- •Contents
- •Preface
- •Table of legislation
- •Table of cases
- •Introduction
- •1.1 Convergence
- •1.2 Path-dependence
- •1.2.1 Politics
- •1.2.2 Economics
- •1.2.3 Culture
- •1.2.4 Social and commercial norms
- •1.2.5 Legal mentalities
- •1.3 Functional convergence
- •1.4 Summary of the analysis
- •2 Paper transfers
- •2.1 The historic starting point
- •2.2 Law and equity
- •2.3 Legal title and registration
- •2.4 Equitable title
- •2.4.1 Equity and transfers of registered securities
- •2.4.2 Legal nature of an equitable (beneficial) interest
- •2.4.3 Acquisition of an equitable (beneficial) interest
- •2.4.4 Equitable title and specific performance
- •2.4.4.1 Enforceable contract
- •2.4.4.2 Claimant must be ready and willing to perform
- •2.4.4.3 Specific or ascertained assets
- •2.4.4.4 Damages are an inadequate remedy
- •2.4.4.5 Conclusions
- •2.4.5 Equitable title on appropriation of securities and payment of purchase price
- •2.4.6 Equitable title on delivery of transfer documents
- •2.4.7 Express trusts
- •2.4.8 Conclusions
- •2.5 Summary of the analysis
- •3 Dematerialisation
- •3.1 Talisman
- •3.2 The need for reform
- •3.3 CREST
- •3.3.1 Introduction
- •3.3.2 Legal title
- •3.3.3 Equitable title
- •3.3.4 Conclusions
- •3.4 The 2001 reforms
- •3.4.1 Introduction
- •3.4.2.1 Effect of entries on registers: shares
- •3.4.2.2 Effect of entries on registers: public sector securities, corporate securities other than shares
- •3.4.2.3 Conclusions
- •3.4.3 Legal title
- •3.4.4 Equitable title
- •3.4.5 Conclusions
- •3.5 Summary of the analysis
- •4 Impact on the institutional framework
- •5 Defective issues
- •5.1 Introduction
- •5.2 Novation
- •5.2.1 Novation by operation of law
- •5.2.2 Novation by contract
- •5.2.3 Novation as a fiction
- •5.3 Defective issues and estoppel
- •5.4 Securities as negotiable rights
- •5.5 Summary of the analysis
- •6 Unauthorised transfers
- •6.1 Introduction
- •6.2 Certificated securities and estoppel
- •6.2.1 Restoration of the legal owner’s name on the register
- •6.2.2 Liability of the issuer
- •6.2.3 Liability of the person who instructed the issuer to amend the register
- •6.2.4 Conclusions
- •6.3 Uncertificated securities and estoppel
- •6.3.1 Restoration of the legal owner’s name on the register
- •6.3.2 CRESTCo’s liability for forged instructions
- •6.3.3 Liability of the issuer
- •6.3.4 Securities as negotiable rights
- •6.3.5 Conclusions
- •6.4 Summary of the analysis
- •7 Indirect holdings
- •7.1 Introduction
- •7.2 Certainty of intention
- •7.3 Certainty of subject matter
- •7.3.1 Tangible goods
- •7.3.2 Registered securities
- •7.3.3 Analysis
- •7.3.3.1 Academic commentators
- •7.3.3.2 US authority
- •7.3.3.3 Policy considerations
- •7.3.3.4 Law reform
- •7.3.4 Conclusions
- •7.4 Summary of the analysis
- •8 Conclusions on English law
- •9 The historic starting point
- •9.1 Securities as intangibles
- •9.2 Shortcomings of the law of assignment
- •9.3 Theories overcoming the law of assignment
- •9.3.1 Nature of the instrument
- •9.3.2 Contract
- •9.3.3 Transfer by novation
- •9.3.4 Conclusions
- •9.4 Securities as tangibles
- •9.5 Summary of the analysis
- •10 Paper transfers
- •10.1 Transfer of ownership
- •10.1.1 German Law
- •10.1.2 Austrian law
- •10.1.3 Conclusions
- •10.2 Unauthorised transfers
- •10.2.1 Introduction
- •10.2.2 German law
- •10.2.3 Austrian law
- •10.2.4 Conclusions
- •10.3 Defective issues
- •10.3.1 German law
- •10.3.2 Austrian law
- •10.3.3 Conclusions
- •10.4 Summary of the analysis
- •11 Impact on the institutional framework
- •11.1 Indirect holdings
- •11.2 Immobilisation
- •11.3 Global certificates
- •11.4 Government bonds
- •11.5 Summary of the analysis
- •12 Immobilisation and its legal analysis
- •12.1 Genesis of the statutory regime
- •12.1.1 1896 German statute
- •12.1.2 Depotgesetz 1937
- •12.2 Relationship between clients and their intermediary
- •12.3 Co-ownership
- •12.4 Transfer of co-ownership
- •12.4.1 Introduction
- •12.4.2 Depotgesetz
- •12.4.3 German property law
- •12.4.4 Global certificates and Government bonds
- •12.4.5 German Government bonds
- •12.4.6 Austrian law
- •12.4.7 Conclusions
- •12.5 Unauthorised transfers
- •12.5.1 German law
- •12.5.2 Austrian law
- •12.5.3 Conclusions
- •12.6 Defective issues
- •12.7 Summary of the analysis
- •13 Evidence of convergence?
- •16 Legal doctrine and market infrastructure
- •17 Implications for convergence
- •17.1 UNIDROIT draft Convention
- •17.2 EU Legal Certainty Project
- •Select bibliography
- •Index
7Indirect holdings
7.1 Introduction
In England, an investor can hold securities in one of three principal ways. Firstly, she can hold the securities in her name in certificated form. In that case, her name is on the securities register; she receives a paper certificate and is considered to hold legal title to the securities.
Secondly, an investor can hold securities in her own name, but in uncertificated form. To be able to hold securities directly in uncertificated form, an investor needs to become a participant of CREST. There are two ways of participating in CREST – by becoming a user or by appointing a sponsor who is a user. The difference between the two is that users have a computer link with CREST. A user needs to acquire the hardware and software necessary to connect to the network. Participants who are not users do not have such a computer link, but access the system through a sponsor who has network access and acts in the name of the participant.1 The later form of participating in CREST is also referred to as ‘personal membership’.2 In both cases the investor’s name appears on the securities register and the investor holds legal ownership to the securities.
Thirdly, an investor can opt to have the securities held by an intermediary on her behalf; in that case, the securities are held indirectly. The investor does not hold legal title to the securities and the name of the intermediary or a nominee company appears on the securities register. There are two standard ways in which intermediaries hold securities for clients. The first is for the intermediary to hold the
1CREST Manual (07.12.2004) 1–2–3–1–2–5.
2CRESTCo, Personal Membership in CREST (February 2000), http://www.crestco.co.uk/ publications/fact_sheets/pm_facts.pdf (last visited 14 November 2006).
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securities in a manner which makes it possible for specific securities to be attributed to individual clients. This method of holding client securities requires a higher level of administration on the part of the intermediary and is therefore frequently associated with a higher level of service charges. The second way of holding securities indirectly is for the intermediary to hold securities on behalf of several clients and without allocating specific securities to individual clients. If securities are held on an unallocated basis, they are sometimes referred to as being held in a ‘pooled account’ or in an ‘omnibus account’. Holding client securities on an omnibus basis is frequently cheaper than holding them on an allocated basis.
The legal position of an investor holding securities directly either in certificated or in uncertificated form was analysed in chapters 2–6. In this chapter, the legal position of investors holding securities indirectly through an intermediary will be examined.
Irrespective of whether securities are held through an intermediary on an allocated or on an unallocated basis, it is important to determine the circumstances in which clients hold a proprietary interest in the securities held on their behalf. In order to determine if an investor enjoys property rights in indirectly held securities, we need to embark on a path-dependent enquiry and examine the English rules on equitable ownership. The conclusion of section 2.4 was that equitable ownership arises when a trust has been created. A trust comes into existence by operation of the law (constructive trust) or as a result of an express declaration (express trust). Trusts that arise by operation of law have been analysed in section 2.4 and in subsections 3.3.3, and 3.4.4. The purpose of this chapter is to focus on express trusts that are established for the benefit of clients who wish to hold securities indirectly.
Before the circumstances in which an express trust arises are analysed it is helpful to remind ourselves of the some of the characteristics of trusts. It has already been noted that English property law has adopted two concepts of ownership, ownership at law and ownership in equity.3 When a particular asset is held on trust, the trustee holds legal title to the asset and the beneficiary holds equitable title to the asset. The analysis is slightly modified when securities are held indirectly through a chain of intermediaries. In those circumstances the intermediary with whom the ultimate investor has its immediate relationship does not hold legal title to the securities. Instead, that
3 See section 2.4.2.
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intermediary holds equitable title to securities held on its behalf by another intermediary. The ultimate investor holds equitable title to the entitlement created in favour of its immediate intermediary.
When securities are held indirectly, the intermediary acts as a trustee and the investor acts as the beneficiary. As a result in English law, unlike in German or Austrian law, intermediaries have a property interest in the securities that they hold on behalf of clients. This property interest is, however, subject to the client’s equitable property interest. The equitable interest continues to exist even if the securities are sold by the intermediary without the client’s authority. It is extinguished only if a third party acquires the securities in good faith and for value. The investor’s equitable interest also has priority in the intermediary’s insolvency and prevails over claims raised by the intermediary’s general creditors. It will be shown below that, using different legal doctrine, German and Austrian law achieve a similar level of protection for investors holding securities indirectly as in English law.4
For an express trust to arise under English law, three requirements need to be satisfied. These requirements are also referred to as the ‘three certainties’. The first one is certainty of intention. The second one is certainty of beneficiary. The third one is certainty of subject matter. Certainty of beneficiary does not usually cause a problem in the context of securities markets5 and will not be discussed further in this book. The following sections will focus on certainty of intention and certainty of subject matter, respectively.
7.2 Certainty of intention
Consistently with the path adopted by English law, the requirement for certainty of intention focuses on the intention of the intermediary holding the securities. The intention can be inferred from an express provision to that effect in the documentation underlying the relationship between the intermediary and the client; it can also be inferred from the fact that the parties clearly intended that the client’s assets should form a separate fund in the hands of the intermediary.6 There is no requirement for the client to consent to the creation of a trust. Even if the client will in most cases have requested, or at least consented to,
4See section 12.3.
5Joanna Benjamin, Interests in Securities (Oxford: Oxford University Press, 2001) 2.42.
6Benjamin, Interests in Securities 2.41.