Legal Origins, Investor Protection, and Canada

In Legal Determinants of External Finance, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny (“LLSV”) argue that the reason that some countries have bigger capital markets than others can be traced to the legal origin of the country, i.e. whether it is a common law or a civil law jurisdiction. This paper explores the LLSV thesis in the context of Canada, which is a common law jurisdiction that also is home to Quebec which has a civil law tradition. Three issues are examined in this paper: first, how and why Canada fared relatively well in the recent financial crisis; second, why Canada has not yet created a national securities regulator; and third, how Quebec, a civil law jurisdiction, operates within an overarching common law framework, and the implications of this cross-fertilization of systems. These three issues are explored by examining the development of various investor protection laws and structures over time in Canada (as opposed to examining investor protection laws at a point in time, as the LLSV studies do), and also by providing context to explain why certain rules and structures have been adapted and others, while economically efficient, may have been rejected. In Canada, as in many other jurisdictions, securities laws and securities structure have an impact on investor protection, as do banking laws and the banking regulatory framework and business culture. Not all investor protection mechanisms are located in the corporate statutes, as LLSV assumes. LLSV did not explore securities law rules, securities law structures, or banking laws. As well, the Canadian system is both structured in such a way and has evolved in such a way that investor protections are fairly consistent between the common law and civil law provinces, even when the civil law statute does not necessarily mimic the common law statute