The notion of indirect or “reflective” loss refers to the loss of value of shares held in the stock of a local or intermediary entity, which in turn owns the assets directly affected by the host State’s measures. Indirect loss claims are distinguishable from claims by indirect shareholders in respect of harm to a local or intermediary company’s assets (on this question, see further Indirect Ownership). Such claims are not particularly common in international investment law, with the early case of Sedelmayer v. Russia, in which an indirect shareholder brought claims of expropriation in relation to the local joint stock company’s assets, serving as a notable exception which confirms the rule.¹

In contrast to claims by shareholders seeking to recover the value of indirectly held assets, indirect loss claims are rather frequent in international investment law. While not expressly regulated under International Investment Agreements (IIAs), such claims have been traditionally understood to fall within the jurisdiction of arbitral tribunals.² In particular, IIAs typically extend their material scope of protection to directly or indirectly held shares and their personal scope of protection to direct or indirect shareholders; in this light, based on the reasoning that IIAs do not contemplate express ratione materiae or ratione personae jurisdictional bars to shareholdings, arbitral tribunals have been receptive to indirect loss claims.³ Shareholders have thus been generally entitled to compensation for the loss of value of their own shares,⁴ and have been deemed to possess an independent cause of action.⁵

See also Indirect Ownership, Section IV and V.

Other international adjudicatory bodies have strictly conditioned shareholder claims for indirect loss. Indicatively, the International Court of Justice has reasoned that diplomatic protection must be denied when mere shareholder “interests” (as opposed to direct rights, such as the right to vote in general meetings or receive declared dividends) are harmed.⁶ Under the Draft Articles on Diplomatic Protection, this “no reflective loss” principle is waived when the direct investor no longer exists under the laws of its place of incorporation, or when it is locally incorporated.⁷ Similarly, the European Court of Human Rights denies standing to shareholders for indirect loss claims, provided that the company itself can bring a claim under the European Convention on Human Rights and that the claiming shareholder does not possess a substantial controlling interest in the company.⁸ In turn, domestic courts in various jurisdictions have held that only direct shareholders’ rights may form the subject-matter of a dispute.⁹

The skepticism of public international law adjudicatory bodies and domestic courts toward shareholder claims for indirect loss (see Section III above) reflects a number of concerns which are equally valid in international investment law:

1. the risk of parallel proceedings by multiple shareholders, or by the shareholder and the direct investor, which may result in double harm for respondents or conflicting outcomes;¹⁰
2. the risk of subjecting recovered assets to the fiscal regime of the indirect shareholder, which will often be a holding company incorporated in a low-tax jurisdiction;¹¹
3. the recovery of corporate assets by shareholders at the expense of creditors;¹² and
4. the calculation of damages as a percentage of the value of the underlying asset or, more generally, without reference to considerations specific to share pricing.¹³

Under “new generation” IIAs, states have sought to mitigate the risk of parallel proceedings arising out of indirect shareholder claims by:

1. requiring a waiver of recourse to alternative fora by the shareholder and the direct investor;¹⁴
2. clarifying that, in the case of derivative actions, i.e. claims for direct loss by the shareholder on behalf of a potentially expropriated or non-functioning local company, damages must be paid to the direct shareholder;¹⁵
3. interpreting the requirements of “identity of parties” and “subject-matter” under “fork-in-the-road” or “local remedies” clauses broadly, thereby ascribing preclusive effects to claims filed before alternative fora, by different entities in the corporate chain, for the same facts;¹⁶
4. providing for the possibility of staying or consolidating proceedings, or otherwise requiring the tribunal to take parallel actions into account when issuing its award.¹⁷

Tribunals have also become increasingly mindful of the risks and externalities of indirect loss claims, relying on general principles such as collateral estoppel,¹⁸ res judicata¹⁹ or abuse of process²⁰ to caution against the initiation of multiple proceedings by related entities in respect of the same facts.

Parallel proceedings, including parallel shareholder claims, are also being discussed as part of UNCITRAL’s current work on ISDS reform.²¹

Páez-Salgado, D., Settlements in Investor-State Arbitration: Are Minority Shareholders Precluded from Having Its Treaty Claims Adjudicated?, Journal of International Dispute Settlement, (2017), pp. 101-124

Gaukrodger, D., Investment Treaties and Shareholder Claims for Reflective Loss: Insights from Advanced Systems of Corporate Law, OECD Working Papers on International Investment, 2014.

Gaukrodger, D., Investment Treaties as Corporate Law: Shareholder Claims and Issues of Consistency, OECD Working Papers on International Investment, 2013.

Bentolila, D., Shareholders’ Action to Claim for Indirect Damages in ICSID Arbitration, Trade, Law and Development, 2010.

Demirkol, E.C., Admissibility of Claims for Reflective Loss Raised by the Shareholders in Local Companies in Investment Treaty Arbitration, ICSID Review-Foreign Investment Law Journal, 2015, pp. 391-413.

Vanhonnaeker, L., Shareholders' Claims for Reflective Loss in International Investment Law, 2020.

Valasek, M., and Dumberry, P., Developments in the Legal Standing of Shareholders and Holding Corporations in Investor-State Disputes ICSID Review- Foreign Investment Law Journal, 2011, pp. 34-75.

Douglas, Z., The International Law of Investment Claims, 2009.