Reflective Loss Principle: Sufficiently Settled For Summary Determination

Published date12 December 2022
Law FirmCooley LLP
AuthorMs Alex Radcliffe

In its judgment in Burnford & Others v Automobile Association Developments Ltd,1 the Court of Appeal has provided a useful summary of the current status of the 'reflective loss' principle - the rule that shareholders cannot bring a claim for diminution in the value of their shares where that diminution is a consequence of loss suffered by the company and in respect of which the company has a claim. The message is clear: despite there being a degree of uncertainly about its application in a very few cases, for the vast majority of cases the law is now settled, and despite its lack of popularity, the principle is here to stay.

Background

The claimants were five former shareholders in Motoriety (UK) Ltd ('Motoriety'), a start-up company that provided a variety of car maintenance related services to motorists. The defendant, Automobile Association Developments Ltd ('AAD'), was a company in the Automobile Association group (the 'AA').

In 2015, Motoriety's shareholders were looking to expand Motoriety's business by finding a suitable investment partner enabling the expansion of the company's subscriber base. There were, according to the claimants, two potential investors: AAD and Solera Holdings Inc ('Solera').

After several months of negotiation, Motoriety, its shareholders and AAD entered into an investment agreement. Under the terms of the agreement, AAD agreed to subscribe for 50% of the shares and Motoriety's shareholders granted AAD an option to purchase the balance of the issued shares in the event that Motoriety's EBITDA reached a specified threshold. If AAD exercised the option it was to pay the shareholders an 'initial option payment' and an 'earn-out consideration', both based on a multiple of Motoriety's EBITDA.

Motoriety did not thrive following the transaction. It went into...

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