Can Shareholders Sue Personally For Losses In Company Share Value?

• Published date: 16 July 2020
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Corporate and Company Law, Landlord & Tenant - Leases, Shareholders
• Law Firm: Torkin Manes LLP
• Author: Mr Marco P. Falco

Since 1843, a corporation has been treated as a distinct legal entity from its shareholders. The practical effect of what is known as the rule Foss v. Harbottle (1843), 67 E.R. 189 (U.K.H.L.) is that only the corporation, not its shareholders, may start a lawsuit for wrongs done to it.

There are exceptions, such as "derivative actions" But even in those cases, the shareholders are simply bringing the derivative action "on behalf of" the corporation. The lawsuit still belongs to the company.

So what happens when there is harm done to a shareholder personally resulting from a loss in the company's share value Does the shareholder have a personal cause of action? Under a strict Foss v. Harbottle analysis, the answer is no.

But a recent decision of the Ontario Court of Appeal, Tran v. Bloorston Farms Ltd., 2020 ONCA 440, now adopts an important exception to Foss v. Harbottle.

Bloorston Farms establishes that a shareholder can bring a claim for the diminution in share value to the company where only the shareholder, not the company, has a right to sue the defendant.

A Restaurant Goes Under. Who Sues?

Bloorston Farm involved the breach of a restaurant lease. The corporation, of which Sang was the sole shareholder operated a restaurant on the premises. Sang was the only listed tenant on the lease.

In 2014, the defendant became Sang's landlord when it purchased the building in which the restaurant operated. The defendant landlord then demanded increased payments of rent from the tenant. Sang disputed the changes to the restaurant's rent and continued paying the rent she was already paying. The landlord ultimately terminated Sang's tenancy and the corporation's restaurant business ceased operations.

Sang brought an action against the landlord for breach of the lease for locking her and the corporation out of the premises. The corporation was also a plaintiff to the action, though it was not a party to the lease.

Part of Sang's claim involved an action for the loss of her share value as the sole shareholder of the corporation.

The landlord brought a motion for summary judgment, arguing that Sang, as a shareholder, could not personally claim the loss of the value of her shares when the corporation became worthless following the restaurant closure. The landlord relied on the rule from Foss v. Harbottle, arguing that only a corporation could bring an action for the harm done to it.

The motion judge rejected the landlord's position. The Court held that there was...