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Shareholder Protection in the USA and Germany - On the Fallacy of LLSV

By Udo C Braendle
Read the Full Contribution as a PDF

A.  Introduction

Though Company Laws of the United States and Germany have much in common, they are opposite in many important ways. While the Anglo-Saxon Law derives from Common Law, German Law has its origin in the Civil Law.

La Porta et al. are not the only ones highlighting that the quality of shareholder protection varies across different jurisdictions depending on which legal system family the jurisdiction belongs. Pistor and Siems went a step further, highlighting that variations in market systems are explainable by more fundamental factors than law, like differences in the underlying ground rules.

The thesis of La Porta et al. is clear: As “law matters” and Common Law countries are offering better shareholder protection than Civil Law countries, the latter should encourage changes towards an Anglo-Saxon approach. This contribution presents a criticism on this thesis.

The rest of the paper is organized as follows: in section B. I will summarize the differences between the main legal traditions, since they influence the shareholder protection of a jurisdiction. Section C.introduces the law matters thesis of LaPorta et al. (hereafter: LLSV) and highlights its importance in economic as well as legal literature. The results of their Law and Finance article emphasize the better shareholder protection of Common Law countries. The existing criticism on and the impact of the article is reviewed. In section D. I reconsider the index for Germany and the United States, two typical representatives of their legal families. By scrutinising the legal provisions of the two countries I will illustrate the weaknesses and pitfalls of the LLSV index.

Germany would score much better on the index if one bothers analyzing the German company law. Moreover, I am pointing out inconsistencies in the judgment of the USA and Germany. After this exercise the differences between Common and Civil Law in terms of shareholder protection seem to be far less significant than LLSV propose, if at all, which will be part...