The Legal Origin of Shareholder Protection - Essay Example

? A1 The main purpose of this research was to ascertain the legal origin of shareholder protection1. To find out the legal origins of shareholders, the researchers investigated the theoretical claims which have associations with the legal origins literature, and previous explanations for such legal origins. Secondly, the study seeks to find out whether legal origin and shareholder protection are associated in any way, and whether countries with the common law origin show signs of robust development of the stock market, compared with countries that mainly apply civil law. The researchers developed a summary of their dataset. They made comparisons between this dataset and quantification approaches of legal rules that had been used before. By using secondary analysis, researchers can gain new ideas from old data2. The researchers also wanted to find out whether corporations from countries based on common law seek funds for running purposes and investment projects from external capital sources, chiefly the stock market, than from internal sources. The researchers performed econometric analyses, in their bid to answer the research questions, test hypotheses, and make conclusions, based on the findings3. In carrying out this empirical research, the researchers used a panel dataset whose main contents had been gathered from a group of developing and developed countries. The researchers used the dataset to carry out econometric analyses. It is also evident that the authors of this article applied various datasets, using the indices that the researchers constructed to allow them investigate the impacts of legal change as time passes by and to explore the correlation of such legal changes to economic development4. The indices that the researchers used in this study took into account codes pertaining to self-regulation and other sources of norms, with an obligatory effect. The rules that the researchers included in their panel dataset included those that originate from takeover codes and corporate governance codes5. In this research, coding was done for principally noteworthy court rulings, with sufficient information of the legal sources in the documents that comprise datasets. LLSV does not apply this practice when developing datasets for research. The researchers attempted to code using more values as they analysed the impact of an identified legal ruling. LLSV indices do not code using more values during analysis of previous legal rulings. Predominantly, binary variables are used in LLSV coding uses, and assumptions are made that if a rule may either apply or not. This does not take legal rulings which may be applied differently in different or specific situations. Also, this does not consider the likelihood of ambiguity or vagueness while making interpretations of legal rulings. In this study, intermediate scores between 0 and 1 were included by the researchers in their datasets6. The researchers included the codes of ‘comply’ or ‘explain’ within their coding. In addition, longitudinal indices were used by the researchers to assign codes to various judicial ruling, alongside the various changes that such rulings have undergone since their introduction. This research empirical design is subject to various criticisms. For instance, in coding for the evolution of legal rules, legal research tools were used to evaluate and analyse the state of law. However, the information is scarce and may not be retrieved from history. Backfilling the information may be difficult because the information is old and may be out of date, dating twenty or ten years ago, and may not be sufficiently detailed because complexity in regulation has been increasing time and again7. Secondly, the study employed numerous variables so as to increase the accuracy of the research findings. However, it is worthy to note that the use of many variables does not guarantee accuracy in the findings. Instead, numerous variables might lead increase complexity and ambiguity, which might lead to invalid findings. For instance, the study found out that legal origin does not affect financial development, which contradicts significantly with the teachings in law and finance. A2 The authors of this article made note of many conclusions and findings from their study. First, it was established that findings support the existence of a link country’s legal origin and its substantive law contents. For instance, it was established that from 1995 to 2005, countries where common law was applicable exhibited a stronger shareholder protection. At the same time, it was also established that the difference between the jurisdictions of common law and civil law is narrowing as time goes by. There is no association between the development of the stock market and protection of shareholder interests; it was established in the study. Therefore, it was established that there is doubt about the role that protection of shareholders plays towards the development of financial markets. According to the findings of research, there was no correlation that was found to exist between protection of shareholders and financial development in English law origin countries, as well as, other developed, where there are higher levels of shareholder protection, compared with developing countries and those that apply civil law. The researchers found that civil law and common law systems are unambiguously different, as they embarked on the early stage of analysis, during their research, whose main aim was to establish and track changes in legal aspects. Thus, a country’s law may be changed by legal origin, and countries applying civil law were doing better and almost measuring up with countries that apply common law in terms of how well the shareholders are protected. It has been noted that the study took place during a time when there were significant changes pertaining to board members that are independent and the introduction of obligatory bids when pursuing takeovers, which are the main attribute of the approach of common law to shareholder protection8. This means that in both developing and developed countries, the legal structure, especially on the part of common law may have changed to suit into the universal standard of company law and corporate governance. The standard prioritise the duty played by company boards and the corporate control market in fostering discipline among listed companies’ managers, than civil law systems did. Initially regimes that applied common law reaped numerous advantages, for example that the shareholders are better protected, contrary to the exhibited by countries that applied civil law. A faster rate of shareholder protection was exhibited in countries with common law systems, compared to countries that applied civil law. According to the findings of this study, legal rules structure is subject to the effect legal origin. A legal origin can also determine the degree of legal protection of shareholders, but it has no effect on financial development, especially during the ten-year period that the study was carried out9. However, this finding was not in line with the prevailing provisions of law and finance. The researchers also concluded that legal change does not initiate conditions that may influence the economic outcomes, as it is assumed by the strong form version of legal origins. The aforementioned conclusions are justified, on the basis of research findings. For instance, the predominant expansions of law and finance support the view that proficient rules which will enhance the development of stock markets at a higher rate compared to systems that apply civil law10. However, this is subject to various post conditions that are a result of introduction of regulations. Separately, as much as the prevailing fields of law and finance propose that legal origin affects financial development, this does not mean that the study’s dataset may have been less robust than datasets developed by LLSV nor did the dataset that was used by researchers fail to identify important variables. The result of the study may be justified on two premises. First, Law may be counter-productive as it confers additional protection on shareholders11. Secondly, laws purported to offer protection to the interests of shareholders may fail to attain such effects, especially when implementation of such laws is perceived as an imposition of unnecessary costs by managers. Also, laws fail to work well in representing international best practices when they are placed into circumstances similar to their systems of origin12. Additionally, the impacts of legal origin are not as strong as widely perceived. A3 Prescriptive legal scholarship is not embodied in this article. This is because prescriptive legal scholarship provides recommendations to legislators, judges, and other legal officials and this study proposes no recommendations to legislators and legal administrators. Also, prescriptive scholarship methodology is termed instrumentalist, if it provides information on how to make legal recommendations, by determining which laws and policies maximize some goal13. This article does not provide any information on how to make legal recommendations. Such studies evaluate and gauge the real effects of law to communicate regulatory arguments that can be forwarded to judges, legislators and legal administrators14. In addition, prescriptive studies include the contents that specify material and other legal components of the legislature15. In this study, the effects of legal policies have been analysed, but the researchers did not incorporate any legal recommendations. Instead, the researchers reported their findings on the legal origin of shareholder protection. Therefore, this article has not employed prescriptive legal scholarship, but it rather uses a descriptive approach. On the other hand, descriptive legal scholarship sees to find the best justifiable meaning of a regulatory instrument by providing information on the ways the objects are supposed to behave and thus the intended effects of regulation. However, a policy or regulation can have unintended effects that are outside the norm. Assumptions are made on how people react to the specific types of regulations16 . Descriptive articles are written to provide legal opinion17. As much as they contain what is known as legal scholarship or doctrine, the authority varies in different legal systems. There are no judicial verdicts or decisions that are included in such articles. However, descriptive approaches incorporate normative arguments18. The researchers used a descriptive approach by reporting on their findings whether shareholder protection and legal origin are associated, and whether countries that apply common law are associated with higher levels of development in their stock markets than countries that apply civil laws. The authors of this article reported their findings about whether companies from countries that apply common law depend on borrowed capital from external financial institutions, especially, those listed in the stock exchange, than they use internal sources of capital such as profit reserves. Also, the researchers provided their findings pertaining to the link between legal origin and shareholder protection, and whether stock markets of common law countries are well developed than those in civil law countries. Therefore, this article used a descriptive approach in reporting the findings of research. A4 This article provides significant contributions to legal literature. First, the study contributes to literature by expounding the legal origins hypothesis, and by obtaining empirical results that offer partial support to LLSV’s conclusion. The study also puts forward alternative hypotheses, which offer better explanations of data19. This means that the article provides additional literature through the findings that are based on the additional hypotheses developed by researchers, in relation to their study. Secondly, the article provides a new longitudinal dataset on legal shareholder interest protection, through research. The article also improves the quality of data through the provision of fully sourced information on the state of law, thereby improving legal origins literature20. This makes it possible to trace the path of legal changes that have taken place, as time moves. Therefore, as readers go through this article, they are able to follow the process of legal changes, over time. This article, through the findings of the study, provides literature, which may contribute to policy making. For instance, literature provided by the article may be used to establish the effects of controls on countries’ legal origin or economic development level21. Also, through the contribution of this study, additional evidence, which implies that there is a relationship between financing of corporate growth, economic development and legal origin, which are of a complex nature, are provided. On the other hand, the contributions of this article to literature and policy making are subject to some limitations due to the nature of research. First, the research was mostly reliant on cross-sectional data22. This was because researchers could not obtain comparative time series data due to its scarcity. Therefore, this poses restrictions to the contribution that the article makes to legal literature or policy making. In addition, the ten-year period, 1995-2005, which was set out for the study is relatively short for study23. The researchers resolved to use a shorter period for the study because researchers found it extremely hard to construct an efficient indicator of legal protection of shareholders, involving long periods of time and many countries. The reason for this is that there are frequent changes in law in different countries at different times, and the difficulties in interpreting and comparing legal provisions. Therefore, the literature that the article provides is limited and may not contribute to policy making sufficiently because the findings are limited by the short period of study and the few number of countries studied. B1 Comparative legal research employs the use of comparative information about foreign legal structures for legal restructuring. It is also applied in addressing real problems of the world. We should understand and be able to assess the function and methodology applied in comparative law so that we can be able to develop a robust approach of understanding the purpose of law in different countries so as to enhance knowledge and insight. Foreign culture and law can be understood through a gathering of knowledge through comparative legal research24. Sometimes, people engage in comparative legal research with a purpose of modernising or harmonising legal regimes. It is aimed at discovering abstract notions that underlie all systems of law and can be used to build up common systems of jurisprudence25. Comparative legal research is also carried out to provide education and aid in interpreting domestic law26 . Through comparative legal research, one is able to determine the efficiency of legal systems and determine or test the extent to which such legal systems might be mutually converging or diverging27. It also aids in unification of divergent laws28. Through comparative legal research findings and recommendations, the existing law can be amended. Many situations disparities are most likely to be mitigated if appropriate, comparative legal research is carried out29. It is imperative that researchers grasp the legal styles of different systems or group of legal systems when carrying out comparative research30. In this article, comparative legal research has been carried out to establish “the functions of transparency in regulating consumer contract terms in UK and Australia”31.The main purpose of the study is to explore how far transparency can legitimise substantively unfair terms. A comparison between the UK and Australia has been done, in terms of the roles that transparency plays and the extent to which the roles are facilitated. In this case, the author sought to solve or address the real problem that exists, pertaining to contracts, both in the UK and Australia. The problem that is explored is transparency and how it determines contract terms32. The recommendations that the author of this article has made can be used to harmonise or modernise both the UK and Australian legal systems by embracing transparency and improving contract terms and performance. The abstract notions that underlie the UK and Australian legal systems in terms of transparency and performance or regulation of contracts can be understood through the analysis carried out by this article. The suggestions made by the researcher, based on his findings, can be implemented by judges, legal administrators and legislators to build up a common system of jurisprudence that can be applied both in Australia and the UK in addressing transparency and regulation of contracts.33 The author of this article has helped in providing valuable information that gives insights to the readers and other interested parties to enable them interpret the existing legal provisions for transparency and regulation of performance contracts in Australia and UK. By comparing, Australian and UK legal systems, the author is able to provide valid information about their efficiency and the extent to which these legal systems are diverging or converging34. With this information, recommendations can be made to legislators and legal administrators on how to unify the divergent laws, or amend the existing law, pertaining to transparency and regulation of contract terms, both in UK and Australia. B2 When a presumption of similarity is made, legal authorities assume that a country’s domestic law is similar to foreign law, and therefore, domestic law can be applied for cases involving foreigners, if it cannot be proved that foreign law is different.35 Therefore, different legal systems appear to provide solutions in the same way. Comparative legal systems are expected to find similar solutions to similar problems, in similar circumstances. Presumption of similarity is formulated as a point of departure unless proof of foreign law is introduced. For instance, English law applies when it is assumed that the foreign law at stake is similar to English law. Foreign law should be considered and treated as a fact containing provision that must be proved in evidence. In cases where evidence is lack to prove that foreign law states otherwise on a given issue, it may be assumed that foreign law is similar to English law. However, in some cases, the presumption is inapplicable. English courts have refused, in numerous cases, to apply the presumption in making judgements because fairness requires them to pay full consideration to any issue of foreign law at trial. There are objections when foreign it appears that foreign law is relied upon, but no further proof is delivered. It is worth to note that the presumption of similarity remains firmly as part of the English private international law36. The common law system based foreign law is the only law that can be presumed as English law. Separately, presumption of difference encourages the recognition and appreciation of the differences that are exhibited by different legal systems. The presumption of difference is not used commonly as the presumption of similarity. Therefore, according to the presumption of difference, different legal systems apply different statutes in resolving legal matters. There should be full consideration of issues that relate to different legal systems, and it should not be assumed that the provisions of one legal system can be applied in resolving legal issues pertaining to another legal system. Different legal system issues should be treated with evidence. In this methodological debate the author stands for the presumption of difference, and not for the presumption of similarity. This is because the study was carried out to comparatively explore the level of legitimisation that transparency is capable of impacting on substantively unfair terms in UK and in Australia. The author also sought to find out other roles that transparency plays and the scope to which such roles are enhanced in the UK and Australia. For instance, the author states that European Union law may have affected UK law positively leading to advancement, unlike what is witnessed in Australia37. Also, in the UK, legitimisation of substantively unfair terms by transparency is unstable and cannot be determined with certainty, compared to Australia, where there has been change over time, and it seems that transparency is likely to legitimise substantively unfair terms, with a small degree of uncertainty. Another comparison that the author has made in his study is that of the transparency of terms that are used in Australia and UK voluntarily. For instance, the Victorian provision has been abolished, in the new Federal Law, there is no provision that is equivalent to the repealed provision. On the other hand, in UK, regulatory practice requires terms to be transparent in hire-purchase contracts, adequate disclosure of the consumer’s right to terminate the contract should be made. Also, there should be sufficient disclosure on the right of creditors to repossess goods under protection38. In Australia, adequate disclosure is required on credit legislation of some consumer statutory rights. B3 The author made a choice on two jurisdictions, UK and Australia. This choice was appropriate for comparative legal research, though there are trivial deficiencies. These two jurisdictions have many aspects in common, and this can be used as an appropriate foundation for comparison. To begin with, English is the national language that is used both in UK and in Australia, facilitating an easier collection of information by researchers. Choosing jurisdictions whose national languages could have led to spending of more time and funds in carrying out the research because translation could have been included in the process. Australia and the UK are both common law systems because one is a former colony of another. Therefore, the law used in these jurisdictions has been developed using precedent and case law, as developed by judges. The Australian federal constitutional law is a complex amalgam of British and American elements39. Australia follows the UK’s legal approach in addressing legal matters because the UK law provides a national model for Australia40. Therefore, these two jurisdictions share a majority of legal principles. The development of law in these two jurisdictions does not rely on existing primary legislation. In both countries, the legislature is the sole body with the authority to make law. It should be noted that it is the British Parliament that agreed on the “Commonwealth of Australia Constitution Act 1900 (UK)”, which created the “Commonwealth of Australia”. Therefore, states such as Australia can only legislate on matters that have not been covered by Commonwealth41. Administration under the Australian scheme is similar to the culture of UK corporate law in its juridiction42. On the other hand, there are significant constraints that Australian legislation imposes on freedom of contracts, which are not present in the UK legislation43. For instance, in the UK, parties to a contract can define their own adjudication scheme. The parties can also nominate their own adjudicator, which is normally not the case in Australia. Also, the laws that states had the power to legislate have led to a significant difference between Australian law and law in the UK44. However, the author’s choice of the aforementioned, two jurisdictions is subject to some limitations in achieving the objective of the study. Given that this was a comparative legal research, the main goal should be to find establish differences in legal systems and provide recommendations for future unification of legal systems. This may not be possible with this research because the author chose to compare Australia and the UK. These two countries share significant similarities in their legal systems. Therefore, it is most likely that the differences ascertained by the study may not be significant enough to enable the researcher to draw inferences. Secondly, these legal systems cannot represent all the legal systems in the region. B4 This article embodies both prescriptive and descriptive legal scholarships. This is because descriptive legal scholarships seek to describe legal doctrines, as they exist. From this article, readers are able to learn about the existing legal doctrines and discover relationships, that is differences and similarities that exist between two legal systems. The article provides adequate information pertaining to the applicable statutes and rules in these two legal systems, Australia and the UK45. These are the important rules that legal practitioners and administrators should adhere to. For instance, the author points out that law commissions in the UK have proposed that there should be an integrated regime that should replace the Unfair Terms in Consumer Contracts Regulations. Statutes such as the New South Wales Contracts Review Act, the Victorian Fair Trading Act and various significant rulings, which are applicable in the Australian legal system have been mentioned and described in this article46. The statutes and judgement described in this article will provide readers with insights about what is given consideration during the ruling of cases, in either of the two countries, the UK and Australia, which are under study. The description of the current law in the UK and that of Australia is, in itself, descriptive legal scholarship. On the other hand, prescriptive legal scholarships are meant to provide recommendations to legal administrators, legislators and law interpreters. In some cases, prescriptive legal scholarship merely offers a recommendation, with no comment about an existing decision. However, most often, prescriptive legal scholarship combines a critique of an existing legal decision with a prescription for a different approach, which may be general or specific. At times, prescriptive legal scholarship suggests that the decision makers of the existing legal decision did exactly the right thing. The author carried out this study with the sole aim of making some recommendations on how contract terms and relevant law can be unified. The legal principles that should be followed by interested parties such as judges, legislators and legal administrators have been suggested. For instance, the author has recommended that there is a need to for including clear transparency in the legislative test in both jurisdictions by amending the tests. People should also be made to understand that transparency alone is insufficient in legitimising a substantively unfair term. This is possible because it does not reflect the intentions of legislators. The author also suggests that all terms used voluntarily should be transparent, and this improvement can be achieved by referring to the models in ‘The European Commission’s Common Frame of Reference’. As far as legal rights of consumers are concerned, the author recommended that both UK and European Union based ‘misleading omissions’ concept should be used, as it offers a superior groundwork for focusing transparency which related to legal rights. This is better than the ‘misleading practice‘concept used in Australia47. These recommendations in the research article are a characteristic of prescriptive legal scholarship. Prescriptive legal scholarship is also referred to as the standard legal scholarship and it is defined as work which frames recommendations or prescriptions for legal decision makers48. It should be noted that prescriptive legal scholarship involves critiquing of existing judicial decisions, constitution, statute or regulation, and provides a recommendation to the legal decision maker that she or he should act differently. Read More