BARRING RECOVERY FOR DIMINUTION IN VALUE OF SHARES ON THE REFLECTIVE LOSS PRINCIPLE

Extract

The question of whether a shareholder may bring a personal action to recover diminution in value of his shares as a result of a wrong committed by the defendant against the company appears to be settled by the House of Lords in Johnson v. Gore Wood & Co. (to be referred to as the Johnson case). The facts may be stated briefly. Gore Wood, a firm of solicitors, had acted for Johnson's company, in which he owned almost entirely all the shares. The solicitors were alleged to have acted negligently when they failed to exercise an option to purchase a piece of land for Johnson's company. The solicitors then settled a suit brought by the company. After the settlement, Johnson sued the solicitors, arguing that they also owed a duty to him personally. As some of the losses claimed by Johnson were also losses which the company suffered and which had been settled, the solicitors applied to strike out those claims on the ground that they were “reflective losses”. The House of Lords struck out those claims which were reflective losses, namely, claims for diminution in value of his shares and reduction in dividend stream, but allowed other claims to go to trial. The concern of this article is with a shareholder's personal claim for diminution in value of shares.