Corporate law in advanced domestic legal systems on the one hand, and typical treaties for the protection of foreign investment on the other hand, treat claims for damages by company shareholders differently. Advanced domestic systems generally bar shareholders from claiming for reflective loss? loss that arises from injury to "their" company (such as a decline in the value of shares). The claim for the loss belongs to the injured company and not to its shareholders. In contrast, shareholder claims for reflective loss have been widely permitted under typical investment treaties over the last 10 years. Ongoing OECD-hosted inter-governmental dialogue on investment law is considering whether there are policy reasons justifying the different approaches to shareholder claims for reflective loss. This paper examines shareholder claims for reflective loss under investment treaties in light of comparative analysis of advanced systems of corporate law. The paper considers the impact of allowing shareholder claims for reflective loss on key characteristics of the business corporation. The paper also explores possible responses by different categories of investors to the availability of shareholder claims for reflective loss under investment treaties.

Scholarly debate on the legitimacy crisis of investment dispute resolution has focused on the ability of multinational corporations to interfere with the state's right to regulate by challenging government measures in investor-state arbitration. Prior work has addressed the hybrid public-private nature of investment treaties that allow foreign investors to sue sovereign states and emphasized the role of multinational corporations in international lawmaking. The academic discourse misses entirely the fact that international investment law drastically impacts relationships within the corporation (between the shareholders, the management, and the board of directors) and alters the expectations about the corporation as a standard-form legal entity. Remarkably, international investment law allows shareholders to bring in arbitration claims for damages for “reflective loss” -- that is, loss incurred by shareholders indirectly as a result of injury to their company. Shareholders can bring these claims without consulting with the company's management and irrespective of any claims by the corporation. Thus, inherent in investment arbitration is the ability of individual shareholders to make decisions affecting the company and to benefit at the expense of the corporation, its creditors, and other stakeholders.Drawing on case studies, this Article seeks to surface the extent of the impact of shareholder claims for reflective loss on corporate law and governance -- the rules, structure, and processes of the management and control within the corporation. Having established the distortive impact of shareholder claims on the corporate legal entity, the Article further explores the ways to address the systemic problem of reflective loss claims. It makes a normative argument: in view of the policy goals of foreign investor protection, shareholder claims for reflective loss should be permitted in international investment law, but only in limited circumstances to curtail the disruption of corporate governance and to reduce the social costs of litigation. The Article concludes by offering a novel private ordering solution to the problem of reflective loss claims. It argues that the corporate distortion problem is best addressed at the level of individual corporations through targeted provisions in corporate charters and bylaws waiving the right of shareholders to bring reflective loss claims in investment arbitration.

In recent years, investor-state tribunals have often permitted shareholders' claims for reflective loss despite the well-established principle of no reflective loss applied consistently in domestic regimes and in other fields of international law. Investment tribunals have justified their decisions by relying on definitions of 'investment' in investment agreements that often include 'shares', while the no-reflective-loss principle is generally justified on the basis of policy considerations pertaining to the preservation of the efficiency of the adjudicatory process and to the protection of other stakeholders, such as creditors. Although these policy considerations militating for the prohibition of shareholders' claims for reflective loss also apply in investor-state arbitration, they are curable in that context and must be balanced with policy considerations specific to the field of international investment law that weigh in favor of such claims: the protection of foreign investors in order to promote trade and investment liberalization.

This book studies shareholders' claims for reflective loss and explains why they are justified in international investment law.

If a company is harmed by the behaviour of a third party, shareholders may suffer the economic consequences in the form of a reduction in the value of their shares. This article, taking a comparative law perspective, answers the question whether shareholders should be able to claim such a loss that is merely reflective of the company's loss. The basic rule is that a direct claim by the shareholder is not allowed; the company should claim damages. Exceptions to this 'no reflective loss' principle in jurisprudence of the UK, the Netherlands and the European Court of Human Rights are analysed. There appear to be two necessary conditions for an exception: (i) the shareholder must have an independent cause of action, and (ii) the reflective loss needs to be certain, i.e., it is certain that the shareholder will not be compensated indirectly through a lawsuit against the wrongdoer by or on behalf of the company. Several specific cases that satisfy these conditions are discussed. It is submitted that awarding damages to the shareholder personally can be justifiable and a derivative suit is usually not a good alternative to protect the injured shareholder in these cases.

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.