An Analysis of the Shareholders’ Claims for Reflective ‎Loss: A Comparative Study in the Legal System of ‎England and Iran

Can a shareholder recover a personal loss resulting from a loss suffered by the company? Unfortunately, that apparently simple question has no simple answer.  The company lawyer may argue that the answer lies in basic company law-as a separate legal entity, it is the company itself that must sue to recoup its own losses. That leaves the shareholder with no cause of action and no standing to sue. The shareholder derivative action, available under certain conditions, is still a corporate action, seeking relief for the company itself. Simply, that means that a shareholder cannot recover damages suffered by the company. A comparative approach is relevant to this investigation as it could provide invaluable insights which could enrich Iranian jurisprudence in case where shareholders will seek to claim for reflective loss. This article, from a comparative law perspective explores whether shareholders should be able to claim such a loss which is merely reflective of the company’s loss. The results of the article show that in the UK corporate law, the direct action of shareholders to claim a reflective loss is limited to exceptional cases (such as where the company is unable or unwilling to pursue the claim) due to the important rule of "no reflective loss". The origins of the rule come from the decision in Prudential Assurance v Newman Industries, in which the court said: “what [the shareholder] cannot do is to recover damages merely because the company in which he isinterested has suffered damage. He cannot recover a sum equal to the diminution the market value of his shares, or equal to the likely diminution in dividend, because such a “loss”  is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only “loss” is through the company, in the diminution in the value of the net assets of the company. The plaintiff,s shares are merely a right of participation in the company on the terms of the articles of association . The share themselves, his right in the participation, are not directly affected by the wrongdoing . The plaintiff still holds all the shares as his own absolutely unencumbered property”.In the Iranian corporate law, despite the doubts about the claim for damages resulting from the reduction of shares and its profits in the decisions of the arbitration board of stock exchange and securities, it seems that such a loss is compensable. Because on the one hand, by examining the conditions of compensable loss in Iran's civil liability system, the loss caused by the diminution in the value of shares and dividends is a personal and independent loss for the shareholders, and any restriction in this field is a violation of the rights of the shareholders, and the person causing the loss must pay all the losses caused for his actions , and on the other hand, the argument that the shareholder's personal right ought to be subordinated so as to protect the interests of the company's creditors and  the autonomy of company would seem somewhat less compelling. Ironically, respecting the principle of company autonomy demands the recognition that shareholders are separate from the company, which in turn forms the premise upon which rights and obligations of shareholders are distinguished from those of the corporate entity. If indeed the shareholder’s right is an independent personal right, the fact that the loss suffered is reflective of the company's loss should not lead to a destruction of that right. Of course, some practical considerations such as the possibility of multiple shareholder lawsuits and efficiency (cost-benefit evaluation) lead us to consider the company as a priority in the litigation without limiting the personal right of shareholders to claim personal loss.