Creating

PROTECTING INVESTORS 43
TABLE 7.6
Who makes it easiest to bring shareholder suits—and
who most difficult?
Easiest
New Zealand
Kenya
Singapore
Canada
Israel
United States
Ireland
Mauritius
Colombia
Nepal
Most difficult
United Arab Emirates
Albania
Venezuela
Vietnam
Afghanistan
Syria
Morocco
Algeria
Iran
Tanzania
Note: Rankings are on the ease of shareholder suits index. See the Data notes for details.
Source: Doing Business database.
can enforce. Even the best rules are useless if enforcement
is weak. 6 Some transition economies have adopted
strong company or securities laws. But in the Kyrgyz Republic
and Moldova, for example, no cases of minority
investor abuse have ever been resolved in the courts. And
neither country has managed to maintain an active stock
market. Nepal also has strong protections on the books
(see table 7.6), but these are rarely invoked and equity
markets are nascent.
As in any other commercial dispute, the speed, cost
and fairness of judgment determine whether small investors
will resort to the courts. Potential expropriators
know this as well and calculate the risk of being caught
and punished. In countries like New Zealand and Singapore,
where courts perform well, less abuse of investors
is seen (figure 7.4).
Why reform?
Poor investor protection means less equity investment. 7
If the rights of investors are not protected, majority ownership
in a business is the only way to eliminate the risk
of expropriation of their investment. But few entrepreneurs
would agree to have their business controlled by
someone else. Those who do have less incentive to work
hard, because the payoffs from success go to someone
else. Meanwhile, investors must devote more oversight to
fewer investments. The result: entrepreneurship is suppressed,
and fewer profitable projects are undertaken.
A recent study of private equity transactions finds