Does a shareholder have a personal cause of action where harm is done to her personally as a result of a loss in company share value? This is the second of a two-part series in which we endeavour to answer this question.
Where only shareholder can sue
The "Second Proposition" from Johnson v. Gore Wood & Co.,  B.C.C. 820 (U.K.H.L.) was articulated by the House of Lords as follows: "Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding ..."
After reviewing previous cases in Ontario and British Columbia, including Meditrust Healthcare Inc. v. Shoppers Drug Mart  O.J. No. 3891 and Robak Industries Ltd. v. Gardner 2007 BCCA 61, the Court of Appeal in Tran v. Bloorston Farms 2020 ONCA 440 held that the Second Proposition from Johnson "fits consistently into a legal framework that is otherwise consistent with Ontario law."
In the court's view, the Second Proposition "should be treated as good law in Ontario."
The court offered three policy reasons for adopting the Second Proposition:
- Allowing a shareholder action for loss of share value where the corporation does not have a cause of action "respects the separate legal identity of the corporation ...";
- There is no risk of a multiplicity of proceedings. The company does not have a cause of action; and
- The claim for a loss in share value is "not simply a claim for loss that is reflective of the loss suffered by the corporation (for which the corporation, and only the corporation, can sue)."
The court cautioned, however, against opening the floodgates with the Second Proposition. The plaintiff still has to prove the necessary elements for a loss in share value: "This does not, of course, mean that in every such case damages for diminution of share value should be allowed. A claim for this head of damages is subject to all the same requirements of proof, causation, foreseeability, and quantification as a claim for any head of damages flowing from the wrong that grounds the shareholder's cause of action."
Applying the principles above, the court held that the corporation had no contractual relationship under the lease with the landlord. Only plaintiff Tran did. The Second Proposition applied and Tran was entitled to damages for the loss of her share value.
A necessary evolution in Ontario corporate law
Bloorston Farms represents a much-needed step in the evolution of Ontario corporate law. Recognizing the Second Proposition as an exception to Foss v. Harbottle (1843) 2 Hare 461, 67 ER 189 aligns Ontario law with other common law jurisdictions.
However, the court was careful to cast the Second Proposition as a narrow, limited means of awarding compensation to shareholders for losses in share value that are otherwise unrecoverable by the company.
Of course, Bloorston Farms is a textbook example of the Second Proposition in action. The case involved a breach of contract to which the corporation was not a party and under which the corporation had no right to sue.
What remains to be seen are the conceptual boundaries of Bloorston Farms. Where it is questionable whether a corporation has a right to pursue an action for losses in share value, the Second Proposition may very well not apply.
This is the second of a two-part series. Read part one: Shareholder actions for loss of share value: Are they now possible?
This article was originally published by The Lawyer's Daily, part of LexisNexis Canada Inc.
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