The rule in Foss v. Harbottle is well established in Ontario law. It normally prevents shareholders from claiming a loss in the value of their shares resulting from a wrong committed against the corporation. Accordingly, the rule is frequently raised as a defence when a shareholder sues to recover for the diminution in value of their shares.
In the July 6, 2020 decision of Tran v. Bloorston Farms Ltd., 2020 ONCA 440 (“Bloorston”), the Ontario Court of Appeal revisited the limits of the rule in Foss v. Harbottle, and the circumstances in which a shareholder may sue to recover the diminution in share value. The Court of Appeal confirmed the law in Ontario and recognized that “where the wrong was not committed against the corporation and the corporation therefore has no cause of action, the rule in Foss v. Harbottle does not prevent a shareholder who has her own cause of action from suing for any damages properly recoverable under that case of action, including, in appropriate cases, loss or diminution of share value.”
The Facts in Bloorston
Sang Thi Tran (“Sang”) was the tenant under a commercial lease. The leased premises was used as a restaurant by Sang’s corporation, 1835068 Ontario Ltd. (“183”). Sang was the sole shareholder of 183. Years later, Bloorston Farms Ltd. (“Bloorston”) purchased the building and became the landlord. Bloorston subsequently demanded that increased rent be paid by Sang. When Sang refused, Bloorston terminated Sang’s tenancy and locked her out of the premises, resulting in the closure of 183’s restaurant business. With the restaurant unable to operate, the shares of 183 became worthless.
Sang commenced an action against Bloorston, later joining 183 as a plaintiff. Bloorston brought a motion for summary judgment. It argued that 183 had no cause of action since it did not have a contract with Bloorston, and that the rule in Foss v Harbottle prevented Sang from recovering damages for the loss of value of her shares in 183. The motion judge recognized that 183 had no cause of action, but allowed Sang’s action, finding that Bloorston wrongfully terminated Sang’s tenancy, and that she was able to recover for the lost value of her shares. The Court of Appeal dismissed Bloorston’s appeal, finding that the rule in Foss v Harbottle did not prevent Sang from recovering the lost value of her shares.
The decision of both the motion judge and the Court of Appeal revolved around the English case of Johnson v. Gore Wood & Co (No 1),  BCC 820 (UKHL) (“Johnson”) and, in particular, the “second proposition in Johnson”.
In Johnson, the House of Lords set out three propositions about the ability of a shareholder to sue for diminution of share value, as follows:
- Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss… [citations omitted].
- 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… [citations omitted].
- Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other… [citations omitted].1
Bloorston argued that the second proposition in Johnson had previously been rejected by the Ontario Court of Appeal and that the rule in Foss v. Harbottle applies because Sang’s claim is for diminution in share value. Justice Zarnett, writing for the unanimous Court of Appeal in Bloorston, disagreed, finding that “the second proposition in Johnson should be treated as good law in Ontario,” and that to accept Bloorston’s argument would be to expand the rule in Foss v. Harbottle rather than respect its limits and rationale.
The rule in Foss v Harbottle was never intended to apply in a situation such as Sang’s. Rather, the rule only applies in a situation where a shareholder sues for a wrong done to the corporation, which losses are properly recoverable by the corporation. In that case, the shareholder is prevented from bringing an action to recover damages which are properly recoverable by the corporation itself, in order to avoid multiplicity of proceedings and double recovery. There is no such risk in a situation where the corporation has no cause of action. In that case, if the shareholder has a cause of action, it is perfectly acceptable for the shareholder to claim for damages to the shareholder’s property, including the lost value of shares.
The Implications of Bloorston
The Court of Appeal’s decision in Bloorston provides a reminder to plaintiffs and practitioners that when assessing a plaintiff’s damages, consideration should be given as to: (i) whether the plaintiff holds shares which have suffered a loss in value as a result of the wrong committed by the defendant against the plaintiff; and (ii) whether the underlying corporation itself has a cause of action by which to recover the loss from the defendant.
If the underlying corporation does not have a cause of action against the defendant, “the second proposition in Johnson,” which is now definitively recognized as good law in Ontario as a result of Bloorston, provides that the shareholder may successfully advance the claim for the loss of share value, where the shareholder can satisfy all the usual requirements of proof, causation, foreseeability and quantification.