The holding in Hercules Managements Ltd. that the duty of care in the preparation of the audit report was owed by the auditors to the shareholders collectively, and thus to the corporation itself, rather than to individual shareholders limits the ability of individual shareholders to bring claims personally. The notion that the negligently prepared reports resulted in a wrong to the corporation itself, for which the shareholders as individuals were not entitled to recover reaffirms the existence of separate corporate personhood, but also, in my view, addresses a more pragmatic concern of indeterminate liability.
In this sense, the holding in the case seems to have responded to real policy considerations: if this claim had succeeded, every individual shareholder could theoretically bring a similar claim against auditors having allegedly breached their duty of care. This would not only render auditors vulnerable to extensive liability, but also likely deter economic efficiency more generally – as the service performed by auditors would become much more precarious, and ultimately, costly (not to mention that the availability of auditing services overall would very likely decrease). These costs would likely also trickle down not only to corporations or firms paying for the services, but also eventually to consumers using the services of those corporations. Furthermore, making these claims viable for each individual shareholder may decrease overall diligence, and possibly create a culture of neglect as these potential claimants would be ‘comforted’ in knowing they always had a ‘recourse’ to a personal claim against the auditor. This is certainly not the type of business-culture and efficiency that ought to be pursued.
Well reasoned Amelie, I agree. One thought I had while reading – what if a shareholder could choose to bring a claim, but only in proportion to the stake they had in the company? (i.e. if the total wrong to the corporation was $10 million, and an individual shareholder held 10% of the shares, then they could choose to sue for $1 million.)
Certainly! That’s a great thought, Ray, it would bring more reasonableness and proportionality of fault to the scenario. Although I suppose we would still see a greater influx of claims – though as you point out, arguably the shareholders could be entitled to at least some claim.
I totally agree with you Amelie. To allow shareholders to have a cause of action would have significant policy implications because there would be no basis for companies to resist claims, and liabilities would become incalculable.
Ray: I do like your idea, however, as Amelie mentioned, it would not help with the influx of claims.
Sorry I posted before being done….But yes, your idea will definitely allow for at least some claim by the SH.