Johnson v Gore Wood & Co [2002] 2 AC 1

Facts

  • The case concerned shareholder losses resulting from harm to a company, specifically when a shareholder’s shares decrease in value due to company damage.
  • The claimant, a majority shareholder and company director, argued that the defendant’s negligence caused the company to lose a legal case.
  • The claimant sought compensation for three items: the company’s loss, the reduction in value of his shares, and the loss of his director position.
  • The defendant allegedly breached their duty, leading to direct and indirect losses for both the company and the shareholder.

Issues

  1. Whether a shareholder can claim compensation for loss in share value that mirrors harm suffered by the company.
  2. Whether exceptions exist that permit a shareholder to claim for losses separate from the company’s losses.
  3. Whether the loss of a directorship, resulting from the same negligent act, constitutes a recoverable independent loss for the shareholder.

Decision

  • The House of Lords confirmed the general principle that shareholders may not recover losses that merely reflect the company’s harm if the company itself can take legal action.
  • The Court highlighted that exceptions exist where a direct legal duty is owed to a shareholder, and the loss is distinct from the company's.
  • In this case, the claimant could not recover for the loss in share value as it duplicated the company’s loss, but may claim for loss of his director position if proven to be an independent harm.

Legal Principles

  • A company is a separate legal entity from its shareholders (referring to the principle from Salomon v A Salomon & Co Ltd [1897] AC 22).
  • Harm to the company affects its assets, not those of the shareholders directly; hence, only the company can generally sue for such harm.
  • Allowing both company and shareholder to claim for the same loss would result in double recovery, which is impermissible.
  • Exceptions are narrowly construed and apply only where an independent duty is owed or the shareholder’s loss is distinct from that of the company.

Conclusion

Johnson v Gore Wood & Co reaffirmed the rule against recovery by shareholders for reflective losses arising from company harm, while acknowledging rare exceptions for independent, direct shareholder claims. The decision upholds the legal separation of company and shareholder interests and remains influential in company law.

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