view is expressed about the likelihood of success of such claims at any stage.

9

 interference with the judiciary leading to denial of the claim). The status of the company and its
recourse is of central importance in considering shareholder claims and consistency issues.
This section first examines two different existing systems which expand the ability of foreigncontrolled companies to recover in ISDS: (i) the derivative action in NAFTA art. 1117; and (ii) ICSID
art. 25(2)(b)). It has been suggested that the expanded availability of recovery for the company in
ISDS may reduce or eliminate the rationale for shareholder claims for reflective loss.
The paper then begins to analyse the wide variety of situations of companies and their potential
relevance for shareholder claims. The company may have effective recourse, such as where the
company has access to ISDS or to effective primary remedies under domestic law. There are other
situations where the company has no real recourse, such as where a government expropriates all of the
company’s assets. There are also scenarios where the company has effective recourse but chooses not
to litigate a claim such as where, after full consideration of the costs and benefits, the company settles
the claim for less than full value due to concerns about government relations, the expectation of future
benefits from a good relationship and the costs and uncertainties of litigation. Given the variety of
situations, a general rule with regard to shareholder claims may not be appropriate.

10

 A. INTRODUCTION7

Claims by company shareholders seeking damages from governments for so-called "reflective
loss" now make up a substantial part of the ISDS caseload. (Shareholders suffer reflective loss as a
result of injury to “their” company, typically a loss in value of the shares.) A rough count suggests that
there are easily more than 40 decisions involving shareholder claims and numerous pending cases,
many of which involve claims for reflective loss.
While governments have challenged these reflective loss claims in a number of cases, many ISDS
arbitral tribunals have found that shareholders are entitled to recover for reflective loss in ISDS. This
case law improves investor protection for potential claimant shareholders in many situations. It can be
seen as a success story from the point of view of consistency of legal interpretation. A number of
commentators have treated the issue as one of settled law under a typical BIT.
Courts in advanced systems of national corporate law, however, generally reject shareholder
claims for reflective loss – largely for explicit policy reasons relating to consistency, predictability,
avoidance of double recovery and judicial economy. Shareholders are permitted to bring cases for
direct injury – for example to their voting rights as shareholders – but not where they suffer reflective
loss due to an injury to “their” company. Only the directly-injured company can bring the claim, a
solution that is seen as both more efficient and fairer to defendants and corporate stakeholders
including creditors and all shareholders. There are few shareholder claims against governments for
reflective loss in domestic courts; those few cases are generally dismissed (without considering the
merits) on the grounds that only the company can sue.
ISDS case law and commentary has generally paid limited attention to the policy consequences of
allowing shareholder claims for reflective loss – the issue has been seen as being resolved by the
inclusion of shares in the BIT definition of investment and by arbitral precedent. This contrasts with
the often explicit policy basis of domestic law generally barring shareholder claims for reflective loss.
Governments concerned about consistency in ISDS may want to ensure that they have analysed, inter
alia, the expected costs and benefits in terms of consistency of a particular shareholder claims regime
in deciding upon their investment law policy.
This background paper seeks to assist governments in analysing these consistency issues.8 The
issues are challenging because they involve the relationships between different stakeholders in the
company – principally shareholders and creditors9 – as well as their relationships with the company.
They also involve the relationship between ISDS and domestic recourse. It is accordingly proposed to
proceed by stages.

7

This paper has been discussed by governments participating in the OECD-hosted Freedom of Investment
Roundtable. It does not necessarily reflect the views of the OECD or of the governments that participate in
the Roundtable, and it cannot be construed as prejudging ongoing or future negotiations or disputes
pertaining to international investment agreements.

8

Roundtable participants have previously noted that shareholder claims in ISDS raise a number of questions
relating to consistency. See, e.g., David Gaukrodger & Kathryn Gordon, Investor-State Dispute Settlement:
A Scoping Paper for the Investment Policy Community (Dec. 2012) (“ISDS Scoping Paper”), pp. 56, 60, 77.

9

Creditors are broadly defined to include contractual claimants on the company, including bondholders and
other lenders, employees, suppliers and others.

11

 This paper seeks to set out a preliminary framework for policy analysis of the consistency issues
raised by shareholder claims. It is structured as follows. It first outlines the nature of the two main
types of possible shareholder loss: (i) direct injury; and (ii) reflective (or derivative) loss due to an
injury to the company. It then reviews the general bar on shareholder claims for reflective loss in
several major common law and civil law jurisdictions, as well as the similar general prohibition under
general international law and the European Convention on Human Rights system.
The analysis then turns to ISDS. The lack of explicit attention to the question of shareholder
claims for reflective loss in most investment treaties is noted (as are some exceptions). The analysis
then identifies in broad terms key outcomes and approaches in ISDS case law on shareholder claims.
The fourth section provides preliminary analysis of the consistency policy issues raised by the
treatment of shareholder claims in ISDS. Some simplifying assumptions about applicable law are
made for purposes of initial policy analysis, with detailed case law analysis being deferred. The policy
analysis first addresses the general impact of the admissibility of shareholder claims on predictability
and legal uncertainty. It then considers the issues of potential double recovery, multiplication of claims
for the same injury and risk of inconsistent results. It then considers the impact of shareholder claims
on creditors of the company and the impact of potential creditor claims for reflective loss in ISDS. The
section concludes by briefly considering the variable shareholder interests and incentives with regard
to shareholder and company claims.
The paper then turns to the question of company recourse - the ability of the company to obtain a
remedy for its direct loss (the direct loss which is also the source of the shareholder’s reflective or
derivative loss). The general bar on shareholder claims for reflective loss in domestic law and general
international law is based on the assumption that the company is better placed to recover the loss. The
analysis first briefly focuses on two existing systems which strengthen the potential for companies
with foreign shareholders to recover through ISDS: the NAFTA derivative action mechanism and the
ICSID art. 25(2)(b) mechanism that deems certain companies to be foreign for purposes of access to
ISDS. In ISDS, the “company” can be in a broader variety of situations than under domestic law.
These range from situations where the company has access to both domestic and ISDS remedies, to
situations where the company is paralysed and unable to act at all due to host state misconduct.
While the analysis primarily focuses on consistency, it continues to briefly identify relationships
with other issues of interest to the Roundtable in its work on ISDS, such as costs, access to justice, a
level playing field or arbitrators.

12

 B. SHAREHOLDER CLAIMS: DIRECT INJURY AND REFLECTIVE LOSS

Shareholders in companies can be harmed in two broadly different ways. First, they can suffer
direct injury to their rights as a shareholder. Those rights include, for example, the right to attend and
vote at general meetings, and the right to share in the residual assets of the company on liquidation.
Shares held only by a particular category of owners may be expropriated.
The second type of injury that can be suffered by shareholders of a company is reflective loss
through an injury to the company. An act that injures the company affects its overall value.
Shareholders normally suffer the most reflective losses because they are the residual claimants on
corporate assets, i.e. all other claims have priority in the event of liquidation. When the company is
near insolvency or insolvent, creditors become the residual claimants and suffer the most from
reflective losses. Where an injury is substantial, reflective losses may be distributed amongst both
shareholders and creditors (the latter broadly defined to include all those with a contractual claim on
the company, including employees, suppliers and customers).
The distinction between direct injury and reflective (or derivative) loss is well established in
advanced systems of national law from both the common law and civil law traditions. As set forth in
the Principles of Corporate Governance of the American Law Institute (ALI), “a wrongful act that
depletes corporate assets and thereby injures shareholders only indirectly, by reason of the prior injury
to the corporation, should be seen as derivative in character; conversely, a wrongful act that is separate
and distinct from any corporate injury, such as one that denies or interferes with the rightful incidents
of share ownership, gives rise to a direct action”.10 Civil law systems recognise the same basic
distinction. French and German law both distinguish between a shareholder's personal injury and
reflective shareholder losses that are the corollary of those suffered by the company. 11 The distinction
between shareholders' direct rights and reflective loss is also well recognised in general international
law and has been recently reaffirmed in strong terms by the ICJ.12

10

American Law Institute, Principles of Corporate Governance, § 7.01 (1994 & 2012 Supp.); see Mid-State
Fertilizer Co. v. Exchange National Bank of Chicago, 877 F.2d 1333, 1335-36 (7th Cir. 1989) (“Good
reasons account for the enduring distinction between direct and derivative injury."). For the UK, see Johnson
v. Gore Wood & Co., (2002) 2 AC 1 (House of Lords); Victor Joffe et al., Minority Shareholders (3d ed.
2009) §§ 1.01-1.03.

11

See Philippe Merle, Droit commercial : Sociétés commerciales (7th ed. 2000) § 409 (for an individual action
by a shareholder, “le préjudice doit être personnel, indépendant de celui qui a pu être subi par la société");
Cour de cassation 2002 (distinguishing between a shareholder's personal injury and his/her injury caused by
injury to the company). German law makes a similar distinction. See Xiaoning Li, A comparative study of
shareholder derivative claims (2007), pp. 199-200, 202; Hans de Wulf, Direct shareholder suits for damages
based on reflective losses, in Stefan Grundmann et al., (eds.), Festschrift fur Klaus J. Hopt zum 70.
Geburtstag am 24. August 2010: Unternehmen, Markt und Verantwortung (De Gruyter 2010) [1551], pp. 12.

12

See, e.g., Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the
Congo), Judgment on Preliminary Objections, (2007) (“Diallo 2007”), § 67 (distinguishing between
admissible claims based on direct rights as shareholder and inadmissible claims based on reflective loss);
Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo),
Judgement, (“Diallo 2010”) (reaffirming the distinction) ; Barcelona Traction, Light and Power Company,
Limited (Belgium v. Spain), Second Phase, Judgment, I.C.J. Reports 1970 (“Barcelona Traction 1970”), § 47
("a distinction must be drawn between a direct infringement of the shareholder's rights, and difficulties or
financial losses to which he may be exposed as the result of the situation of the company"); Oppenheim 's
International Law, 9th ed. (1990), p. 520 ("Shareholders may, furthermore, have their rights directly
infringed (as where shares held only by a particular category of owners are expropriated), as opposed to

13

 Issues for discussion


Would FOI participants wish to explain whether their country’s law distinguishes between
direct and reflective loss?

suffering loss indirectly through damage inflicted upon the company"). For the European Court of Human
Rights, see, e.g., Olczak v. Poland, § 58 (7 Nov. 2002) (distinguishing direct and reflective loss).

14

 C. COMPARATIVE LAW

1.

Advanced systems of domestic law

a.
Shareholder claims for reflective loss are generally barred under advanced systems of
national law
A review of the law in several OECD jurisdictions suggests that shareholders generally cannot
recover damages for reflective loss in advanced national legal systems. As a general rule, only the
company can sue to recover the loss. The initial analysis presented here could be completed with
information about additional legal systems and refined and improved by government input.
i.

Common law jurisdictions

In the United States, individual shareholders generally have no separate right to sue for reflective
loss incurred due to injury to “their” company. Gaubert v. United States illustrates the issues in the
context of a shareholder claim against the government for damages.13 The claimant was the largest
shareholder of a financial institution. Federal regulators had extensively engaged in management of
the company including allegedly both negligently selecting its directors and officers, and negligently
conducting its day to day operations.14 After the company became insolvent, Gaubert sued the US
government, claiming the loss in value of his shares in the amount of USD 75 million.
Without considering the merits, a federal appellate court dismissed the claim because
“[g]enerally, individual shareholders have no separate right to sue for damages suffered by the
corporation which result solely in the diminution of the value of the corporation's shares.” The
Gaubert approach is routinely applied in the United States to bar shareholder claims for reflective
loss.15
Canadian law similarly generally prohibits claims by shareholders for reflective loss:
[A] shareholder of a corporation – even a controlling shareholder or the
sole shareholder – does not have a personal cause of action for a wrong
done to the corporation. The rule respects a basic principle of corporate
13

Gaubert v. United States, 855 F.2d 1284 (5th Cir. 1989).

14

The claimant's factual allegations were assumed to be true for purposes of the government's motion to
dismiss the claim at the outset of the case. Because the claim was dismissed, it was not determined whether
there was in fact negligence.

15

See, e.g., Quarles v. City of East Cleveland, Quarles v. City of East Cleveland, 1999 US App. LEXIS 34061
(6th Cir. 1999) (dismissing shareholder claims against a city government for reflective loss without
addressing the merits; only the company could claim for the alleged violations of due process, expropriation
(a regulatory taking) and violations of equal protection); 12B Fletcher, Cyclopedia of Corporations, § 5911
(2012) (if damages to a stockholder result indirectly, as the result of an injury to the corporation, and not
directly, he cannot sue as an individual).
The courts have underlined in particular that a shareholder cannot use the corporate entity as a shield from
unlimited liability and then disregard the corporate entity for purposes of making claims for reflective loss.
See, e.g., Alford v. Frontier Enterprises, Inc., 599 F.2d 483 (1st. Cir. 1979) ([the shareholder] "is attempting
to use the corporate form both as shield and sword at his will. [T]he corporate form effectively shielded [him]
from liability" but the shareholder contended that he "can disregard the corporate entity and recover damages
for himself. Of course, this is impermissible.”).

15

 law: a corporation has a legal existence separate from that of its
shareholders. A shareholder cannot be sued for the liabilities of the
corporation and, equally, a shareholder cannot sue for the losses suffered
by the corporation.
The rule ... avoids multiple lawsuits. Indeed, without the rule, a
shareholder would always be able to sue for harm to the corporation
because any harm to the corporation indirectly harms the shareholders.16
1.
English law also recognises a general “no reflective loss principle”.17 The House of Lords
reaffirmed the general prohibition on shareholder claims for reflective loss in the leading case of
Johnson v. Gore Wood & Co.18 Lord Millett considered that allowing shareholder claims for reflective
loss would result in one of two unacceptable outcomes. Either the defendant has to pay the same
damages twice – this would allow the claimant shareholder to recover without harming the company’s
creditors and other shareholders – or the claimant shareholder recovers at the expense of the creditors
and other shareholders of the company:
If the shareholder is allowed to recover in respect of [reflective] loss,
then either there will be double recovery at the expense of the defendant
or the shareholder will recover at the expense of the company and its
creditors and other shareholders. Neither course can be permitted. This is
a matter of principle; there is no discretion involved. Justice to the
defendant requires the exclusion of one claim or the other; protection of
the interests of the company's creditors requires that it is the company
which is allowed to recover to the exclusion of the shareholder.19
The law in Australia and in Hong Kong, China similarly generally bars shareholder claims for
reflective loss.20 The Hong Kong Court of Final Appeal recently unanimously upheld a decision
striking out a shareholder claim for reflective loss as a matter of law. Expressly adopting the House of
Lords reasoning in Johnson, the court held that the general rule is that "where a company suffers loss
as a result of an actionable wrong done to it, the cause of action is vested in the company and the
company alone can sue. ... No action lies at the suit of a shareholder suing as such".21

16

Meditrust HealthCare Inc. v. Shoppers Drug Mart, 61 O.R.(3d) 786 (Ont. Ct. App. 2002) (citing Foss v.
Harbottle); see also Hercules Management Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165 (Supreme Court of
Canada) (“individual shareholders have no cause of action in law for any wrongs done to the corporation ....
The rule ... avoids ... a multiplicity of actions.”); Robak Industries Ltd. v. Gardner, 2007 BCCA 61 (B.C. Ct.
App. 2007) (same).

17

Day v. Cook, [2001] EWCA Civ. 592 (Ct. App. 2001) § 1.

18

Johnson v Gore Wood & Co., [2000] UKHL 65; [2002] 2 A.C. 1 (House of Lords 2000).

19

Id., 2 A.C. at p. 62 (Lord Millett).

20

See, e.g., Thomas v. D’Arcy, 2005 QCA 68 (Queensland Ct. App. 2005) (“Applying the principle in [Johnson
v. Gore Wood], the plaintiff’s claim for damages representing the loss in value of his shareholdings in [two
companies] is not sustainable”). See also Gould v. Vaggelas, 56 A.L.R. 31 (High Ct. Australia 1984)
(shareholder cannot recover reflective loss).

21

Waddington Ltd. v. Chan Chun Hoo, [2009] 4 HKC 381 (Hong Kong Ct. of Final Appeal 2008), § 49.

16

 ii.

Civil law jurisdictions

Germany and France similarly generally bar shareholder claims for reflective loss.22 The German
Supreme Civil Court (BGH) has held that where a third party negligently damages a company, the
shareholder cannot claim damages from the third party because this would run counter to the principle
of capital maintenance (Kapitalerhaltung) and would conflict with the principle that the company’s
assets are bound for the purpose of the business (Zweckwidmung des Gesellschaftsvermögens).23 The
BGH noted that the shareholder could claim for any separate, direct damage, but not for reflective loss.
In a scholarly article, a BGH judge further explained that any monetary compensation the shareholder
receives would have remained within the company but for the injury caused by the third party; the
shareholder would not have had a claim against the company for distribution of this sum. 24 The
principle that a shareholder cannot claim for reflective loss directly applies both to the AG and the
GmbH types of companies.25
In France, a shareholder can generally only bring an individual action where the shareholder has
suffered a "personal" injury, independent from that suffered by the company. 26 The Cour de cassation
has dismissed several shareholder claims for reflective loss because the injury claimed by the
shareholder is only a “corollary” of that suffered by the company.27

22

See Xiaoning Li, A comparative study of shareholder derivative claims (2007), pp. 199-200, 202
(“According to German law, only the injured [AG] company can bring an action to enforce its claims.
Although the shareholders also suffer from the loss in value of shares, the loss is no more than indirect
damage and the shareholders cannot bring actions directly”; same rule for GmbH type companies); Bas J. de
Jong, Shareholders’ claims for reflective loss: a comparative legal analysis, European Finance eJournal
10/2011, p. 3 (“The basic rule in most jurisdictions, including the United Kingdom, Germany and the
Netherlands, is that a shareholder cannot recover a loss which is simply reflective of the company’s loss.”);
de Wulf, op.cit., p. 8 (“In France, The Netherlands and Germany, too, recovery of reflective losses by an
individual shareholder, who wants damages to be paid out to him personally, is usually banned”).

23

See de Wulf, p. 12 (citing “Dubai-Fall”, BGH 10 November 1986, WM 1987 13).

24

See de Jong, p. 4 (citing H. Brandes, Ersatz von Gesellschafts- und Gesellschafterschaden in Festschrift für
Hans-Joachim Fleck, Berlin, De Gruyter, 1988, pp. 13–22).

25

Xiaoning Li, A comparative study of shareholder derivative claims (2007), pp. 199-200, 202. Ms. Li’s study
also reviews the law in China. She argues that based on the intention behind the 2006 Chinese Company Law
and comparative analysis, “an individual shareholder should not be allowed to apply article 153 [of the law]
in order to bring a direct action for his reflective losses”. Id., p. 280.

26

See Philippe Merle, Droit commercial : Sociétés commerciales (7th ed. 2000) § 409.

27

See, e.g., Cour de cassation, chambre commerciale, No. 97-10886 (15 January 2002) (“le préjudice invoqué
par M. X, ... n’étant que le corollaire de celui causé à la société, n’avait aucun caractère personnel”); Cour de
cassation, chambre criminelle, Nos. 97-80664, 99-80387, 99-84855 (13 December 2000) (three decisions)
(rejecting shareholder claims because “la dépréciation des titres d'une société découlant des agissements
délictueux de ses dirigeants constitue, non pas un dommage propre à chaque associé, mais un préjudice subi
par la société elle-même”); Versailles Ct. App. No. 04-1262 (13 Sept. 2005) (same). See also Guy-Auguste
Likillimba, Le préjudice individuel et/ou collectif en droit des groupements, 2009 Revue trimestrielle de droit
commercial 1, § 6 ("Selon le juge commercial, lorsque la société est in bonis, le constat est qu'il écarte
presque systématiquement toute demande de réparation du préjudice individuel dès lors qu'il est considéré
comme ‘inclus dans le préjudice social’. La prise en compte du préjudice individuel n'est envisagée qu'à titre
exceptionnel, c'est-à-dire à la condition d'en démontrer le caractère personnel et distinct par rapport au
préjudice collectif.")

17

 b.
The analysis frequently focuses on the nature of the loss rather than whether there is a
separate legal basis for the claim
Courts adjudicating shareholder claims often focus on the nature of the loss. Under this approach,
it is not sufficient for a shareholder merely to identify a separate cause of action (separate legal basis)
in order to successfully bring a claim. This is illustrated, for example, by the English Court of Appeal
decision in Gardner v. Parker:
It does not matter that [the shareholder]’s and [the company]’s cause of
action are different. The essential point is that [the shareholder]’s claim
against [the defendant] is in substance a claim for compensation in
respect of the same loss to which [the company] has a claim against him.
... [The shareholder's] loss will be made good if the wronged company,
which has the primary claim, enforces in full its claims against the
wrongdoer.”28
In the “Dubai-Fall” case cited above, the German Supreme Civil Court found that if the
shareholder’s loss was reflective, the existence of a separate legal duty to the shareholder made no
difference; the claim was denied.29 In Landune International Ltd v. Cheung Chung Leung, the Hong
Kong Court of Appeal emphatically stated that the focus of the rule against reflective loss must be on
the type of loss claimed as opposed to the causes of action being asserted. Thus the rule applies even if
the shareholder can establish an independent cause of action against the wrongdoer.30 In Thomas v.
D’Arcy, Justice Williams’ opinion similarly underlined that the court was denying the shareholder's
claim notwithstanding that “the respondents owed [the shareholder] a duty separate and distinct from

28

See Gardner v. Parker, [2004] 1 BCLC 417, 430 (Eng. Ct. App. 2004) (dismissing shareholder claim for
reflective loss). See also Victor Joffe et al., Minority Shareholders, op. cit, §§ 1.151-152 [(“The no reflective
loss principle is not concerned with barring causes of action as such, but with barring recovery for certain
types of loss. ... It is irrelevant that the duties owed by the defendant to the company and to the claimant may
be different in content.”) (citations omitted).]
In the US, see, e.g., Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Sup. Ct. Del. 2004) (“[t]he
stockholder's claimed direct injury must be independent of any alleged injury to the corporation. The
stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can
prevail without showing an injury to the corporation.”) (emphasis added).
While many cases such as Gardner rely on an analysis of the injury, some other cases frame the issues in
terms of the respective rights of the company and shareholder. In domestic law, this has not usually affected
the results, as noted in the Principles of Corporate Governance of the American Law Institute:
All decisions are in fundamental agreement with the basic distinction ...: a wrongful act that depletes
corporate assets and thereby injures shareholders only indirectly, by reason of the prior injury to the
corporation, should be seen as derivative in character; conversely, a wrongful act that is separate and
distinct from any corporate injury, such as one that denies or interferes with the rightful incidents of
share ownership, gives rise to a direct action. Sometimes this result has been justified in terms of an
“injury” test that looks to whose interests were more directly damaged; at other times, the test has
been phrased in terms of the respective rights of the corporation and its shareholders; but regardless
of the verbal formula employed, the results have been substantially similar.
American Law Institute, Principles of Corporate Governance, § 7.01, cmt. c (1994 & 2012 Supp.).

29

See “Dubai-Fall”, BGH 10 November 1986, WM 1987 13) (denying shareholder claim for reflective loss
even though the defendant breached duties towards the shareholder).

30

Landune International Ltd v Cheung Chung Leung, [2006] 1 HKLRD 39 (Hong Kong Ct. App.); Rita
Cheung, The no reflective loss principle: a view from Hong Kong, I.C.C.L.R. 2009, 20(7), pp. 223-229.

18

 the duty owed to the [two] corporations. The critical question is not so much with respect to the duty,
but with respect to the damages recoverable consequent upon its breach”.31
The distinction between direct and reflective claims is frequently clear. However, in some cases,
it can be difficult to draw the lines between the two types of claims. In such cases, the courts can
decline to strike the claims at an initial stage, and make a determination about its nature in dealing
with the merits when all of the necessary facts are established.32
c.
The no reflective loss principle is based on the assumption that the company has or had
the power to recover the loss.
The prohibition on shareholder claims is based on the premise that the company has the power to
recover the loss.33 Recovery by the company is seen as more efficient: it avoids multiple claims (and
complex and expensive efforts to allocate the reflective losses). It is also seen as fairer: all interested
parties who suffer reflective loss will automatically benefit in accordance with their relative interests
in any flow of assets to the company.
For a variety of reasons, the company may choose not to bring the claim. Alternatively, the
company may have settled the claim for less than full value. The company may also be insolvent. As a
general matter, none of these situations affects the rule.34
The status of the company is an important issue in the ISDS context and is addressed further
below.
d.

Shareholder derivative actions

Many advanced systems have adopted a form of “derivative action” that lets shareholders bring
claims – on behalf of the company and with recovery for the company – where the machinery of
corporate governance has broken down. For example, where the conduct of directors is at issue, the
company’s board of directors may be subject to a conflict of interest in deciding about litigation
against a director.

31

Thomas v. D’Arcy, 2005 QCA 68 (Queensland Ct. App. 2005), § 29, 37.

32

See, e.g., Fletcher, Cyclopedia of Corporations, § 5911 ("While there usually is little difficulty in determining
whether a cause of action in behalf of a shareholder is individual or derivative, there are border-line cases
that may be hard to classify."); Johnson, 2 A.C. at p. 36 (Lord Bingham).

33

See Mid-State Fertilizer Co. v. Exchange National Bank of Chicago, 877 F.2d 1333, 1335-36 (7th Cir. 1989);
Johnson, 2 A.C. at p. 36 (Lord Bingham); Barcelona Traction 1970, separate opinion of Judge Sir Gerald
Fitzmaurice, § 10.

34

See Victor Joffe et al, Minority Shareholders, § 1.142 (2009) (“It is ... irrelevant that the company has not yet
brought proceedings against the wrongdoer, that it is not in a position to bring such proceedings by reason of
lack of means or that it chooses not to claim against a defendant or to settle with him on comparatively
generous terms. Similarly the principle applies if the company is in liquidation or receivership, if it has been
dissolved or if its claim is time-barred.”) (footnotes omitted).
In Christensen v. Scott, the New Zealand Court of Appeal permitted two potato farmers who had relied on
advice from lawyers and accountants to "go behind" a settlement with them by the receiver for the company
and bring a separate claim as shareholders for reflective loss. Christensen v Scott, [1996] 1 NZLR 273 (Ct.
App. 1995). The Christensen approach has been disapproved for policy reasons by the UK House of Lords in
Johnson and by the Australian courts. See Johnson, [2002] A.C. 1, 36, 55. 65-66 (majority) (extensive
discussions of policy); Thomas v. D'Arcy, §§ 21, 31, 38.

19

 Shareholders are in effect allowed to bring claims for reflective loss only under specified
conditions, which frequently include, inter alia: (i) recovery going to the company rather than the
claimant shareholder; (ii) an ability for the company to either block or take over the litigation unless
its board or management is disqualified due to a conflict of interest; and (iii) court oversight of the
proceedings including any settlement. (See box 1- Shareholder derivative actions)
Box 1. Shareholder derivative actions
Shareholder derivative actions are governed by specific rules to address the policy concerns relating to
consistency raised by reflective loss. For example, Germany introduced a shareholder derivative action into its
Company Law in 2005. For the first time, the law allows shareholders to personally enforce a claim for reflective loss.
The company recovers the damages, not the shareholder.
The policy concerns raised by shareholder claims for reflective loss are addressed in detail by the law. The law
ensures that there is practically no risk of multiple claims: (i) shareholders must obtain leave from the court to bring the
action; (ii) all shareholder claims must be consolidated in a single action; and (iii) the judgment or settlement in a
shareholder derivative suit binds all shareholders and the company. Creditor and non-claiming shareholder interests
1
are also protected because, as noted, recovery goes to the company rather than the claiming shareholder. The
company's pre-eminent role in deciding on the litigation is preserved: shareholders must first demand that the
company bring the suit before seeking court authorisation to file their suit and the company is a party to the request for
authorisation; even if the court authorises the claim and the shareholders file suit, the company can take over the suit
at any time, the shareholder is joined to the company claim, and the shareholder suit is discontinued.
This regime for shareholder claims for reflective loss is essentially circumscribed to claims against corporate
2
"insiders". It is not available for claims against outside third parties such as a government. As in Germany, derivative
suits in most other systems of national law primarily if not exclusively allow shareholders to challenge actions by
3
persons involved in some way in corporate governance or surveillance. Derivative suits against unrelated outsider
third parties who injure the company but are uninvolved in its governance – such as governments, outside tortfeasors
4
or co-contractants – are generally impossible; even where they are in theory possible, they are infrequent in practice.

1
2

3

4

See AktG art. 148(4) ("The action shall be brought ... with the aim of obtaining compensation for the company".)
See AktG § 147(1) (listing only members of the supervisory and management boards and promoters of the company as potential
defendants); Martin Gelter, Why do shareholder derivative suits remain rare in Continental Europe?, 37 Brooklyn J. Int’l Law 843.
See, eg., Code de commerce art. L.225-252 (France) (shareholder can only bring derivative claim against directors or the
managing director). In Japan, shareholders may only bring derivative claims against “corporate members”, defined as the
directors, officers and certain auditors and accountants. See Company Law 2006 (Japan), arts. 847, 423. In the UK, derivative
claims against outsider third parties are possible, but only where a company director was also at fault. See UK Companies Act s.
260(3) (derivative actions can [generally] only be brought in cases involving alleged misconduct by a director of the company);
Explanatory Notes to Companies Act (“Derivative claims against third parties would be permitted only in very narrow
circumstances, where the damage suffered by the company arose from an act involving a breach of duty etc on the part of the
director.”).
See Gelter, p. 877 (derivative suits against outsider third parties are not permitted in Continental Europe: “possible defendants in
Continental European [shareholder] derivative suits are limited to directors (including supervisory board members) and in some
cases corporate officers, auditors, or the founders of the corporation”)) (citations omitted).
In the US, defendants in derivative suits are also usually directors, officers or other corporate insiders although there is no legal
limit on the targets of derivative suits. Gelter, p. 875-76; Robert C. Clark, Corporate Law (1986), pp. 643-44.

e.

Exceptions to the general bar are policy based and carefully defined

The bar on shareholder claims for reflective injury is recognised as a general principle in all of
the systems reviewed. There are, however, exceptions recognised in some systems of national law
although they often remain controversial.

20

 The principal exception arises where the company has no claim at all. Where the company has no
claim, the rule does not apply. For example, a defendant may contract with the shareholder to do work
for the company. If the company is not a party to the contract, it has no claim. The defendant's failure
to perform the contract may harm the company and thus shareholder. Since the company has no ability
to claim and the shareholder has a contract claim, there is no bar to the shareholder claim.35
Some US states recognise a ”special injury” exception where a shareholder suffers injury beyond
that suffered by shareholders generally.36 The exception remains controversial and was rejected in
Delaware, a leading corporate law jurisdiction, in a 2004 decision.37 Roughly half of US publiclylisted companies are incorporated in Delaware.38
The derivative action discussed above is arguably a “partial” exception. It is exceptional in that a
shareholder is able to bring a claim for reflective loss. However, it is not an exception to the bar on
shareholder recovery because it does not allow direct shareholder recovery. Recovery goes to the
company, not the shareholder, because the derivative action must be brought by the shareholder on
behalf of the company.
2.

General international law

Customary international law is much less developed than national law with regard to shareholder
claims, but the general principles with regard to shareholder claims for reflective loss have been
squarely addressed by the ICJ in two cases. The distinction between direct loss and reflective loss is
well established, as is their different treatment.
a.

Direct injury to a shareholder’s rights can form the basis of a claim.

As in domestic law, claims based on direct injury to shareholders are admissible. As the ICJ
noted in Barcelona Traction, “[w]henever one of his direct rights is infringed, the shareholder has an
independent right of action.”39

35

See George Fischer (Great Britain) Ltd v Multi Construction Ltd., [1995] 1 BCLC 260 (UK) (Ct. App.
1994). See also Fletcher Cyclopedia of Corporations, (US) § 5911 ("If the injury is one to the plaintiff as a
shareholder as an individual, and not to the corporation, for example, where the action is based on a contract
to which the shareholder is a party, or on a right belonging severally to the shareholder, or on a fraud
affecting the shareholder directly, or where there is a duty owed to the individual independent of the person's
status as a shareholder, it is an individual action. If the wrong is primarily against the corporation, the redress
for it must be sought by the corporation, except where a derivative action by a shareholder is allowable, and a
shareholder cannot sue as an individual.") (footnotes omitted).

36

Laws relating to the creation, organisation and dissolution of companies are primarily state laws rather than
federal law in the United States.

37

See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Sup. Ct. Del. 2004) (“[t]he stockholder's
claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must
demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without
showing an injury to the corporation.”) (emphasis added).

38

Reinier Kraakman et al, The Anatomy of Corporate Law (2d ed. 2009), p.34.

39

Barcelona Traction 1970, § 47.

21

 b.

Claims based on reflective injury to shareholders are generally barred.

The general principle that shareholder reflective loss cannot form the basis of a claim under
general international law is also well-established. In its decisions in the Diallo case in 2007 and 2010,
the ICJ reaffirmed the general bar against claims based on reflective injury to shareholders:
The Court, in the Barcelona Traction case, recognized that “a wrong done
to the company frequently causes prejudice to its shareholders”. But, it
added, damage affecting both company and shareholder will not mean
that both are entitled to claim compensation:
“whenever a shareholder’s interests are harmed by an act done to
the company, it is to the latter that he must look to institute
appropriate action; for although two separate entities may have
suffered from the same wrong, it is only one entity whose rights
have been infringed”.
This principle was reaffirmed when the Court, responding to a Belgian
contention, established a
“distinction between injury in respect of a right and injury to a
simple interest . . . Not a mere interest affected, but solely a right
infringed involves responsibility, so that an act directed against and
infringing only the company’s rights does not involve responsibility
towards the shareholders, even if their interests are affected.”40
In its 1970 Barcelona Traction decision referred to in Diallo, the ICJ dismissed a claim by
Belgium because it was based on alleged reflective injury to shareholders. Only the company's alleged
injury could form the basis for a claim and the company was incorporated in Canada. Accordingly, the
claim was inadmissible.
In making this determination, the ICJ relied on comparative national law principles of corporate
law given the recognised absence of any general international corporate law.41 The Court also noted
that there were policy reasons for the rule.42
No exceptions have been found to exist by the ICJ to date although there has been considerable
debate among judges of the ICJ and others about the possible existence of exceptions. Claimant states
have argued for the recognition of exceptions to the general rule analogous to some exceptions
recognised in some systems of national law. As noted by Ian Brownlie, two exceptions to the general
prohibition were proposed and rejected by the Court in Barcelona Traction.43 Several judges argued
40

Diallo 2010, § 156 (citations omitted).

41

Barcelona Traction 1970, § 38 (“In this field international law is called upon to recognize institutions of
municipal law that have an important and extensive role in the international field ... All it means is that
international law has had to recognize the corporate entity as an institution created by States in a domain
essentially within their domestic jurisdiction. This in turn requires that, whenever legal issues arise
concerning the rights of States with regard to the treatment of companies and shareholders, as to which rights
international law has not established its own rules, it has to refer to the relevant rules of municipal law.”),
quoted in Diallo 2010, § 104.

42

See Barcelona Traction 1970, § 96 (claims based on reflective injury to shareholders, by opening the door to
competing diplomatic claims, "could create an atmosphere of confusion and insecurity in international
economic relations. The danger would be all the greater inasmuch as the shares of companies whose activity
is international are widely scattered and frequently change hands").

43

See Ian Brownlie, Principles of Public International Law (7 th ed. 2008), pp. 488-89.

22

 for a more flexible approach to exceptions in separate opinions, while others rejected the proposed
exceptions.
c.

The ICJ has recognised that specific treaties may apply different rules.

The ICJ has recognised that States may agree in a treaty to vary the principles applicable under
general international law for purposes of the treaty. States may thus agree to modify the general
principles to permit certain claims based on reflective loss or to give shareholders expanded direct
rights.
The Court has also recognised that the bulk of investment claims are now brought by investors
under investment treaties rather than through diplomatic protection under general international law.
The Court did not otherwise address those treaties in Diallo, except to reject the argument that the
proliferation of investment treaties, or investment treaty case law interpreting such treaties, had
changed customary international law relating to claims based on injury to shareholders.
3.

European Convention on Human Rights

As in national law systems, shareholders may bring claims under the European Convention on
Human Rights (ECHR) when they suffer direct loss.44 Like national courts, the European Court of
Human Rights (ECtHR) also bars shareholder claims for reflective loss as a general rule.45 The Grand
Chamber of the Court reiterated the applicable principles in a recent case:
[A] person cannot complain of a violation of his or her rights in
proceedings to which he or she was not a party, even if he or she was a
shareholder ... of a company which was party to the proceedings ...
[W]hile in certain circumstances the sole owner of a company can claim
to be a “victim” within the meaning of Article 34 of the Convention
where the impugned measures were taken in respect of his or her
company, when that is not the case the disregarding of a company’s legal
personality can be justified only in exceptional circumstances ....
The ECtHR has noted that if claims were not restricted to the company, it would be hard to
determine which shareholder or creditor constituencies should be allowed to bring ECHR claims
against governments.46

44

See, e.g., Olczak v. Poland, Case 30417/96 (2002) § 58 (ECtHR has held shareholder claims for reflective
loss generally inadmissible, but shareholder could bring admissible claim where measures at issue involved
direct injury such as the cancellation of certain shares). The court noted that "[i]t may be assumed that in the
majority of national legal systems shareholders do not normally have the right to bring an action for damages
in respect of an act or an omission that is prejudicial to 'their' company"). Id., § 57.

45

Agrotexim and Others v. Greece, Series A no. 330, pp. 25-26, §§ 68-71; Géniteau v. France (no. 2), Case
4069/02 (8 Nov. 2005) (finding shareholder claim inadmissible; "La Cour relève que ... le requérant ne se
plaint pas en l’espèce d’une violation de ses droits en tant qu’actionnaire de la société Valeo, mais que son
grief se fonde exclusivement sur l’allégation selon laquelle une violation du droit au respect de ses biens
résulterait de la baisse de valeur de ses actions du fait d’une atteinte au patrimoine de la société. ... La Cour
rappelle sa jurisprudence, selon laquelle il n’est justifié de lever le « voile social » ou de faire abstraction de
la personnalité juridique d’une société que dans des circonstances exceptionnelles ... ").

46

Agrotexim, § 65.

23

 4.

Conclusions with respect to comparative law

The no reflective loss principle is applied as a general rule to bar shareholder claims for reflective
loss in all of the advanced legal systems surveyed. It is a long-standing rule primarily generated by
case law.47 It is primarily based on policy considerations (which are further discussed below). The
shareholder’s loss is recognised, but it is seen as more efficient and fairer to restrict the power to bring
suit to the company. The rule is based on the assumption that the company has the power to recover
the loss. The principle is also derived from the legal personality of the corporation and is often seen as
a corollary of shareholders' limited liability for the company's obligations.
The bar on claims for reflective loss under national law does not mean that shareholders,
including minority shareholders, cannot bring claims. However, such claims are generally limited to
claims for direct injury.
In addition, the bar is not absolute. Exceptions exist. Their existence and scope is frequently the
subject of debate. Policy concerns are central to the debate about exceptions.
Issues for discussion

47



How does your country's domestic law generally resolve shareholder claims for reflective
loss?



If your country applies a different general rule, what is it?



What is the rationale for the applicable rules?



The Roundtable has previously noted that, other than for expropriation, investor claims
for damages under domestic law are very rare. Shareholder claims appear to be especially
rare. Have shareholders claimed for damages against your government under domestic
law for reflective loss? Would such claims be permitted under your domestic law?

In civil law systems, the analysis is generally derived from statutory or Code provisions. However, these
appear not to resolve the reflective loss issue directly so that significant judicial interpretation is involved.

24

 D. SHAREHOLDER CLAIMS IN ISDS

1.

Investment treaties

It appears that most investment treaties do not expressly address the issue of the scope of
shareholder claims. Typically, the only reference to shares in a typical BIT is a clause that clarifies that
shares are assets that qualify as an investment under the treaty definition of investment. Creditor
interests in companies, such as bonds, are also frequently included in such lists, sometimes with
qualifications.
For example, the UK-Russia BIT provides in its Article 1(a) that:
the term "investment" means every kind of asset and in particular, though
not exclusively, includes: [...]
(ii) shares in and stock, bonds and debentures of, and any form of
participation in, a company or business enterprise;48
NAFTA, CAFTA-DR and a few other treaties establish more articulated regimes for shareholder
claims, including regimes for a form of derivative action (see below).
The sparse treaty provisions mean that the law has primarily been developed through case law.
However, while treaty provisions are reduced to a minimum in the typical BIT, they have been
interpreted as having a considerable impact on corporate law principles. The consequence is outcomes
with regard to shareholder claims that differ sharply from domestic law.
2.

ISDS case law

The treatment of shareholder claims in ISDS contrasts significantly from that adopted in
advanced systems of national law, ECHR and customary international law. Four substantive
differences in outcomes between ISDS and domestic law are noteworthy: (i) shareholders have
generally been able to claim for reflective loss in ISDS whereas such shareholder claims are generally
barred in national law; (ii) tribunals have awarded recovery of reflective loss to shareholders rather
than to the company as under domestic law derivative action procedures; (iii) ISDS tribunals have
found the separate cause of action (in the treaty) rather than the nature of the loss to be determinative;
and (iv) the focus on the treaty cause of action leads to the conclusion that shareholder claims for
reflective loss are autonomous from the company’s claims, thereby allowing for overlapping and
separate shareholder/company claims in ISDS.49 A fifth difference is one of approach: unlike national
and international courts, ISDS tribunals have given limited consideration to the policy aspects and
consequences of allowing shareholder claims for reflective loss.
a.

Admissibility of shareholder claims for reflective loss in ISDS

ISDS tribunals have accepted claims for adjudication from a wide variety of shareholder
interests:
48

Agreement between the Government of the Union of Soviet Socialist Republics and the Government of the
United Kingdom of Great Britain and Northern Ireland for the Promotion and Reciprocal Protection of
Investment, concluded on 6 April 1989, art. 1(a)(ii).

49

The focus in this paper is on identifying general trends for policy analysis. The paper takes no position on
whether any particular interpretation is correct with regard to BITs in general or any particular treaty.

25

 

100% parent companies



majority shareholders



minority shareholders



indirect shareholders with ultimate control



other indirect shareholders, such as intermediate holding companies.50

In a significant number of ISDS cases, tribunals have expressly held that shareholders can
recover reflective loss. A number of commentators have described the issue of the admissibility of
shareholder claims for reflective loss in ISDS as settled law.51
b.

Recovery of reflective loss by the shareholder rather than the company

As noted above, under derivative action statutes in domestic law, shareholders can bring actions
to recover reflective loss under certain conditions. However, recovery of damages goes to the
company. Shareholders generally cannot recover reflective loss directly.
Except for the special case of NAFTA-type treaties and ICSID art. 25(2)(b) (see below section
F.1), BITs generally do not provide for recovery by the company in ISDS as a solution for shareholder
reflective loss. ISDS tribunals have awarded damages for shareholders' reflective loss to the claimant
shareholder rather than to the company.52
c.
ISDS tribunals have found the separate cause of action (in the treaty) rather than the
nature of the loss to be determinative.
As outlined above, domestic law generally requires shareholders to establish both a separate
cause of action and non-reflective damages. In many cases, such as Gardner v. Parker, the shareholder

50

For recent survey of shareholder cases of these various types, see, e.g., Martin J. Valasek & Patrick
Dumberry, Developments in the Legal Standing of Shareholders and Holding Corporations in Investor-State
Disputes, ICSID Review, Spring 2011, p. 73 et seq. [hereinafter “Valasek”].

51

See, e.g., Christoph Schreuer, Shareholder Protection in International Investment Law, (2005) 2
Transnational Dispute Management, issue No.3 ("Shareholder protection extends not only to ownership in
the shares but also to the assets of the company. Adverse action by the host State in violation of treaty
guarantees that affect the company's economic position gives rise to rights by [sic] the shareholders.");
Stanimir Alexandrov, The "Baby Boom" of Treaty-Based Arbitrations and the Jurisdiction of ICSID
Tribunals: Shareholders as "Investors" and Jurisdiction Ratione Temporis, The Law and Practice of
International Courts and Tribunals, Vol. 4 (2005) 19, 40-45 (noting that tribunals considering shareholder
claims "all considered it to be beyond doubt that a shareholder's interest in a company includes an interest in
the assets of that company, including its licenses, contractual rights, rights under law, claims to money or
economic performance, etc., and that in finding jurisdiction they based that reasoning on the broad definition
of investment in the applicable BITs").

52

In a NAFTA case, Marvin Roy Feldman Karpa v. Mexico, involving the specific NAFTA derivative action
provisions applicable to shareholder claims, Mexico requested that the tribunal correct the award to conform
to the mandatory NAFTA requirement that shareholder derivative claims under NAFTA provide for recovery
to the company. The tribunal did so. Marvin Roy Feldman Karpa v. Mexico, ICSID (AF), Correction and
Interpretation of the Award (2003).

26

 can establish a separate cause of action, but the reflective nature of the loss is determinative and
precludes a claim.53
In contrast, in ISDS the existence of a separate legal basis for a claim in the treaty has been seen
as sufficient to allow for claims for reflective loss. The analysis focuses on the shareholder's separate
cause of action based on the inclusion of shares in the definition of investment in the BIT. For
example, in Impregilo v. Argentina, the tribunal found that Impregilo's shares in the company (AGBA)
were protected under the BIT because of the definition of investment. It concluded that Impregilo
could recover for reflective loss.54 The relationship of the shareholder loss to the loss by the company
is not considered to be relevant to determining whether the shareholder can bring the claim.55 In some
cases, tribunals do not determine whether the claim is for direct or reflective loss.
d.
The focus on the treaty cause of action leads to the conclusion that shareholder claims for
reflective loss are autonomous from the company’s claims.
As noted above, the general domestic corporate law rule barring shareholder claims is based on
the company being better placed to bring the claim for the same losses. Where the company sues, no
shareholder suit is possible. Even where the company decides not to sue, shareholder suits are
generally barred.
In contrast, in ISDS, tribunals have generally interpreted the shareholder’s right as autonomous
from the company’s claim due to the separate cause of action. The BIT is interpreted as giving the
shareholder an independent right to claim alongside the company regardless of whether the company
has a claim. The company's possible or even actual recourse with regard to the direct loss appears to
be seen as largely irrelevant in a number of ISDS shareholder cases.

53

See Eilís Ferran, Litigation by Shareholders and Reflective Loss, The Cambridge Law Journal, 60 [2001], pp.
245-247 ("it is clear that where a company and a shareholder have overlapping claims the shareholder cannot
pursue its personal claim if its loss is merely reflective of the company's loss").

54

Impregilo S.p.A. v. Argentina, Award (2011), § 138 (“It follows from Article 1(1)(b) of the Argentina-Italy
BIT that Impregilo's shares in AGBA were protected under the BIT. If AGBA was subjected to expropriation
or unfair treatment with respect to its concession - an issue to be determined on the merits of the case - such
action must also be considered to have affected Impregilo's rights as an investor, rights that were protected
under the BIT.”).

55

See, e.g., Total S.A. v. Argentina, Decision on Objections to Jurisdiction (2006) § 80 ("Having found,
however, that the assets and rights that Total claims have been injured in breach of the BIT fall under the
definition of investments under the BIT, it is immaterial that they belong to Argentine companies in
accordance with the law of Argentina. Total asserts its own treaty rights for their protection, regardless of any
right, contractual or non-contractual that the various companies [in which it owns shares] might assert in
respect of such assets and rights under local law before the courts of other authorities of Argentina, in order
to seek redress or indemnification for damages suffered as a consequence of actions taken by those
authorities."); Suez, Sociedad General de Aguas de Barcelona S.A. and Interagua Servicios Integrales de
Agua S.A. v. Argentine Republic, ICSID, Decision on Jurisdiction (2006) § 49; see also Campbell McLachlan
et al., International Investment Arbitration: Substantive Principles (2007) §§ 6.77, 6.79 ("Given the wide
definition of investment contained in most bilateral investment treaties, if an 'investment' can include shares
in a company there is no conceptual reason to prevent an investor recovering for damage caused to those
shares which has resulted in a diminution in their value. ... The simplest approach to justify claims [for
reflective loss] is ... based upon the wording of the treaty."); Stanimir Alexandrov, The "Baby Boom" of
Treaty-Based Arbitrations and the Jurisdiction of ICSID Tribunals: Shareholders as "Investors" and
Jurisdiction Ratione Temporis, The Law and Practice of International Courts and Tribunals, Vol. 4 (2005) 19,
40-45; Christoph Schreuer, Shareholder Protection in International Investment Law, (2005) 2 Transnational
Dispute Management, issue No.3.

27

 As noted by Zachary Douglas, several ISDS tribunals have found shareholder claims to be
admissible without regard to the quality of the recourse available to the company to obtain a remedy:
[S]everal tribunals hearing claims by shareholders have proclaimed as
irrelevant the fact that the company is actively negotiating with the host
state to achieve a settlement in respect of any prejudice cause to the
company by the acts of the host state. This apparently extends to
circumstances where the company's position in such negotiations
contradicts the litigational approach of the shareholder. Similarly, the
company's pursuit of a claim in the local courts of the host state has been
discarded as a factor that might be relevant in considering the
admissibility of an investment treaty claim by the shareholder for the
same prejudice.56
The view that shareholder recourse is autonomous may be related to a tendency of some ISDS
tribunals and commentators to consider that domestic remedies (in this case, for the company) are of
little practical use or relevance. Many ISDS shareholder cases involve claims by shareholders of
domestic law companies with access to the domestic courts but without access to ISDS. In Roundtable
16, the Roundtable discussed this apparent tendency to dismiss domestic recourse. It noted that a
number of ISDS tribunals have characterised treaty requirements for time-limited recourse to domestic
courts (as a pre-condition to ISDS arbitration) as "nonsensical".57 Some ISDS commentators take a
similar view.58 If the working assumption is that domestic recourse by the company is futile, an
approach which discounts the need to consider the company situation may be more likely to be seen as
appropriate.
Views may differ on the degree, if any, that an implicit belief that domestic recourse is generally
futile lies behind the theory that shareholder claims in ISDS should be autonomous from company

56

Zachary Douglas, The International Law of Investment Claims (2009), p. 456 (citing cases).

57

See Plama Consortium Limited v. the Republic of Bulgaria, ICSID, Decision on Jurisdiction (8 February
2005) (allowing investor to circumvent "curious" 18-month requirement using an MFN clause; finding it
appropriate "to neutralize ... a provision that is nonsensical from a practical point of view”); Suez, Sociedad
General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. The Argentine Republic, ICSID Case No.
ARB/03/19; AWG Group Ltd. v. The Argentine Republic, UNCITRAL (joined cases), Decision on
Jurisdiction § 67 (citing Plama's "nonsense" theory in allowing application of MFN to avoid 18-month
requirement); ISDS Scoping Paper, p. 27 & n.59.

58

See, e.g., Christoph Schreuer et al, The ICSID Convention: A Commentary (2d ed. 2009), p. 413 ("It is
questionable whether insistence by a host State on the exhaustion of local remedies prior to ICSID arbitration
serves any useful purpose. .... The host State's investment climate may be affected by the public proceedings
in its courts ....")
The Roundtable has noted that the view that domestic recourse does not serve any purpose contrasts with a
number of advanced systems of administrative law, such as the Austrian, German and Swiss systems, which
strictly require exhaustion of recourse seeking primary remedies as a pre-condition for claims for damages
(notably through the substantive law principle of contributory negligence). See ISDS Scoping Paper, p. 27
n.59. In Roundtable 16, Prof. van Aaken questioned whether current ISDS practice underestimates the
usefulness of domestic administrative law recourse. See Summary of FOI Roundtable 16 (March 2012), p. 13
(Prof. van Aaken "considered that national courts can be unbiased and independent in many cases; it is not
appropriate to base policy on the assumption that national courts are necessarily biased. They can grant
primary remedies that satisfy an investor better than an ex post damages remedy."); see also id., p. 17
(Roundtable discussion about the appropriate ISDS policy assumptions with regard to expected national
court performance).

28

 recourse.59 What appears clear, however, is that the primary basis for the finding of autonomous
shareholder rights to claim – arbitral interpretation of the definition of investment – has a broader
application than where company recourse is futile.
Tribunals have not limited autonomous shareholder claims to cases where the company may have
limited recourse. They have found that shareholders can bring autonomous claims even when the
company has effective recourse. One example of this autonomy is that, even where a company has the
entitlement to claim under ISDS, tribunals have held that shareholders of that company can still pursue
their own autonomous claims in ISDS.60 (See below section on multiple claims).
The theory that the shareholder ISDS claim is autonomous from the company claim has been
strongly affirmed at the jurisdictional, admissibility and liability phases. However, the distinction
tends to break down at the damages phase if the policy concern about double recovery is addressed.61
The recognition of shareholders’ ability to bring autonomous claims without regard to company
recourse may have significant consequences as ISDS cases increasingly address government action in
advanced legal systems with effective systems of primary remedies for domestic companies. Under
this approach, foreign shareholders would have the power to bring autonomous ISDS claims
regardless of company action in the domestic courts.
e.
ISDS tribunals have given limited consideration to the policy aspects and consequences of
shareholder claims.
In domestic law and general international law, the general bar on shareholder claims for reflective
loss is driven by policy. As recently underlined by the Hong Kong Court of Final Appeal, the principle
barring shareholder claims for reflective loss “is a matter of legal policy. It is not because the law does
not recognise the loss as a real loss”.62 Judgments on shareholder claims for reflective loss in national
law regularly review the policy interests that weigh against such claims, including the risks of multiple
actions and inconsistent outcomes, double recovery, and the impact on creditors and other
shareholders. Judicial decisions to recognise an exception to the general rule barring claims is
generally based on explicit analysis showing that the relevant policy interests will not be affected.
In contrast, arbitral decisions in ISDS have rarely given consideration to the policy implications
of allowing shareholder claims, as noted by one critical commentator:

59

See Zachary Douglas, The International Law of Investment Claims (2009), p. 456 (suggesting that the ISDS
shareholder claims regime reflects an "abdicat[ion of] responsibility for the development of a coherent
relationship between the investment treaty regime and [domestic] legal orders").]

60

See, e.g., Lauder v. Czech Republic (Final Award) (2001); CME Czech Republic BV (The Netherlands) v.
Czech Republic, Partial Award (2001) & Final Award (2003); Sempra Energy International v. Argentina,
Preliminary Objections (2005), § 42.

61

See, e.g., Gemplus, S.A. v. Mexico, Award, Part XII (16 June 2010), § 60 (shareholder claimants insisted that
their claim is “jurisdictionally distinct and wholly separate” from the company claim for damages in the host
state’s domestic courts, but “[n]evertheless ... appreciate the concern that, in practical terms, they may be
seen as recovering compensation for the same acts through separate sets of proceedings”).

62

Waddington Ltd. v. Chan Chun Hoo, [2009] 4 HKC 381 (Hong Kong Ct. of Final Appeal 2008), § 49;
Johnson, 2 AC at 66 (“The disallowance of the shareholder’s claim in respect of reflective loss is driven by
policy considerations.”); Thomas v. D’Arcy, 2005 QCA 68 (Queensland Ct. App. 2005) (the no reflective loss
principle is “driven by policy considerations”); Barcelona Traction 1970, § 96.

29

 The remarkable and disquieting feature of the investment jurisprudence is
that tribunals have so readily abdicated their responsibility to give proper
consideration [to whether allowing shareholder claims for reflective loss
will] ... (i) unfairly expose the host state or the company to a multiplicity
of actions; (ii) materially prejudice the interests of the creditors of the
company; or (iii) interfere with a fair distribution of the recovery among
all interested parties. The common refrain is no more sophisticated than
'it is not our problem'.63
Tribunals have apparently considered it unnecessary to consider policy consequences in any
detail because they consider that the issue is resolved by the inclusion of shares in the investment
definition. Tribunals also rely heavily on arbitral precedent (although it has rarely if ever addressed the
policy issues or consequences).64
The lack of arbitral interest in the policy consequences is also reflected in some commentators’
treatment of the issue of shareholder claims. Much of the commentary on shareholder claims focuses
on arbitral decisions and address policy issues only briefly if at all.65 The limited attention to creditor
and other policy interests is puzzling because the United States and more recently Argentina have
raised these issues in a substantial number of cases. A few commentators have more extensively
analysed the policy interests raised by shareholder claims.66
Different governments (and others) likely have different views about whether ISDS tribunals
should explicitly address policy issues relating to consistency that are raised by potential
interpretations they are considering. As a matter of practice, however, the reluctance of tribunals to do
so in the area of shareholder claims appears clear. Early cases under typical BITs did not consider the
policy issues, and today it appears that a significant number of tribunals consider the issue to be one of
63

Zachary Douglas, The International Law of Investment Claims (2009), p. 455; see also Meg Kinnear et al,
Investment Disputes under NAFTA, An Annotated Guide to NAFTA Chapter 11 (2006 & 2008 Supp.), p.
1116-7 (the policy issues relating to the risk of double recovery, the effect on other shareholders and on
creditors “have not been adequately considered” by NAFTA tribunals); Schreuer, 2005 (“tribunals have
disposed of the argument in a rather summary fashion”) (quoting Alexandrov, 2005).

64

As discussed below, some arbitral tribunals have sought to address the risk of double recovery at the stage of
granting a remedy.

65

See Stanimir Alexandrov, The "Baby Boom" of Treaty-Based Arbitrations and the Jurisdiction of ICSID
Tribunals: Shareholders as "Investors" and Jurisdiction Ratione Temporis, The Law and Practice of
International Courts and Tribunals, Vol. 4 (2005) 19, 40-45 (analysis of case law outcomes but no reference
to policy consequences for judicial economy, creditor, non-claimant shareholder or respondent government
interests); Christoph Schreuer, Shareholder Protection in International Investment Law, (2005) 2
Transnational Dispute Management, issue No.3 (same).
Other commentary briefly addresses some policy issues although creditor interests are rarely addressed. See,
e.g., Valasek (discussing multiple claims, costs and risk of inconsistent outcomes); Campbell McLachlan et
al., International Investment Arbitration: Substantive Principles (2007) §§ 6.84-6.85 (briefly noting that some
policy concerns "are well-founded and could result in substantial prejudice for respondent States", but
suggesting that tribunals' reliance on the treaty definition of investment precludes consideration of the policy
consequences; no discussion of creditor interests). Critical commentary about ISDS from NGOs is also rarely
concerned with creditor or non-claimant shareholder interests.

66

The most thorough policy analysis, which is very critical of ISDS case law, is found in Zachary Douglas, pp.
397-457; see also Gabriel Bottini, Indirect Claims under the ICSID Convention, 29 U. Pa. J. Int’l L. 563
(2008) (article by then-counsel for Argentina); Joseph D’Agostino, Rescuing International Investment
Arbitration: Introducing Derivative Actions, Class Actions, and Compulsory Joinder, 98 Va. L. Rev. 177
(2012).

30

 settled law under a typical BIT and thus unworthy of significant analysis. If the policy issues raised by
shareholder claims are to be considered, governments likely need to play a role.
Issues for discussion


Has your country experienced shareholder claims in ISDS? What is your perspective on
the consistency issues raised by such claims?



As noted, domestic and general international law cases extensively discuss the policy
consequences of proposed interpretations relating to shareholder claims whereas ISDS
tribunals have not done so. What explains the different approaches in your view?



Under advanced systems of national law, significant changes to corporate law, such as the
2005 and 2006 reforms in Germany and the UK that adjusted the regimes for shareholder
claims, are typically preceded by years of study and debate. As noted above, many ISDS
tribunals have considered that the inclusion of shares in the definition of investment in
BITs has modified general principles of corporate law governing shareholder claims for
purposes of damages claims against governments under BITs; moreover, they have in
effect concluded that the treaty language largely eliminates any need for tribunal
consideration of the consequences of the new approach. Has your government analysed
the consequences of these changes to corporate law and in particular the impact on issues
of consistency?



Has your government analysed how ISDS principles will interact with principles for
shareholder claims under your national law?

31

 E. PRELIMINARY POLICY ANALYSIS

This section provides some preliminary policy analysis of consistency interests raised by
shareholder claims for reflective loss in ISDS. For purposes of this analysis, the following simplifying
assumptions are made: (i) both direct and indirect shareholders can bring ISDS claims; (ii) both
controlling and minority shareholders can bring ISDS claims; (iii) shareholders can bring ISDS claims
for both direct and reflective loss; (iv) shareholders have an autonomous right to claim in ISDS
regardless of company recourse; and (v) company nationality (including the nationality of
shareholders who are companies) is determined by the state of incorporation without any requirement
of a “genuine link”.67
It is also assumed that nonexpropriatory government misconduct in violation of an investment
treaty has injured an operating company causing a loss in value of shares; the loss is suffered equally
by all shareholders in proportion to their economic interest. Other stakeholders such as creditors may
suffer part or all of the loss. It is also assumed that the company may have access to an effective
remedy in domestic law or ISDS. Some of these assumptions will subsequently be relaxed.
References to the “company” refer to the company in which the shareholder owns shares (directly
or indirectly). References to the “operating company” generally refer to the company that is active and
that incurs the direct loss due to government misconduct. References to shareholders refer generally to
shareholders covered by an investment treaty; where clarification is needed, covered and non-covered
shareholders are distinguished.
1.
Impact of the admissibility of shareholder claims on predictability and legal
uncertainty
a.
Shareholder claims are likely to be less predictable for governments than claims by the
injured company.
The nationality of a company is generally public information and it is generally expensive and
difficult for a company to change it. This allows governments to ascertain the law, including the
investment treaty, applicable to claims by the company.
In contrast, it can be difficult to identify the shareholders and particularly the indirect
shareholders of a company. This may be particularly true for special purpose vehicles with direct or
indirect shareholders located in non-transparent jurisdictions. The identity of shareholders also
frequently evolves; this can involve both intra-group transactions and share transactions with third
parties.
In addition, shareholders acquire their shares at different times. Since it is often recognised that at
least most pre-investment state policy is not subject to challenge under ISDS, the different dates of
purchase mean that the facts regarding the state of national law and policy are different for each
shareholder claim. The separate ISDS cases brought by CMS and Total, two minority shareholders of

67

As noted above, this paper takes no position on whether these interpretations are correct with regard to BITs
in general or any particular treaty.

32

 the same company (TGN), focused on the different dates of the purchase of the TGN shares by
different shareholders as key considerations in the analysis.68
In contrast, under corporate law applying the no reflective loss principle, shareholders who
acquire shares in a company after the events in a dispute involving the company, but before the dispute
is resolved, normally acquire an indirect interest in the outcome of the dispute. Share purchasers
acquire a potential reflective gain with regard to claims by the company against third parties, and a
risk of reflective loss with regard to any pending claims against the company.
b.

Treaty shopping is facilitated if shareholder claims are admissible.

Roundtable delegates have noted that a regime that facilitates treaty shopping can create
uncertainty for governments: "where investors can engage in treaty shopping, States parties to
investment treaties cannot be sure of the exact scope of their commitments under these treaties; this
increases the legal uncertainties countries face in relation to these treaties."69
Treaty shopping is facilitated if shareholder claims for reflective loss are generally admissible.
Shareholder ownership structures are often easy to modify. For example, intermediate holding
company subsidiaries can be created in various jurisdictions between the beneficial owner and the
operating company, with each being a potential ISDS claimant under a different treaty if the operating
company suffers loss. Ownership of an operating company can also be transferred from one part of a
corporate group to another. Simple incorporation of a company in a state has been interpreted as
sufficient to qualify as a national of that State under many BITs.
As noted in the scoping paper, companies frequently seek to structure their affairs to benefit from
advantageous legal rules. It is not suggested here that there is anything inherently improper in that
process. The policy issue addressed here is the scope for such behaviour that is provided by the ISDS
system.
c.

The ability of shareholders to claim for reflective loss may make it harder to settle cases.

The Roundtable has noted that consistency can promote settlement and that, conversely,
settlement negotiations are made more difficult by greater legal uncertainty. The uncertainties
associated with shareholder claims may complicate settlement negotiations.
Under the no reflective loss rule, a settlement with the company normally provides the defendant
with the assurance that the matter is resolved. The law bars any subsequent shareholder claims. The
company normally does not need to seek shareholder consent to settle a claim.
In contrast, where shareholders can claim autonomously for reflective loss, a settlement with the
company may be much less attractive for the government. The settlement may be followed by
additional claims by one or more shareholders arising out of the same events. The settlement value to
the State, and thus to the company, will be less if the company is unable to deliver “real peace” in
exchange for the settlement consideration.70

68

See CMS Gas Transmission Company v. Argentina, Award (2005); Total, S.A. v. Argentina, Award (2010).
See also below the discussion of the risk of inconsistent results.

69

Summary of discussion of FOI Roundtable 16 (March 2012), p.20; ISDS Scoping Paper, p. 55.

70

See, e.g., Eilís Ferran, Litigation by Shareholders and Reflective Loss, The Cambridge Law Journal, 60
[2001], pp 245-247 ("Secondary policy considerations also come into play to explain the absolute nature of
the rule that [a shareholder] cannot sue for reflective loss where the company also has a cause of action. If a

33

 In particular, the spectre of subsequent shareholder damages claims could hinder attempts to
work out a settlement involving continuing investor presence in the host state. As the Roundtable has
noted, governments may seek to replicate, through settlement with the company, the non-pecuniary
remedies available under domestic law. If such settlements are followed by shareholder claims for
damages in ISDS, the incentive to reach them may be lower. Weaker settlement incentives may
encourage exit by investors and/or litigation.
The parties to settlement discussions could seek to re-establish, by contract, the optimal
conditions for a settlement. This would involve waiver by shareholders of their rights as part of the
settlement. However, this is likely only feasible in companies with few shareholders and only with
unanimous shareholder consent. The company normally has no power to compel a waiver by
shareholders of their claims.71
2.

The risk of double recovery

As illustrated by the House of Lords decision in Johnson, it is widely recognised that claims for
reflective loss raise serious concerns about double recovery. The basic financial problem has been
described in the following example by Eilís Ferran:
A simple example can set the scene: take a company with a net present
value of £1 million and four shareholders, A, B, C and D; £2 million has
been extracted from the company by wrongdoers in breach of duties
owed to the company and to its shareholders personally. All four
shareholders would be fully and equally compensated if the company
sued successfully to recover the lost £2 million: the shareholders' loss is
reflective of the company's loss. What if, say, A, could sue personally to
recover its share of the loss as reflected in the value of its shares£500,000? That £500,000 would be for A's benefit alone. If the company
were then to pursue its claim, the wrongdoers could not be held liable for
more than £1.5 million since that would offend against basic principles.
Should the company succeed, the value of each individual shareholding
would increase to £625,000, not the £750,000 that would have been
recovered if the company had been able to sue for the full £2 million. But
in the absence of court orders taking into account what has already
occurred, A would end up considerably better off than the others since it
company agrees a compromise settlement with a defendant, principles of certainty and fairness dictate that
shareholders should not then be able to re-open the case by seeking to pursue the defendant in a personal
capacity. Shareholder complaints about the terms of a compromise should properly be directed at those who
agreed the compromise on the company′s behalf, not the original wrongdoer.")
71

A US appellate court has painted a colourful picture of the potential paralysis of the company that it foresaw
if shareholder claims for reflective loss were permitted:
The rule is a salutary one: if a shareholder, dissatisfied with the dealings entered into between his
corporation and a third party, automatically possessed a personal right of action against the third
party, then corporations would be paralyzed. They could rarely act except upon unanimous
consent [of all shareholders]. Business affairs would slow to a crawl, and the courts, confronted
with a bewildering myriad of shareholder claims, would be as busy as a colony of centipedes
with athlete's foot.
Potthoff v. Morin, 245 F.3d 710, 717 (8th Cir. 2001) (dismissing shareholder suit arising out of termination of
license to company by local government port authority; only the company could claim) (quoting In re Dein
Host, Inc., 835 F.2d 402, 406 (1st Cir.1987)).

34

 holds shares now worth £625,000 plus the £500,000 recovered in its
personal action.72
Professor Ferran considers that recovery of more than a total of £ 2 million would offend against
basic principles. Nonetheless, such recovery would be necessary to make the other shareholders whole
and restore the value of their shares to their original value of £ 750,000. To fully compensate the other
shareholders, the defendant would have to found liable in the second proceeding for £ 2 million; its
total liability of £ 2.5 million would exceed the £ 2 million in damages that it caused. As Prof. Ferran
notes, it is this dilemma of being required either to undercompensate some injured parties or to impose
double recovery on the defendant that led the House of Lords to reject recovery of reflective loss in
Johnson.
While their rejection of reflective loss claims exempts them from the problem of double recovery,
national courts have far more effective powers than an arbitral tribunal to address it. National courts
could normally bring most if not all of the relevant constituencies together in a single proceeding or in
related proceedings. Parties can intervene or be joined to court proceedings by the court because
jurisdiction is not based on consent. National court decisions can also bind non-parties. A national
court could thus try to allocate reflective damages among most of the affected parties in a single
proceeding.
Arbitral tribunals have no such powers because their jurisdiction is based on party consent. If the
company and one or more shareholders bring claims, several international tribunals as well as national
courts would normally be involved. There is no mechanism for coordination of their decisions.
Some ISDS investment tribunals have expressed strong confidence that double recovery is a nonissue.73 However, these tribunals have generally not explained how the problem would in fact be
resolved. In effect, the problem is left to be resolved (or not) by a subsequent court or tribunal. This
view contrasts with Johnson, Waddington and other domestic cases which have considered the
problem sufficiently serious to bar recovery.74
ISDS tribunals that have faced the double recovery problem in more concrete terms have used
creative remedies. One innovative remedial approach to allowing recovery by a shareholder for
reflective loss is in effect to give the government an option to avoid the risk of double recovery by
acquiring the claimant's shares. Where the government is to acquire the shares as part of a remedial
package, it must pay both the damages it caused and the residual value of the shares.
Perhaps because this remedy is innovative and extends beyond compensation, and thus may be
questioned in terms of the tribunal's jurisdiction, tribunals frequently seek to rely on a degree of
consent from one or both parties. The claimant may volunteer to cede its shares (and thus exit the
market) if it obtains its desired damages remedy, as in the CMS case. The tribunal then conducts the
analysis, and its order provides for damages and gives the government an option to purchase the shares
72

Eilís Ferran, Litigation by Shareholders and Reflective Loss, The Cambridge Law Journal, 60 [2001], pp
245-247 (2001).

73

See, e.g., Impregilo S.p.A. v. Argentina, Award (2011) § 139 ("The question of double compensation being
granted would seem to the Arbitral Tribunal to be a theoretical rather than a real practical problem. It seems
obvious that if compensation were granted to [the company] at domestic level, this would affect the claims
that [the shareholder] could make under the BIT, and conversely, any compensation granted to [the
shareholder] at international level would affect the claims that could be presented by [the company] before
Argentine courts.").

74

See also below in the section on NAFTA (section F.1), the decision of a NAFTA tribunal recognising the
issue as a significant problem for the subsequent court or tribunal.

35

 at a price fixed by the tribunal. Given the broad discretion of tribunals in fixing damages (and valuing
companies), the tribunal may have some ability in practice to evaluate the amount of damages and the
residual value in a manner that makes the purchase option more or less attractive for the government.
In CMS, the damages caused to the shareholder were evaluated at US$133.2 million whereas the
residual value of the claimant's shares was valued at approximately $2.1 million. 75
The share purchase remedy can provide a solution to the problem of double recovery. If the
company subsequently recovers its full direct loss (which includes the shareholder’s reflective loss),
the government (now as shareholder) will benefit from the company recovery in proportion to its
shareholding.
The share purchase remedy appears to be most relevant for treaty violations that destroy
practically all of the value of the company. In such cases, the residual (post-breach) value of the shares
is close to zero. Where the residual value remains substantial, at least two issues are raised.
First, the cost of the share purchase option for the government could be significantly higher than
the damages caused. For example, a treaty violation could damage a major company (initially valued
at $10 billion) by $1 billion (10% of its value). This could give rise to an award of $200 million to a
20% shareholder of the company. For the government, avoiding the risk of double recovery through a
share purchase remedy would be very expensive. The acquisition of the 20% shareholding to avoid
double recovery would involve an additional government payment of $1.8 billion to cover the residual
value of the shares.
Second, if the government were interested in acquiring the shares to protect itself from double
recovery, the valuation of the company by the tribunal could have more practical importance than the
case for breach. In the example above, consider a reduction of 10% in the tribunal's pre-injury
valuation of the company (from $10 billion to $9 billion). The $1 billion in damages would leave a
post-injury value of $8 billion for the company. The residual value of the 20% shareholder interest
would be $1.6 billion (20% of $8 billion). The $1.8 billion cost to the government of the total package
here (200 million plus $1.6 billion) would be the same as the residual value alone in the first example.
The 10% change in company valuation by the tribunal would have the same effect as the entire
damages award on the “package price”.76
Further research or monitoring could determine if any subsequent courts/tribunals have in fact
been able to adjust their remedies to overcome the effects of previous shareholder remedies. It could
also determine whether pre-emptive attempts to resolve the problem by the first tribunal through share
repurchase orders or claimant undertakings are effective in practice.
It does not appear that national courts have given significant consideration to attempting to
resolve the problem of double recovery using the creative techniques developed by ISDS tribunals,
such as share purchases or shareholder undertakings. This may be in part because the techniques
developed by arbitral tribunals to date to address double recovery do not appear to address other policy
concerns that underlie the prohibition on the recovery of reflective loss, such as judicial economy (the
avoidance of multiple proceedings for the same injury and risk of inconsistent rulings) or the
protection of creditors of the company.
75

In the event, Argentina did not acquire the shares. The purchase option was available for one year and was
conditioned on prior payment of the damages component of the award, which has not been paid. CMS sold
the shares to a third party in 2008.

76

In addition, the share purchase remedy gives rise to substantial government ownership of the company with
consequences for the remaining shareholders and others.

36

 3.

Multiple claims and inconsistent outcomes

Multiple shareholder claims cause high legal costs and a risk of inconsistent results with regard to
the same underlying situation. They may also provide a single shareholder with an opportunity to
bring essentially the same case twice as a beneficial owner. These issues are addressed in turn.
a.

The interest in judicial economy and the issue of costs

National courts have frequently underlined that the prohibition on shareholder claims for
reflective loss serves the societal interest in “judicial economy” by reducing the number of cases
needed to address the harm. The Gaubert court underlined this interest:
One rationale behind this prohibition [on shareholder claims for
reflective loss] rests on principles of judicial economy. A corporation can
protect its shareholder's interest by suing in the corporate name, and if the
suit is successful the proceeds will inure to the benefit of the corporation;
this increases the value of the individual shares in proportion to the
amount of the recovery. Compare this to a situation where all
shareholders sue in their individual capacities, which achieves the same
resultant recovery, but requires our legal system to process hundreds or
thousands of suits, rather than one suit in the name of the corporation.77
Multiple shareholder claims in ISDS substantially increase costs for governments as well as for
claimants:
[Because shareholder claims are widely available in ISDS,] capitalimporting countries having entered into a significant number of BITs will
increasingly run the risk of being respondents in multiple (and often
simultaneous) arbitration claims filed by different entities included in the
increasingly sophisticated and complex corporate structure of foreign
investors. Such multiple claims will clearly result in very high legal costs
for respondent States.78
For example, CMS and Total were two unrelated minority shareholders of TGN, an Argentine
gas distribution company. Each brought a separate claim. Only partial costs information has been
released in either case, but there is no doubt that costs in both multi-year cases have been very
substantial for all parties.79 In its 2010 award on liability, the Total tribunal noted that the claimant was
seeking an interim costs award in the amount of EUR 10,264,735.62 plus USD 4,368,881.87 for its
legal and related costs incurred to that date, as well as USD 431,500 for arbitral costs to that date.
Argentina claimed that its interim costs amounted to USD 1,215,222.99.80 The company, TGN, has
recently announced that it also intends to sue the government for alleged damages arising out of

77

Gaubert, 885 F. 2d at 1291.

78

Valasek, p. 73.

79

The CMS case was filed in 2001. It gave rise to a 2003 decision on jurisdiction, a 2005 decision on the merits
and a 2007 decision on an application for annulment. The Total case was filed in 2003 and has given rise to a
2006 decision on jurisdiction and a 2010 decision on the merits; a further decision is expected on damages,
which may be followed by additional proceedings seeking an annulment.

80

See Total 2010, § 19.

37

 "pesification"; the degree of overlap with the damages awarded or at issue in the CMS and Total
claims is unclear.81
In another example, Egypt reportedly faces multiple ISDS claims from shareholders with regard
to alleged treatment of East Mediterranean Gas Company (EMG).82 An alleged 12.5% shareholder of
EMG known as Ampal has brought an ICSID case against Egypt. Other shareholders with overlapping
interests in EMG, include Ampal's CEO and controlling shareholder, are reportedly pursuing a
separate ad-hoc UNCITRAL ISDS arbitration under the Poland-Egypt bilateral investment treaty over
the same events.83
Costs for claims for reflective loss may be increased because of the need for high-cost expert
evidence to address the problem of how much reflective loss is suffered by the different corporate
stakeholders.84
In addition to increased costs for governments, the availability of multiple shareholder claims
may allow tactical behaviour by shareholders. The Yukos situation has generated multiple claims
against Russia by different shareholders of Yukos in different proceedings. A small Spanish Yukos
shareholder claim for $2.6 million in Quasar v. Russia was entirely financed by $14.5 million
provided by the majority Yukos shareholder (which is bringing three separate Yukos-related cases
against Russia).85 This interested third party financing arrangement was discovered only late in the
Quasar proceedings.86 The small Quasar case gave rise to tribunal findings that are expected to be
used by the majority shareholder-funder as well as by other Yukos shareholder claimants.87 It appears
81

See TGN demandará a gobierno de Argentina, El Economista (Mexico) (10 October 2012) (TGN announces
expected claim against government due to 2002 pesification law and subsequent freezing of tariffs; claim to
seek damages incurred since 2006). CMS's damages as a shareholder were apparently calculated based on the
life of the TGN concession to 2027. CMS Gas Transmission Company v. Argentina, Award (2005), § 199.

82

See Luke Eric Peterson, Battle is joined on second treaty-arbitration front in Israel-Egypt gas fight, as ad-hoc
arbitral tribunal is chosen, International Arbitration Reporter (6 Feb. 2013).

83

See id. ("In the Ampal claim at ICSID, as well as in the ad-hoc claim, ... damages are sought not merely for
the interruptions in supply suffered as a result of the “terror” attacks, but also for the ultimate termination of
the gas venture by the Egyptian counter-parties (whose conduct is attributed by the claimants to the Egyptian
state)).
There are additional contract claims and commercial arbitration proceedings involving the company, EMG,
and Egyptian SOEs apparently also arising out of the same events. Id.

84

See GAMI v. Mexico, Submission of the United States (non-disputing party) (30 June 2003) (noting that
"international tribunals have rejected shareholder claims in part because of the difficulty in determining what
relief can fairly be granted in light of potential claims by creditors and other interested parties").

85

Quasar de Valores SICAV, S.A. v. Russian Federation, (SCC), Award (2012); Hulley Enterprises Ltd
((Cyprus) v. Russia; Yukos Universal Limited v. Russia; Veteran Petroleum Limited v. Russia. The
three latter cases are being heard together by a single tribunal.

86

See Quasar de Valores SICAV, S.A. v. Russian Federation, (SCC), Award (2012); Luke Eric Peterson, Russia
held liable for expropriation of Yukos shareholdings in case brought by minority Spanish shareholders (but
funded by majority owner), International Arbitration Reporter (26 July 2012) (“with the publication of the
final award in the Spanish shareholders' claim, it has been confirmed that the $14.5 million (US) used to
pursue the Spanish BIT claim was provided entirely by an interested third-party: the majority Yukos
shareholder, Group Menatep Limited”).

87

See id. (“Compensation is modest [in Quasar], but majority shareholders (and funders of this case) may be
heartened” [by the tenor of the Quasar decision]).
In addition to the three joined cases brought by majority shareholder of Yukos and the Quasar case, ISDS
shareholder claims arising out of the alleged injury to Yukos include a claim by RosInvestCo Ltd, a UK

38

 that a government may take a risk if it seeks to save money on its defence costs in defending a small
shareholder claim.88
In contrast to domestic law, the admissibility of shareholder claims for reflective loss in ISDS
makes possible a broad range of multiple claims for the same underlying injury to an operating
company. Some of these possibilities are illustrated in figures below.
A first type of multiple shareholder claims are brought by unrelated foreign shareholders of the
same company. The shareholders are separate entities without any common ownership.
Figure 1. Multiple Claims by Unrelated Shareholders

Shareholder A
(BIT-covered
foreign company)

Government

Shareholder B
(BIT-covered foreign
company)

Alleged
harm

Other BIT-covered
shareholders

Domestic
company

Non-covered foreign
and domestic
shareholders

Creditors

Other types of multiple claims can be brought by related entities (with common ownership).
Three scenarios can be distinguished. In the first, a domestic company (without access to ISDS) claims
in the domestic courts and a foreign shareholder brings an ISDS claim.

affiliate of the US hedge fund Elliott Associates. In addition to the shareholder claims, the company brought
proceedings against Russia at the ECtHR, which reached different conclusions from the ISDS tribunals on
some issues. See OAO Neftanaya Kompaniya Yukos v Russia (Application No. 14902/04), Judgment of 20
September 2011 (European Court of Human Rights); Jarrod Hepburn, Human Rights Court find some
breaches by Russia in Yukos case, but diverges from earlier BIT arbitration ruling on other points,
International Arbitration Reporter (20 Sept. 2012).
88

To the extent the Yukos cases involve direct loss rather than reflective loss for shareholders, the cases would
not be subject to any principles on reflective loss. See, e.g., Hulley v. Russia, Interim Award on Jurisdiction
and Admissibility, §§ 61, 372 (2009) (finding that the claimant’s shares were frozen by the government and
the company was prevented from disposing of any assets; finding that claim is an action for direct loss). They
are addressed here to illustrate issues raised by multiple shareholder claims.

39

 Figure 2. Multiple Claims by Related Entities I
Foreign shareholder and a domestic company without access to ISDS

Shareholder A
(BIT-covered
foreign company)

Government

Non-covered foreign
and domestic
shareholders

Other BIT-covered
shareholders

Alleged
harm

Domestic company
 domestic claim only
 no access to ISDS

Creditors

In the second type of multiple claim by related parties, a foreign company and a domestic
company with access to ISDS bring separate claims.89
Figure 3. Multiple Claims by Related Entities II
Foreign shareholder and a domestic company with access to ISDS

Shareholder A
(BIT-covered
foreign company)

Government

Other BIT-covered
shareholders

Alleged
harm

Domestic company
 foreign controlled
 access to ISDS

Non-covered foreign
and domestic
shareholders

Creditors

In a third type of multiple claims by related parties, two different foreign shareholders, at
different levels of the corporate chain, both bring ISDS claims.

89

Domestic companies can, for example, have access to ISDS pursuant to certain provisions of the ICSID
Convention. See below section on ICSID art. 25(2)(b).

40

 Figure 4. Multiple Claims by Related Entities III
Two different tier foreign shareholders both with access to ISDS

Other BIT-covered
shareholders

Shareholder A
(BIT-covered
foreign company)

Non-covered foreign
and domestic
shareholders

BIT-covered
foreign company

Government

Alleged
harm

Operating company

Creditors

These variations can be combined. For example, multiple claims by unrelated foreign shareholders
can be accompanied by a further claim by the company (in ISDS or in the domestic courts).
In the absence of legal barriers to shareholder claims, high case costs for ISDS claims may be the
principal barrier to multiple shareholder claims against governments. In terms of the costs effects for
governments, this may cut both ways: while these costs will diminish the number of multiple claims,
the costs in each case that is brought will be very high. High costs also raise issues about access to
justice and equal treatment between foreign investors.
Arbitral case law on shareholder claims does not appear to have reflected significant concern with
judicial economy issues raised by allowing multiple shareholder claims for reflective loss in ISDS. As
with other policy issues, arbitrators have generally interpreted the treaty definition of investment and
arbitral precedent as resolving the issue without the need to consider the consequences (in this case,
for respondent States and non-claimant victims of reflective loss such as other shareholders and
creditors).90
b.

The risk of inconsistent outcomes rises with multiple claims

National courts appear to have focused more on the costs consequences of multiple claims than
on the risk of inconsistent outcomes. Because the applicable rules in national law generally block
shareholder claims, cases of inconsistent outcomes are very rare in national law.
The risks of incoherent outcomes may be greater in ISDS that it would be if claims for reflective
loss were permitted in national law. The ISDS system is decentralised and uncoordinated compared to
national courts. In ISDS, each shareholder (or other reflective claimant) is entitled to its own tribunal
90

As participants have noted in earlier Roundtable discussions of ISDS, high costs for the parties in ISDS
constitute revenues for the arbitration bar and create economic incentives, particularly with regard to
decisions on jurisdiction. See ISDS Scoping Paper, pp. 47-48. The impact of those incentives, if any, is the
subject of differing views. See FOI Roundtable Progress Report on ISDS, p. 16 (section on arbitrator
incentives). Because of the corporate law context, the alignment of certain economic incentives for arbitrators
and foreign investor interests may differ somewhat from other jurisdictional decisions.

41

 (in the absence of clauses requiring consolidation, which are rare). It can often file its claim under a
different treaty so that different law may apply. Some or all of the proceedings may be confidential. As
Valasek notes, the admissibility of shareholder claims “will ... increase the likelihood of inconsistent
arbitral decisions.”91
The Lauder/CME cases are a well-known example. Ronald Lauder, a U.S. national, was the
ultimate beneficiary of an investment in a Czech operating company (CNTS). The investment was
held through an intermediate corporation (CME). Lauder commenced a first ISDS arbitration claim in
August 1999. Six months later, CME started a second ISDS proceeding before a different arbitral
tribunal under a different BIT. (See Figure 5). The Czech Republic refused to consolidate the
proceedings as proposed by the claimants.
Figure 5. Multiple Claims by Related Entities: Lauder/CME
Two different-tier foreign shareholders both with access to ISDS
(Reflective loss hypothesis; domestic law claims omitted)

Ronald Lauder
Ultimate controlling
shareholder

Intermediate holding
company

Intermediate holding
company

Other BIT-covered
shareholders

CEMEL
US-listed company

Non-covered foreign
and domestic
shareholders

Creditors

CME
(BIT-covered
foreign company)

Government

Alleged
harm

CNTS
Czech operating
company

This chart is derived from the corporate structure of the claimants in the Lauder and CME claims as available from public sources.
It presents a simplified version of the corporate structure. Some aspects, such as the number of intermediate holding companies,
have been hypothesised.

91

Valasek, p. 73 et seq.

42

 Both ISDS claims arose from the same facts and involved essentially the same claims.92 As noted
by Susan Franck, however, “one of the few common conclusions the two tribunals made was that
Lauder and his Dutch investment vehicle had been the victims of discrimination. Beyond that point,
the two tribunals came to diametrically opposed conclusions on issues related to expropriation, fair
and equitable treatment, full protection and security, and compliance with minimum obligations under
international law”.93
The tribunals also took different views of the facts. The CME damages award was US
$269,814,000, roughly equivalent to the annual health budget of the Czech Republic. The Lauder
tribunal did not award any damages. In a third case, the primary wrong-doer, Lauder's Czech partner,
was held in an ICC arbitration liable to pay CME a “mere” US$20 million.94 The inconsistencies over
the same issues in Lauder/CME were further highlighted by the “impression of a race to the judgment
seat between the two tribunals” with the two decisions being issued within 10 days of one another.95
Even where a second tribunal carefully considers an earlier decision, however, inconsistencies are
possible. The two tribunals that heard the two separate claims by TGN shareholders against Argentina
reached divergent results, notwithstanding careful consideration of the first decision (CMS) by the
second (Total). Contrary to the CMS tribunal, the Total tribunal rejected the claimed breach of the fair
and equitable treatment standard during the height of the financial crisis. This appeared to be based on
(i) an expressly different interpretive approach to the fair and equitable treatment obligation, and to the
nature and relevance of legitimate expectations; (ii) somewhat different wording in the BITs at issue;
and (iii) different facts (a later date of purchase of the shares by Total).96 Views may differ as to the
relative importance of these factors in explaining the different outcomes for the two shareholders of
TGN.
c.

A single beneficial owner of shares may be able to bring essentially the same case twice.

In addition to their inconsistent outcomes, the Lauder/CME cases have been sharply criticised
because critics consider that the same shareholder was in effect given “two bites at the apple”. The risk
of inconsistent outcomes is borne principally by the respondent state, because a single victory is
enough for the shareholder to obtain the benefit of an enforceable award for the full amount; a loss in
the other case has no impact:
An appeal to basic notions of justice would surely suffice to refute any
suggestion that such a state of affairs is acceptable as a matter of
principle. A host state cannot be expected to defend a barrage of
concurrent or consecutive claims relating to precisely the same prejudice
to a single investment. Nor can it be right for a host state to defend
consecutive claims in relation to the same investment by different
members of the group of claimant companies until an award favourable
92

For a detailed analysis of the background and decisions, including the similar provisions in the two
investment treaties, see Susan D. Franck, The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing
Public International Law through Inconsistent Decisions, 73 Fordham L. Rev. 1521 (2007).

93

Id., p. 1563.

94

See James Crawford, Ten Investment Arbitration Awards That Shook the World: Introduction and Overview,
4 No. 1 Disp. Resol. Int'l 71, 92 (May 2010).

95

Id.

96

See Total v. Argentina, Award on Liability (2010). Both tribunals found Argentina liable for the period after
the peak of the financial crisis.

43

 to that group is procured. The enduring and disturbing feature of the
award in CME v. Czech Republic is that this state of affairs was
condoned as an inevitable feature of the investment treaty regime.97
These types of claims are not possible in domestic law under the no reflective loss principle.
They would appear to require not only the admissibility of reflective loss claims, but also that each
claim is seen as autonomous.
A number of commentators have argued that a more flexible use of the principles of res judicata
could address the “two bites at the apple” problem in the context of claims by related entities.98
In the Lauder/CME cases, arguments based on res judicata were rejected by the tribunal and by a
Swedish appellate court.99
4.
Consistency concerns could be exacerbated if creditors, at risk of injury from
shareholder claims for reflective loss in ISDS, also seek to bring reflective loss claims in ISDS
a.

Shareholder claims for reflective loss put creditors at risk

It is widely recognised that allowing shareholder claims for reflective loss can injure creditors of
the company (unless the defendant is forced to pay the same damages twice).100 As noted above, Lord
Millett underlined in Johnson that "protection of the interests of the company's creditors requires that
it is the company which is allowed to recover to the exclusion of the shareholder" (assuming double
recovery is excluded).101 The Gaubert court similarly underlined how the bar on shareholder suits
serves to protect the company’s creditors:
Were common shareholders allowed to sue directly and individually for
damages to the value of their shares, we would be allowing them to
bypass the corporate structure and effectively preference themselves at
the expense of the other persons with a superior financial interest in the
corporation.102

97

Douglas, p. 309. See Valasek, p. 71 (“each holding company in a long chain of ownership could file its own
separate claim against the host State for the same treaty breach.”) (emphasis in original).

98

In broad terms, res judicata refers to the principle that once a lawsuit is decided, the parties are barred from
raising the case again.

99

CME Czech Republic BV (the Netherlands) v. Czech Republic, Partial Award on the Merits (2001); CME
Czech Republic BV (the Netherlands) v. Czech Republic, Svea Ct. App. (2003) (rejecting the claim of res
judicata because the cases involved different parties, different treaties and possibly different presentations of
the facts).

100

Conflicts of interest between shareholders and creditors of a company are one of the key concerns of
corporate law and finance. See, e.g., Reinier Kraakman et al, The Anatomy of Corporate Law (2d ed. 2009),
p. 2 (conflicts between shareholders and the corporation's other constituencies, including creditors, are one of
the three principal agency conflicts that are addressed by corporate law); Peter O. Mulbert, A synthetic view
of different concepts of creditor protection, or: a high-level framework for corporate creditor protection,
E.B.O.R. 2006, 7(1), 357-408 (reporting on a pan-European discussion on creditor protection and company
law).

101

2 A.C. at p. 62 (Lord Millett).

102

Gaubert, 885 F. 2d at 1291; see also Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 274
(1992) (US Supreme Court) ("a suit by an indirectly injured victim could be an attempt to circumvent the
relative priority its claim would have in the directly injured victim's liquidation proceedings").

44

 The Supreme Courts of Germany and the Netherlands have also noted the no reflective loss
principle protects the interests of the company’s creditors.103 Corporate law and finance textbooks
similarly recognise the protection of creditors as a core reason for appropriate restrictions on
shareholders diverting corporate assets and more specifically for the prohibition on shareholder
claims.104
In ISDS, the United States and Mexico have similarly argued that the NAFTA provision
requiring that recovery for derivative action claims be paid to the company rather than a shareholder
protects creditors.105 (See below section on NAFTA) Argentina has also made policy arguments based
on the risk of injury to creditors from shareholder claims for reflective loss in more recent cases. As
noted above, however, tribunals have rarely addressed creditor interests.
b.

Creditors may seek to bring ISDS claims for their reflective loss

International investment, like domestic investment, usually involves a mix of debt and equity
financing. As noted above, creditors, like shareholders, can suffer reflective loss when the debtor
company suffers a substantial injury.106 A company may default on its debt or the market value of a
company's bonds may fall due to a higher risk of default.107 Harm to creditors from shareholder claims
is most clearly at issue if the injured company appears to be in financial difficulty, as may often be the
case in ISDS if there is serious governmental misconduct.108
Under the no reflective loss principle, only the company can make the claim and its recovery
indirectly benefits creditors as well as shareholders. As noted by appellate judge and corporate law
103

See Girmes, (BGH, German Supreme Civil Court 20 March 1995), BGHZ 129, 136, 166; Poot/ABP, (Hoge
Raad, Dutch Supreme Civil Court, 2 December 1994), NJ 1995, 288), cited by de Jong, p. 3.

104

A policy that puts creditors of companies engaged in foreign investment at risk may affect the availability
and price of debt finance for foreign investment. As noted by leading corporate law scholars, stronger legal
protection of creditors' rights is generally associated with more lending to corporate borrowers. Protection of
creditors from inappropriate shareholder diversion of corporate assets can lower the cost of debt finance for
the company, resulting in gains to both creditors and shareholders. See John Armour, Gerard Hertig and
Hideki Kanda, Transactions with Creditors, ch. 5 in Reinier Kraakman et al, The Anatomy of Corporate Law
(2d ed. 2009), p. 115 n.1 (citing sources); see id. p. 118 (“both creditors and shareholders can benefit from
appropriate restrictions on the ability [of shareholders] to divert ... assets, because such restrictions are likely
to reduce a firm’s costs of debt finance”) (emphasis in original). See also Louise Gullifer & Jennifer Payne,
Corporate Finance Law: Principles and Policy (2011), p. 96 (approving House of Lords decision in Johnson).

105

See, e.g., GAMI v. Mexico, Submission of the United States (non-disputing party) (30 June 2003) § 17 (nondisputing party submission); id, Escrito de Contestación of Mexico, §§ 166-67, pp. 61-64 (24 Nov. 2003).

106

Creditors can also suffer a direct loss. For example, if a State were to prohibit a company from making
foreign currency payments to foreign lenders, the debtor company would not suffer any loss; only the
creditors would.

107

See Armour et al., in Kraakman 2009, p. 117.

108

See Mid-State Fertilizer Co. v. Exchange National Bank of Chicago, 877 F.2d 1333, 1336 (7th Cir. 1989)
(“recovery by the firm, followed by division according to entitlements, is especially important when the firm
has landed in bankruptcy. Suits by shareholders, guarantors, and the like may well be efforts to divert the
debtor's assets – to pay off one set of creditors ... while keeping the proceeds out of the hands of the firm's
other creditors”.); Peter O. Mulbert, A synthetic view of different concepts of creditor protection, or: a highlevel framework for corporate creditor protection, E.B.O.R. 2006, 7(1), 357-408 (generally in corporate law,
“since shareholders' incentive to act to the detriment of creditors increases with the company becoming
financially distressed, it is important to provide for mechanisms that will work to effectively control any
opportunistic behaviour on the shareholder's part”).

45

 scholar Frank Easterbrook in Mid-State, this approach eliminates the need for costly efforts to allocate
reflective losses among the victims:
Good reasons account for the enduring distinction between direct and
derivative injury. When the injury is derivative, recovery by the
indirectly-injured person is a form of double counting. "Corporation" is
but a collective noun for real people – investors, employees, suppliers
with contract rights, and others. A blow that costs "the firm" $ 100
injures one or more of those persons. If, however, we allow the
corporation to litigate in its own name and collect the whole sum (as we
do), we must exclude attempts by the participants in the venture to
recover for their individual injuries. ... To avoid double counting courts
must either restrict recoveries to the directly-injured party or attempt to
apportion the recovery according to who bears the effects: say, $60 to
equity investors, $20 to debt investors, $10 to employees with specialized
skills, $10 to persons who leased property to the firm. Divvying up the
recovery would be a nightmare ....
Why undertake such a heroic task when recovery by the firm handles
everything automatically? – for investors, workers, lessors, and others
share any recovery according to the same rules that govern all receipts.109
Under national law, creditors of a company are also generally subject to a bar on the recovery of
reflective loss. Creditors generally cannot sue cannot sue third parties who injure the company for
creditors’ reflective loss. Only the company can make the claim.110
If reflective loss claims are possible in ISDS, company creditors may seek to bring claims for
reflective loss.111 In a context where shareholders can bring such claims, creditor claims may arise in
part to protect creditor interests from shareholder claims. They may also be an effort to pre-empt other
claimants on corporate assets.

109

Mid-State Fertilizer Co. v. Exchange National Bank of Chicago, 877 F.2d 1333, 1335-36 (7th Cir. 1989).

110

See, e.g., Pagan v. Calderon, 448 F.3d 16, 29 (1st. Cir. 2006) ("As is the case with shareholders, creditors do
not have standing to sue in their personal capacities unless the alleged misconduct causes harm to them
separate and distinct from the injury inflicted upon the debtor corporation."); Landune International Ltd v
Cheung Chung Leung [2006] 1 HKLRD 39 (CA (Hong Kong)); Rita Cheung, The no reflective loss
principle: a view from Hong Kong, I.C.C.L.R. 2009, 20(7), 223-229.
Creditor claims for reflective loss have arisen in the context of the financial crisis in domestic law. They raise
similar issues with regard to consistency as shareholder claims and courts have dismissed them for similar
reasons. In American National Insurance Co. v. JP Morgan Chase & Co., 2012 US Dist. Lexis 139831 (D.C.
Dt. Ct. 2012), bondholders sued the acquirer of a bank. A government-organised seizure and sale of the bank
to the acquirer – which rendered the bonds worthless – was allegedly caused in part by the acquirer's
spreading of misinformation to regulators disparaging the bank's viability. The court dismissed the
bondholder claims for reflective loss as "clearly barred", underlining that reflective claims are problematic
because they involve "double counting". Only the bank's receiver could bring the claim. See also Mid-State
and cites therein.

111

As described above, the primary textual basis for the recognition of shareholder claims for reflective loss in
ISDS has been the reference to shares in the BIT definition of investment. As noted above, bonds and other
credit instruments are frequently mentioned in the definition of investment as well,. See, e.g., UK-Russia
BIT, art. 1(a) (definition of investment includes “shares in and stock, bonds and debentures of, and any form
of participation in, a company or business enterprise”). Other factors are relevant and no opinion is expressed
with regard to the likelihood of such claims succeeding at any stage.

46

 If creditor claims in ISDS for reflective loss were accepted, they could exacerbate the same
consistency-related concerns raised by shareholder claims: (i) governments could face further separate
claims from both shareholders and creditors arising out of the same events leading to increased
litigation expenses (including for expert evidence to try to allocate the reflective losses) and risk of
inconsistent outcomes; (ii) governments would face increased risks of double recovery, and efforts to
address double recovery risks through share purchase remedies and undertakings to refund future
dividends could be more complicated; and (iii) direct recovery by one creditor in ISDS would be at the
expense of other claimants on the company (e.g., other creditors, shareholders), unless there is double
recovery.
If, on the other hand, creditor claims for reflective loss were generally found inadmissible while
shareholder claims were permitted in ISDS, the differential treatment could have an effect on investor
incentives.
5.

Multiple shareholder claims: shareholder interests and incentives

As the ECtHR noted in Agrotexim, there may often be disagreements among different
constituencies in the company about whether the company's rights have been violated or whether a
claim should be brought.112 Under corporate law applying the no reflective loss principle, the decision
is normally taken by the company pursuant to the relevant rules on corporate governance. The
availability of shareholder claims for reflective loss in ISDS may affect both shareholder and corporate
incentives about how to address the injury.
a.

Different types of shareholders will likely have different interests

Under an ISDS regime in which shareholder claims are admissible, it may be useful to distinguish
three broad groups of shareholders in terms of their likely reactions to government misconduct
affecting the company:


Category I shareholders: “Likely claimants”. These shareholders are likely to be ready, willing
and able to claim as shareholders in ISDS. Category I shareholders first need to have a
sufficient stake to make bringing a claim worthwhile. They also need to be ready to incur the
cost to bring an individual claim if the company is mistreated. Such shareholders can decide
between supporting company action or their own claim (at one or more levels as a
shareholder) or both. They may be the principal beneficiaries of an expansive regime for
shareholder claims.



Category II shareholders: “Potential but unlikely claimants”. This group is composed of
shareholders covered by an investment treaty but who are unlikely to claim as shareholders.
This may be due to the limited size of their investment or their diversified investment
strategy.113 The fortunes of these shareholders lie primarily but not exclusively with company
remedies.

112

See Agrotexim, § 65 (“It is a perfectly normal occurrence in the life of a limited company for there to be
differences of opinion among its shareholders or between its shareholders and its board of directors as to the
reality of an infringement of the right to the peaceful enjoyment of the company's possessions or concerning
the most appropriate way of reacting to such an infringement.”)

113

Category II may include some institutional investors who prefer to diversify their risk across many
companies and sell at a loss in any particular company rather than bring high cost claims as a shareholder:
Since only those minority shareholders active, informed, and wealthy enough to pursue claims
can recover even when other shareholders are equally injured, many minority shareholders are

47

 

Category III shareholders: “Excluded claimants.” This group includes foreign shareholders not
covered by a treaty and domestic shareholders. These shareholders cannot bring an ISDS
claim as a shareholder. They also cannot bring a claim under domestic law because only the
company can bring the claim. The fortunes of these shareholders lie solely with company
remedies.

Categories I and II are not rigid categories and the dividing line may vary depending on the facts.
For most if not all shareholders, including Category I shareholders, litigation is generally undesirable.
Some normally passive Category II investors might be driven to bring a personal claim as a
shareholder if their losses are unusually high and the government misconduct is egregious.
Nonetheless, the broad categories are likely to exist.114
b.
Shareholder and company behaviour may be difficult to predict in a regime where
shareholder claims are admissible.
The analysis differs with regard to separate claims by different unrelated shareholders of the same
company and vertical claims by related entities (through common ownership). (See above figures 1-5).
i.

Claims by unrelated shareholders

The number of horizontal claims will depend on the number of Category I “likely claimant”
shareholders and the facts. (See Figure 1 above) Given ISDS case costs of over $8 million on average,
only shareholders with substantial holdings are likely to bring claims.
In some cases, it may be possible to consolidate these claims, lessening the cost burden on the
parties and encouraging consistent results. However, provisions providing for consolidation are rare:
each shareholder can generally bring its own case. Governments seeking consolidation may lack
bargaining power; for example, if consolidation is offered only after two or more tribunals are
selected, the government may have to agree to the tribunal preferred by the investors as a condition for
an agreed consolidation.
The number of horizontal claims may also depend on claim outcomes and limitations periods.
Some shareholders may prefer to wait to see if a first shareholder claim is successful.115

left out of [investment] arbitration remedies. This is especially important as institutional funds
made up of portfolio investors ... have become increasingly important sources of capital. Such
funds tend to be highly diversified, reducing or removing the incentive for portfolio managers to
pursue claims when any one of their investments has been harmed by a host government.
D’Agostino, 98 Va. L. Rev. at 203 (footnotes omitted).
114

If it is assumed that creditors can also claim for reflective loss in ISDS, they could be categorised into similar
categories. Likely reflective loss claimants among creditors may be fewer because, as noted above, creditors
generally suffer less reflective loss than shareholders (providing the company is solvent); creditor interests
and losses may also be dispersed if, for example, the company’s bonds are widely held. If it is assumed that
creditors cannot claim for reflective loss in ISDS, they would all be “excluded claimants” whose fortunes
would lie solely with company recourse.

115

For example, CMS and Total were both minority shareholders in TGN. CMS filed its shareholder claim in
2001. Total did not file its shareholder claim against Argentina until October 2003, shortly after the July
2003 tribunal ruling finding CMS' minority shareholder claims to be admissible in ISDS. As noted in earlier
Roundtable work, many BITs do not contains time limits on claims.

48

 ii.

Claims by related entities at different levels of the corporate chain

Further research and analysis is required to evaluate the litigation incentives in this area.
However, a few preliminary points may be noted. In the House of Lords decision in Johnson, Lord
Millett noted that a further policy reason weighing against allowing shareholder claims for reflective
loss is that they would create conflicts of interest for company directors who are shareholders with an
interest in a personal suit.116
For example, in the context of settlement negotiations, the director's duty would generally be to
make the highest-value settlement for the company. However, this duty would conflict with his/her
interest as a shareholder because a minimal recovery for the company followed by a personal
shareholder action for the balance would allow the shareholder to recover the maximum amount for
itself at the expense of the creditors and other shareholders.117 A similar conflict of interest could
apply to decisions about whether the company should file a claim at all, and thus to whether the
government would face two vertical claims.
Box 2. Impact of shareholder claims for reflective loss in ISDS on a level playing field between foreign and
domestic shareholders
The Roundtable has noted that ISDS creates differences in treatment between foreign and domestic companies.
Domestic companies are largely limited to the non-pecuniary primary remedies in domestic administrative law whereas
1
foreign companies have access to both primary remedies under domestic law and damages in investment arbitration.
The Roundtable has discussed the issue of these differences on a level playing field for investors, with a variety of
views being expressed.
In the case of shareholders, the differences in treatment between foreign and domestic shareholders in ISDS
may be more stark than for companies. Under domestic law, shareholder claims may be dismissed without
consideration of the merits on the grounds that only the company can sue. In contrast, foreign shareholders frequently
have access to their own recourse for reflective loss in ISDS. For shareholders, ISDS may introduce a distinction
between those who have personal recourse and those who have none.
As noted in the text, shares are much easier to buy and sell than companies. Rapid changes can occur in the
2
proportion of foreign ownership of a company's shares (and more generally, in a country's listed companies). Overall,
as a result of increasing foreign ownership, half of the listed companies in the UK and Belgium, 40 per cent of the
companies in France and Germany and around 30 per cent of the companies in Spain and Italy have a large foreign
3
shareholder. Countries with advanced capital markets and traditional BITs may be beginning to see their first
shareholder claims, which, depending on the outcomes, may raise the profile of the question of the comparative
treatment of shareholders.
1.

See ISDS Scoping Paper, pp. 25-27 & Annex 4. As noted in the FOI Roundtable Progress Report on ISDS (p.10), "[f]oreign
investors, which may generally choose between domestic fora or ISDS, have a wider range of options and available remedies
against governments than do domestic investors faced with similar government action. In addition to having access to monetary
damages, foreign investors can frequently go directly to international arbitration without having to resort to national courts or
administrative remedies if the investor considers arbitration to be more advantageous."

2

See, e.g., Christoph van der Elst, Shareholder Rights and the Importance of Foreign Shareholders, (Tilburg Law and Economics
Center (TILEC) Law and Economics Discussion Paper No. 2010-008) (Feb. 2010), pp. 5-6 (over an 8 year period, "the
internationalisation of the shareholder structure was remarkable in Germany and France"; in Germany, 30% of all large stakes are
held by foreign shareholders, including hedge funds, an increase of almost 300%).

3

Id., p.7.

116

Johnson, [2002] 2 A.C. at p. 66 ("The disallowance of the shareholder's claim in respect of reflective loss is
driven by policy considerations. In my opinion, these preclude the shareholder from going behind the
settlement of the company's claim. If he were allowed to do so then, if the company's action were brought by
its directors, they would be placed in a position where their interest conflicted with their duty ...")

117

This conflict of interest may have different effects depending on whether the interested shareholder is a
controlling or non-controlling shareholder.

49

 ISDS cases, even where they are public, do not provide much information about the resolution of
these conflicts. Securities law disclosure by listed companies can, however, provide some insight. In
the Lauder/CME case, the first ISDS case was brought by Ronald Lauder, the top tier controlling
shareholder. CME, a lower tier corporation controlled by Lauder, brought its claim only six months
later.
Sandwiched in between Lauder and CME in the corporate chain was a listed company known as
CEMEL. Lauder was the controlling shareholder and the chairman of the board of CEMEL. CEMEL
owned 100% of CME, the claimant in the second case. (See Figure 5)
CEMEL had issued USD and deutschemark bonds to raise approximately USD 160 million. The
two cases likely had different profiles from the perspective of CEMEL's bondholders. Recovery by
CME would benefit them (because CEMEL owned 100% of CME). CEMEL’s 2001 Form 10-K US
securities law filing made clear that the fortunes of its bondholders were tied to CME’s ISDS claim:
Should the Company receive and collect a substantial award [from the
CME claim], the Company may be in a position to refinance or otherwise
satisfy its Senior Notes, which currently have $163,563,000 of principal
outstanding (the "Senior Notes"), on or before August 15, 2004. There
can be no assurance that the Company will be awarded substantial
damages in the second round of hearings, and if awarded such damages,
that the Company will be able to collect the award. If substantial
damages are not awarded and collected, the Company is likely to
experience difficulties in refinancing the Senior Notes without additional
external investment. If the Company is unsuccessful in refinancing the
Senior Notes, the Company is likely to be unable to continue
operations.118
In contrast, Lauder's personal recovery as a top tier shareholder would likely not have benefitted
CEMEL’s bondholders or its other shareholders (unless special arrangements existed).119 The
corporate decision-making processes about the two suits are not known. It is possible that CEMEL’s
creditors and other shareholders expressed concern about the Lauder suit, and that the second CME
suit resulted from that concern.
The incentive effects of the availability of shareholder claims on the likelihood of a company
claim, however, are hard to predict. On the one hand, each shareholder claim could reduce the
likelihood of a company claim: the claimant shareholder might not want to pay the legal costs again
for the same claim at the company level, especially if double recovery is addressed. This may affect
the chances of recovery by the other shareholders and creditors through a company action.
On the other hand, if “two bites at the apple” are permitted in ISDS along the lines of the
Lauder/CME precedents discussed above, a shareholder might support action at two levels because a
victory in either case can suffice. Because of the practical absence of investor exposure to
counterclaims in ISDS, the only financial downside to multiple claims would be legal costs.

118

Central European Media Enterprises Ltd., Form 10-K Annual Report for the year ended 31 December 2001,
Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934, p.25 (original in bold
print).

119

CEMEL’s other shareholders similarly would normally benefit only from CME recovery and not from
Lauder recovery.

50

 Reputational concerns, however, could constrain opportunistic behaviour even in the absence of legal
constraints.120
Issues for discussion


Are the following policy interests relating to consistency in ISDS of importance to your
country?
 limiting the number of claims arising from the same injury and the attendant litigation
costs
 limiting the risk of conflicting decisions
 potential double recovery of damages
 the difficulty and costs of trying to evaluate and allocate reflective loss
 avoiding giving the same beneficial claimant “two bites at the apple”
 equal treatment of shareholders



120

Have you considered methods to centralise claims and recovery with the company, such as
ICSID art. 25(2)(b) consent or a derivative action mechanism?

Corporate law constraints also likely exist in many systems of corporate law; views may differ on how
effective they would be in controlling conflicts of interest in practice in this context.

51

 F. THE ISSUE OF COMPANY RECOURSE

It has been suggested that the availability of recovery by the company can lessen or eliminate the
need for shareholder recovery of reflective loss, and provide certain advantages. This section first
reviews two existing systems in ISDS, one under NAFTA and one in ICSID, which expand the ability
of companies with foreign shareholders to recover in ISDS. It then briefly outlines the wide variety of
possible situations in ISDS with regard to company status and recourse.
1.
Two existing systems which expand the ability of companies with foreign shareholders
to recover in ISDS.
a.

NAFTA

i.

Introduction

NAFTA contains a significantly more developed system for shareholder claims than most
investment treaties. Two separate provisions govern the standing of shareholders to bring claims.
Art. 1116 governs a "Claim by an Investor of a Party on Its Own Behalf" for damage caused by
the breach of a NAFTA provision. Article 1117 of NAFTA allows certain shareholders to bring a
claim on behalf of a company.121 Because the art. 1117 claim is brought by the foreign shareholder on
behalf of the company rather than by the company itself, the company can be a host-state company.122
Art. 1117 in effect establishes a special form of shareholder derivative action. The shareholder
brings the art. 1117 claim, but the company is the beneficiary of the award. Art. 1135(2) ensures that
recovery for all art. 1117 claims goes to the company rather than the shareholder. Recovery for the
company protects company creditors and all shareholders, as derivative action mechanisms generally
do under domestic law.
The claimant shareholder must own or control the company directly or indirectly to bring a claim
under art. 1117. Non-controlling shareholders cannot bring claims under art. 1117. Where a
shareholder brings an art. 1117 claim, the company is expressly prohibited from bringing a claim on
its own behalf.123 As noted by Meg Kinnear, this likely helps avoid the possibility that a foreign
company could make one ISDS claim while its controlling owner makes another.124
Several provisions specifically address and reduce the risk of multiple proceedings. Waiver of
claims is required as a pre-condition to bringing a claim. which largely precludes the possibility of
multiple claims. If a claim is brought under art. 1117, both the investor and the company must waive

121

For convenience and consistency, we refer herein to a company. NAFTA refers to a claim brought on behalf
of an "enterprise", which is defined in art. 201(1) as "any entity constituted or organized under applicable
law, whether or not for profit, and whether privately-owned or governmentally-owned, including any
corporation, trust, partnership, sole proprietorship, joint venture or other association".

122

As noted above, a domestic company cannot claim against its home state under customary international law;
a treaty provision is required.

123

NAFTA art. 1117(4).

124

Meg N. Kinnear et al., Investment Disputes under NAFTA, An Annotated Guide to NAFTA Chapter 11
(2006 & 2008 Supp.), p. 1117-4.

52

 the right to initiate or continue local proceedings (art. 1121(2)).125 Consolidation of related shareholder
claims under arts. 1116 and 1117 is mandated unless the tribunal finds that a disputing party would be
prejudiced.126
ii.

Reflective loss claims and the relationship between articles 1116 and 1117

As noted by Kinnear, the NAFTA Parties have argued in similar terms that claims for reflective
loss (derivative damages) can only be brought under the derivative action procedure of art. 1117 with
recovery for the company:
The NAFTA Parties have argued that tribunals should treat seriously the
differences between claims under Articles 1116 and 1117. In particular,
they have argued that Article 1116 permits a claim only for damage
suffered by the investor. If the investment is an enterprise, any claim for
damages to the enterprise itself could only be made under Article 1117.
Under this theory, so-called “derivative damages” – damages based on
the diminution in value of the interest in the enterprise owned by the
investor – would not be compensable under Article 1116.127
For example, the United States has consistently argued that the two provisions are distinct and
that reflective loss (indirect injury) can only be claimed through the art. 1117 derivative action
procedure. In a case brought by a US investor against Mexico, the US filed a non-disputing party
submission to this effect:
the United States does not believe that Article 1116 can fairly be
construed to reflect an intent to derogate from the rule that shareholders
may assert claims only for injuries to their interests and not for injuries to
the corporation. It is well recognized that “an important principle of
international law should not be held to have been tacitly dispensed with
by an international agreement, in the absence of words making clear
intention to do so.” Nothing in the text of Article 1116 suggests an intent
to derogate from customary international law restrictions on the assertion
of claims on behalf of shareholders. By contrast, the view of at least one
of the Parties as to the intent of the three NAFTA countries was
expressed in the contemporaneous United States Statement of
Administrative Action in terms that are quite clear: consistent with the
prevailing rule under customary international law, Article 1116 provides
standing for direct injuries; Article 1117 provides standing for indirect
injuries. Were minority noncontrolling shareholders to be permitted to
bring a claim under Article 1116 for indirect injuries, Article 1117 would
be superfluous.128

125

Certain non-pecuniary remedies in domestic courts proceedings may still be sought.

126

NAFTA art. 1117(3).

127

Kinnear, pp. 1116-6 - 1116-7.

128

GAMI v. Mexico, Submission of the United States (non-disputing party) (30 June 2003) (footnotes omitted).
As is customary in NAFTA art. 1128 submissions by non-disputing parties, the US did not take any position
on the merits.
The US Statement of Administrative Action referred to in the excerpt describes the two provisions as
follows:

53

 As noted above, the US and Mexico have also highlighted the interests of company creditors in
this context:
The distinction between Articles 1116 and 1117 is also critical to
ensuring that creditors’ rights with respect to the investment are
respected [because recovery in an art. 1117 claim goes to the enterprise].
This prevents the investor from effectively stripping away a corporate
asset – the claim – to the detriment of others with a legitimate interest in
that asset, such as the enterprise’s creditors.129
This view of articles 1116 and 1117 corresponds to a significant degree with the domestic law
principles governing reflective loss discussed above. Reflective loss would generally only be
recoverable through a claim brought on behalf of the company; recovery for the company would
benefit all stakeholders.
The relevant NAFTA case law is somewhat uncertain. For example, in Mondev v. United States,
the tribunal noted the creditor, respondent and tax interests protected by art. 1117 and that tribunals
should ensure that in cases where those interests are at issue, damages should be recovered by the
company:
[The] United States argued that Mondev should have brought the action
on behalf of the enterprise, LPA, under Article 1117. It pointed to the
importance of the distinction between claims brought by an investor of a
Party on its own behalf under Article 1116 and claims brought by an
investor of a Party on behalf of an enterprise under Article 1117. The
principal difference relates to the treatment of any damages recovered. If
the claim is brought under Article 1117, these must be paid to the
enterprise, not to the investor (see Article 1135(2)). This would enable
third parties with, for example, security interests or other rights against
the enterprise to seek to satisfy these out of the damages paid. It could
also make a difference in terms of the tax treatment of those damages.
In addition, if a claim is brought under Article 1117, both the investor
and the enterprise must waive the right to initiate or continue local
proceedings (Article 1121(2)). ...
Having regard to the distinctions drawn between claims brought under
Articles 1116 and 1117, a NAFTA tribunal should be careful not to allow
any recovery, in a claim that should have been brought under Article
1117, to be paid directly to the investor.130
Other NAFTA tribunals, however, have rejected the argument that reflective loss claims are
limited to Art. 1117. Pope & Talbot v. Canada involved a claim by a foreign 100% shareholder for
reflective loss incurred due to the treatment of its subsidiary. Over Canada's objection (which was
supported by the United States), the tribunal found that reflective loss was recoverable under Art.
Articles 1116 and 1117 set forth the kinds of claims that may be submitted to arbitration:
respectively, allegations of direct injury to an investor, and allegations of indirect injury to an
investor caused by injury to a firm in the host country that is owned or controlled by an investor. (
129

See, e.g., GAMI v. Mexico, Submission of the United States (non-disputing party) (30 June 2003) § 17 (nondisputing party submission); id, Escrito de Contestación of Mexico, §§ 166-67, pp. 61-64 (24 Nov. 2003)
(agreeing with and quoting US submission).

130

Mondev Int’l Ltd. v. United States, Award (2002), §§ 84-86.

54

 1116.131 In GAMI, the tribunal found that a claim for reflective loss by a minority shareholder under
Art. 1116 was admissible.
However, consistent NAFTA government arguments in Mondev, Pope & Talbot, GAMI and other
NAFTA cases about the policy issues and the difficulties of evaluating reflective loss (notably in light
of the competing claims of creditors and others) may have encouraged NAFTA tribunals to recognise
those difficulties either by ensuring that any recovery go to the company in appropriate cases or in
considering damages.
In considering the issue of possible damages, the GAMI tribunal first recognised that resolution of
multiple and overlapping shareholder and company claims for the same loss in the ISDS context is
practically certain to be uncoordinated.132 The tribunal also (i) took note of the interests of creditors
and the other shareholders; and (ii) recognised the risk of double recovery, underlining that it would be
difficult to justify reducing the company's damages due to pre-existing shareholder recovery of
reflective (derivative) loss in ISDS:
How could [the company's] recovery be reduced because of the
[hypothetical earlier ISDS] payment to [the shareholder]? [The company]
is the owner of the expropriated assets. It has never paid dividends. It
would have been most unlikely to distribute revenues in the amount
recovered by [the shareholder]. At any rate such a decision would have
required due deliberation of [the company's] corporate organs. Creditors
would come first. And other shareholders would have an equal right to
the distribution. [The company] would obviously say that it is the
expropriated owner and that its compensatable loss under Mexican law
could not be diminished by the amount paid to one of its shareholders.
These difficulties are attributable to the derivative nature of GAMI's
claim.133
GAMI's claims were dismissed on the merits so that tribunal did not have to resolve the problems
it identified.
As noted, the law under NAFTA remains somewhat uncertain. However, it would appear that
minority shareholders may face substantial hurdles in successfully recovering reflective loss directly
under NAFTA. There appear to have been few such claims under NAFTA since the 2004 decision in
GAMI although further research is necessary.

131

Pope & Talbot v. Canada, Award in Respect of Damages, ¶¶ 75–76 (31 May 2002). The tribunal relied on
the waiver provision in Article 1121(1)(b), which refers to an Article 1116 claim which involves “loss or
damage to an interest in an enterprise of another Party that is a juridical person that the investor owns or
controls directly or indirectly”. The tribunal concluded that NAFTA contemplates an Article 1116 claim
arising from loss or damage to an investor's interest in the relevant enterprise. It noted, however, that the
investor would still have to prove “that the loss or damage was caused to its interest, and that it was causally
connected to the breach complained of.”

132

GAMI v. Mexico, Award (2004) § 119 ("The overwhelming implausibility of a simultaneous resolution of the
problem by national and international jurisdictions impels consideration of the practically certain scenario of
unsynchronised resolution.") (emphasis in original).

133

Id., §§ 120-121.

55

 ICSID also provides a mechanism under which foreign (and other) shareholders can be protected
through which claims can be brought with recovery for the company. It operates differently from the
NAFTA art. 1117 arrangement.134
b.

ICSID art. 25(2)(b)

i.

Overview

Article 25(2)(b) allows certain domestically-incorporated companies to be deemed to be foreign
companies for purposes of access to ISDS.135 For purposes of treaty claims, the requirements are (i)
foreign control of the host state company by nationals of the home state; and (ii) State consent – the
home and host states must agree to treat the foreign-controlled host state company as foreign.136
For treaty claims, State consent is generally found in the investment treaty. The Secretariat
statistical survey of ISDS provisions in BITs found that approximately 20% of the 1660 BITs
reviewed contain consent provisions relating to art. 25(2)(b).137 In addition to bilateral treaties, consent
under art. 25(2)(b) is included in the Energy Charter Treaty (art. 26(7)).
During the negotiation of ICSID, it appears that at least some governments saw company claims
and shareholder claims as substitutes. During the negotiations over article 25, a proposal was advanced
on several occasions to allow shareholder claims instead of company claims. It was rejected as
unworkable:
While there was some resistance to the idea of giving locally
incorporated companies the possibility to sue the host State, a majority of
delegates found that it would be unwise to exclude locally incorporated
but foreign controlled companies. A suggested solution to give access to
dispute settlement not to the locally incorporated company but directly to
its foreign owners was discarded. It was soon realised that this would not
be feasible where shares are widely scattered and their owners are
insufficiently organized.138
The art. 25(2)(b) regime ultimately provided for claims by foreign-controlled domestic
companies as noted above, based on State consent.

134

Of the NAFTA parties, only the United States is a party to ICSID.

135

As noted above, under customary international law, only a non-national has standing to bring a claim against
a State. Article 25(2)(b) of the ICSID Convention derogates from that rule by making certain domestic
companies eligible for ISDS at ICSID. A treaty provision is needed to modify customary international law.
See generally, Christoph Schreuer et al, The ICSID Convention: A Commentary (2d ed. 2009), p. 296 et seq.

136

Article 25(2)(b) provides in relevant part as follows:
"National of Another Contracting State" means: [...] any juridical person which had the nationality of the
Contracting State party to the dispute on that date and which, because of foreign control, the parties have
agreed should be treated as a national of another Contracting State for the purposes of this Convention.

137

Joachim Pohl, Kekeletso Mashigo and Alexis Nohen, Dispute settlement provisions in international
investment agreements: A large sample survey (2012), p. 20.

138

See Schreuer, p. 297 (page references to drafting history omitted).

56

 ii.

Relationship between art. 25(2)(b) claims by the company and shareholder claims

As discussed above, the no reflective loss rule in domestic corporate law is based on the view that
recovery by the company is both more efficient and more fair. Company recovery avoids multiple
claims (and complex and expensive efforts to allocate the reflective losses). It is also seen as fairer to
all interested parties who suffer reflective loss because they will automatically benefit in accordance
with their relative interests in any flow of assets to the corporation. Recovery is thus available for
creditors and all shareholders like any other corporate asset, and any distributions to shareholders are
taxed in the normal way.
Consent to an art. 25(2)(b) regime provides certain domestic companies with access to ISDS; visa-vis a shareholder who also has access to ISDS, this makes the situation of the company more
analogous to the situation of the company in domestic corporate law. Some States and commentators
have argued that where governments have agreed to an art. 25(2)(b) regime, the availability of
company recourse to ISDS further strengthens the argument for prohibiting shareholder claims for
reflective loss.
However, arbitrators have generally not agreed that shareholder access to ISDS for reflective loss
claims should be limited by the availability of company recourse to ISDS under art. 25(2)(b). The
basic doctrinal rationale is that the inclusion of shares in the definition of investment amounts to
acceptance by the government of autonomous shareholder claims for reflective loss. (See above
section D.2.d). This right to claim is found to be unaffected by State consent to an art. 25(2)(b) regime
allowing the company to also claim in ISDS.
The availability of a company claim under art. 25(2)(b) has thus been interpreted as having no
impact on whether a shareholder can bring a claim arising out of the same injury to the company. As
in other areas, the analysis does not address the consequences with regard to consistency concerns:
In the present case, the [shareholder] in fact had an option. It could claim
as a national of the United States, the other contracting State, insofar as it
meets the requirements laid down in the Convention and the Treaty. ...
[The Argentine company] also had the option to complain [under the
Treaty] as a company incorporated in Argentina, if it is established that
this company is under foreign control .... This option was the subject of
an agreement between the parties contained in Article VII(8) of the
Treaty. The existence of this possibility does not prevent the investor
claiming as such under the terms of the first sentence, if that option is
also available.139
The continued availability of shareholder claims exemplified by Sempra and CMS likely leaves
little if any practical role for company claims under art. 25(2)(b). As noted by Douglas, economic
incentives are likely to favour separate shareholder claims rather than company claims if the former
are available under applicable law:
It is difficult to imagine why a shareholder would elect to bring a claim
for the account of its company if it had the option of bypassing the
company altogether. The company might be liable to pay creditors, local

139

Sempra Energy International v. Argentina, Decision on Objections to Jurisdiction (2005), § 42; see also CMS
Gas Transmission Company v. Argentina, Decision of the Tribunal on Objections to Jurisdiction (2003), §
51.

57

 taxes and discharge other obligations before distributing the residual
amount of any damages recovered to the shareholders.140
Schreuer does not specifically address the economic incentives, but similarly recognises that
shareholder claims are "usually preferred over proceedings brought by a locally incorporated company
under Art. 25(2)(b) .... [The availability of shareholder claims] may lead to the relative disuse of the
mechanism under Art. 25(2)((b)").141 Although more research is necessary, it appears that have been
few recent treaty-based claims by an art. 25(2)(b) company rather than a shareholder.
The availability of an art. 25(2)(b) claim by the company would appear to be unlikely to address
the consistency issues identified above as long as shareholders have the ability to bypass it and bring
their own claim.
2.

The variety of company situations in ISDS

The status of the company and its recourse are of central importance in considering consistency
issues relating to shareholder claims. It is also an area in which it is clear that there may be a broad
range of situations.142 In some cases, the company will have effective recourse. In other cases,
companies may have access to effective primary remedies, but not to damages. This may be
increasingly the case as more ISDS claims are brought against governments with advanced systems of
administrative law. In other cases, the company may have uncertain or no meaningful recourse.
It may be useful to outline some concrete examples. There may be various situations in which the
company has effective recourse:


the company has access to ISDS under the same treaty as the shareholder



the company has access to ISDS under a different but comparable treaty



a company (without access to ISDS) has access to effective primary remedies in an advanced
administrative law system, but not to damages under domestic law principles143

There are other situations where the company has no real recourse:


the company (with no access to ISDS) brings a claim in the domestic courts, but suffers a
denial of justice (eg. government interference with the judiciary leading to denial of the claim)



the company suffers a "legal death", ie. ceases to exist due to a winding-up



the company remains in existence, but is paralysed due to host state action (eg. all its assets
are frozen or taken)

140

Douglas, p. 452.

141

Christoph Schreuer et al, The ICSID Convention: A Commentary (2d ed. 2009), pp. 305-306.

142

In preliminary discussions, Roundtable participants have expressed a variety of views about the relative
quality of domestic remedies. See FOI Progress report on ISDS, p. 11 ("Participants expressed differing
views about the prevalence of bias against foreign investors in national legal systems and the appropriate
working assumptions in this regard.").

143

As set forth in the ISDS Scoping Paper, advanced systems of administrative law generally provide nonpecuniary primary remedies for investors, but do not make damages remedies available. See ISDS Scoping
Paper, Annex 4. A variety of views have been expressed about how close a substitute effective primary
remedies are for money damages for investors, and the costs/benefits of each for governments.

58

 There are also scenarios where the company has effective recourse but chooses not to fully
litigate a claim:


after full consideration of the costs and benefits, the company settles the claim for less than
full value due to concerns about government relations and the expectation of future benefits
from a good relationship.



the company directors improperly settle the company claim for low value in order to obtain
collateral benefits for themselves, e.g. favourable personal tax treatment.

In addition, there are many situations where the quality of recourse available to the company is
not certain. For example, it may have access to a domestic system that works reasonably well, but is
sometimes subject to political influence. Given the wide variety of situations, a general rule with
regard to all shareholder claims may not be appropriate.

59

 G. CONCLUSION

This paper has set out a preliminary framework for analysis of the consistency issues raised by
shareholder claims for reflective loss in ISDS. These types of claims now make up a substantial
proportion of ISDS claims, but they are the subject of very little attention in most BITs. They have
been found admissible by many ISDS arbitral tribunals. This can be seen as a success story from the
point of view of consistency of legal interpretation, and improves investor protection for potential
claimant shareholders in many cases.
Courts in advanced systems of national corporate law, however, generally reject shareholder
claims for reflective loss – largely for explicit policy reasons relating to consistency, predictability,
avoidance of double recovery, and judicial economy. Only the directly-injured company can bring the
claim, a solution that is seen as both more efficient and fairer to corporate stakeholders including
creditors and all shareholders. The paper has preliminarily analysed the relevance of these policy
considerations in ISDS cases. The scrutiny so far is preliminary and it is proposed to further consider,
as part of the 2013 work program on investment law, the characteristics of international investment
that might justify the differences in approach to shareholder claims for reflective loss in domestic
corporate law and ISDS.

60

 OECD