Indirect Investor Protection: The Investment Ecosystem and Its Legal Underpinnings

This paper argues that the key mechanisms protecting portfolio investors in public corporate securities are indirect. They do not rely on actions by the investors or by any private actor charged with looking after investors’ interests. Rather, they are provided by the ecosystem that investors (are legally forced to) inhabit, as a byproduct of the self-interested, mutually and legally constrained behavior of third parties without a mandate to help the investors such as speculators, activists, and plaintiff lawyers. This elucidates key rules, resolves the mandatory vs. enabling tension in corporate/securities law, and exposes the current system’s fragile reliance on trading.

Keywords: Investor Protection, Index Funds, Market Efficiency, Activism, Activist Hedge Fund, Private Equity, Plaintiff Lawyers, Contractarian Model of Corporate Law, Mandatory Law

JEL Classification: G34, G38, K22

Suggested Citation: Suggested Citation

Spamann, Holger, Indirect Investor Protection: The Investment Ecosystem and Its Legal Underpinnings (June 20, 2021). 14 Journal of Legal Analysis (2022), Harvard Law School John M. Olin Center Discussion Paper No. 1046, European Corporate Governance Institute - Law Working Paper No. 594/2021, LawFin Working Paper No. 18, Available at SSRN: https://ssrn.com/abstract=3707249 or http://dx.doi.org/10.2139/ssrn.3707249