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
II. Jurisprudence of investment tribunals on indirect loss claims
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. 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.2 Shareholders have thus been generally entitled to compensation for the loss of value of their own shares,3 and have been deemed to possess an independent cause of action.4
III. Indirect loss claims in domestic and public international law
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.5 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.6 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.7 In turn, domestic courts in various jurisdictions have held that only direct shareholders’ rights may form the subject-matter of a dispute.8
IV. Risks and externalities of indirect shareholder claims
The skepticism of public international law adjudicatory bodies and domestic courts toward shareholder claims for indirect loss (see above section III) reflects a number of concerns which are equally valid in international investment law:
V. Recent trends and developments
Under “new generation” IIAs, states have sought to mitigate the risk of parallel proceedings arising out of indirect shareholder claims by:
Tribunals have also become increasingly mindful of the risks and externalities of indirect loss claims, relying on general principles such as collateral estoppel,17 res judicata18 or abuse of process19 to caution against the initiation of multiple proceedings by related entities in respect of the same facts. Parallel proceedings,
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
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.
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