Academic journal article Brigham Young University Law Review

Legal Origins, Investor Protection, and Canada

Academic journal article Brigham Young University Law Review

Legal Origins, Investor Protection, and Canada

Article excerpt

I. INTRODUCTION

Beginning with their publication of Legal Determinants of External Finance,1 Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny ("LLSV") asked: "Why do some countries have so much bigger capital markets than others?" According to them, the answer lies in the legal environment of the country - its legal origin. LLSV conclude that because common law countries have better investor protection mechanisms and better enforcement, bigger capital markets are more achievable. They also find that the concentration of ownership of shares in the largest public companies is negatively related to investor protection. Their theories have led to a number of influential papers, either in agreement, or as a critique to their work - collectively turning LLSV "into the most cited economists in the world over the past decade."6

While LLSV classified Canada as a common law jurisdiction in their studies, Canada actually stands out as somewhat unique in the world financial markets as one of the few countries with both common and civil law traditions. While the federal government and twelve of the thirteen provinces and territories operate under the common law system, Quebec operates a civil law system in its province within the larger Canadian common law framework. This fact makes Canada an interesting jurisdiction for exploration of the LLSV theories, conclusions, and critiques.

Canada's capital markets are also different than the United States or the United Kingdom. Canada is a small player in the world's capital markets, with Canadian issuers representing only 3% of the world's capital.7 Despite Canada being such a small player, the number of Canadian public companies is relatively high compared to other countries, with about 4000 issuers listed on the TSX and TSX Venture Exchange.8 Canada also has a small number of very large issuers and a large number of very small issuers. For example, the market capitalization of the 200 largest issuers listed on the TSX accounts for more than 88% of the total market capitalization of all TSX and TSX Venture Exchange listed companies.9 Over 190 of Canada's largest issuers are also listed on major U.S. exchanges.10 In addition, a significant number of the largest non-financial public companies in Canada have controlling or major shareholders.11

Studies show that valuations of Canadian companies cross Usted in the United States are higher than those listed only in Canada.12 Studies also show that the cost of capital in Canada is approximately twenty-five basis points higher than in the United States.13 These differences in valuation and cost of capital could be the result of differences in the quality of investor protection between Canada and the United States. It is reasonable to attribute these differences to investor concerns about Canada's fragmented regulatory structure for securities, concerns about ineffective enforcement vis-à-vis the United States, and concerns about the significance of large numbers of controlling or major shareholders in Canada. These factors suggest that context is important in the relative strengths of the capital market and investor protection and that there is much more at play than can be found in examining the system of laws.

Canada (and Quebec within Canada) provides an excellent context in which to explore the nuances of the LLSV theories, conclusions, and critiques on investor protection, capital markets, and legal families. Three issues are explored in this paper. The first issue is how and why Canada fared relatively well (in contrast to the United States in particular) in the recent financial crisis. The second issue is why Canada still has not created a national regulator for securities, despite more than forty years of attempts to do so. The third issue explored in this paper is how Quebec, as a civil law jurisdiction, operates within an overarching Canadian common law framework and the cross-fertilization implications of a civil law system within a common law jurisdiction. …

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