Robust legal protections for shareholders play a vital role in strengthening the competitiveness of the listing venue and wider capital markets in a number of ways. First, they give investors’ confidence that the market is comprised of well-run companies that believe they can comply with legal requirements. Second, they support investors’ ability to engage with companies effectively, as the right to legal recourse means that there is an ultimate form of escalated engagement if all other engagement fails. Third, they ensure that investors’ capital is protected when an egregious corporate governance failure occurs.
Legal protections as a signal of market integrity
When shareholders have a right to legal recourse against companies, this creates a credible deterrent against corporate wrongdoing. This deterrent sends a powerful signal that participants in that market are held to high standards and accept accountability. This lowers the risk premium associated with an investment in this market and means that investors should be more willing to commit their capital.
Legal protections as a stewardship tool
From a stewardship perspective, the right to legal recourse underpins the stewardship ecosystem because it means that litigation can be used as a tool of last resort when all other forms of engagement have failed. When a serious corporate governance failure has occurred and other remedies have been exhausted, investors have enforceable rights to bring companies and directors to justice and uphold market discipline. This reinforces the effectiveness of all other shareholder engagement.
Legal protections as a capital recovery mechanism
Accessible shareholder rights to recourse also mean that, where a company has misled the market, committed fraud, or failed to uphold corporate governance standards, investor capital is protected. This means that investors can invest with confidence that it will be possible to recover their capital through legal recourse if necessary.