Introduction
Reflective loss describes a drop in a shareholder’s share value caused by damage to the company. The rule blocking recovery for reflective loss prevents shareholders from making personal claims if the company can act. This rule avoids duplicate payments and keeps company and shareholder rights separate. The House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1 set out the main criteria for this rule, stressing the difference between personal and derivative claims. This article examines the Court of Appeal’s decision in Broadcasting Investment Group Ltd v Smith [2021] EWCA Civ 912, which explains how the reflective loss rule works in disputes over shareholder agreements.
The Facts of Broadcasting Investment Group Ltd v Smith
Broadcasting Investment Group Ltd (BIGL) and Mr. Smith signed a shareholders' agreement for a company, Infront Sports & Media AG. BIGL claimed Mr. Smith broke this agreement, harming both Infront and BIGL directly. BIGL sued, asking for damages for direct harm and reflective loss from falling Infront share values.
The Reflective Loss Principle Reaffirmed
The Court of Appeal in BIGL v Smith kept the reflective loss rule as stated in Johnson v Gore Wood & Co and later in Marex Financial Ltd v Sevilleja [2020] UKSC 31. The Court ruled the rule fully blocks shareholder claims for reflective loss if the company can act. The goal is still to stop duplicate payments and protect the company’s legal standing.
Telling Reflective Loss Apart from Direct Loss
A key point in BIGL v Smith was the Court’s advice on separating reflective and direct loss. The Court decided that if a shareholder’s loss stands apart from the company’s loss, it is not reflective and can be claimed personally. BIGL said some losses came straight from Mr. Smith’s breach of the shareholders' agreement, separate from Infront’s losses. The Court of Appeal agreed, finding these losses could be claimed as they came from a distinct legal breach, not the company’s loss.
How Shareholder Agreements Matter
The BIGL v Smith ruling showed the importance of shareholder agreements in judging reflective loss claims. The Court accepted that breaking these agreements can create direct shareholder claims, apart from the company’s claims. This happens because shareholder agreements set direct contractual duties between shareholders, separate from their ties to the company. Losses from breaking these duties don’t count as reflective loss.
Using Marex Principles
The Court of Appeal in BIGL v Smith used ideas from Marex, which narrowed the reflective loss rule’s reach. Marex said the rule covers creditors and others with financial stakes in the company, not just shareholders. It also said the rule works even if the company can’t act, like during insolvency. However, the Court in BIGL v Smith treated this case differently, as the claim was based on separate rights under the shareholders' agreement, not Infront’s loss.
What This Means in Practice
Broadcasting Investment Group Ltd v Smith gives clear advice for shareholders, companies, and lawyers. The decision shows the need to check if a shareholder’s loss is direct or reflective. If the loss comes from breaking a standalone agreement like a shareholders' pact, it may be claimed even if the company has its own case. This outcome strengthens the role of clear shareholder agreements in protecting shareholder rights.
Conclusion
The Court of Appeal’s ruling in Broadcasting Investment Group Ltd v Smith gives key points on the reflective loss rule. The decision separates truly reflective losses (from share value drops due to company harm) from direct losses from separate legal breaches, like those in shareholders’ agreements. By confirming the rules in Johnson v Gore Wood & Co and Marex Financial Ltd v Sevilleja, BIGL v Smith clarifies when shareholders can make personal claims apart from the company’s rights. This affects how shareholder agreements are written and enforced, and how disputes are handled. The Court’s split between direct and reflective loss shows the need for clear legal arguments and proof of separate loss, making sure the reflective loss rule works correctly while letting shareholders claim for breaches of their own rights.
