8Conclusions on English law

Part I of the book analysed the English law of securities. English securities are issued predominantly in the form of registered securities. They do not constitute negotiable instruments. Securities certificates are documents of evidence only. When securities first appeared in England they were transferred by way of novation. This doctrinal mechanism has sent English law down a path on which it has remained since then. The transfer procedure that was in place when securities first emerged reflects the law of novation and has shaped transfer procedures that have been adopted ever since, all the way down to the rules that govern uncertificated securities.

In England, property rights in securities are deeply imbedded in the path adopted by English private law. England approaches property rights in securities from the perspective of its historically determined dual-headed jurisdiction at law and in equity. An investor becomes the owner at law when her name is entered on the securities register. It is possible for an investor to acquire equitable title to the securities prior to that; equitable title, however, vests in the buyer only if a trust is created in her favour either by operation of law or by an express declaration. Neither ownership at law nor ownership in equity are enforceable through an action that would establish that the claimant has absolute title to the securities. Property rights in England are established only as between the parties who participate in the respective litigation.

When paper certificates became too cumbersome to handle, the English securities market opted for dematerialisation of securities. The form in which this dematerialisation was carried out shows the influence of the legal doctrinal tools that had been in place prior to dematerialisation. Nevertheless, dematerialisation has caused English

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law to become more like German and Austrian law, albeit at a functional rather than a doctrinal level.

English legal doctrine has also had an impact on the type of service provider that has emerged in the English securities market. The procedural steps that need to be taken to transfer securities and that have been shaped by the law of novation have faciliated the emergence of registrars who maintain securities on behalf of issuers in the English market.

Investors are traditionally protected against defective issues in English law through the doctrine of novation and the doctrine of estoppel. It is difficult to see how both doctrines operate in the context of modern uncertificated transfers. That is, however, a matter for the courts to resolve and they will do so consistently with the path adopted by English law.

English legal doctrine protects investors against unauthorised transfers through the law of estoppel. Similar to the situation in relation to defective issues, it is not clear how, if at all, the traditional rules apply to uncertificated transfers. Nevertheless it is fair to conclude that the courts will develop the law consistently with the principles put in place by incumbent English legal doctrine. In addition to the rules on estoppel, the regulation governing uncertificated securities put in place rules on unauthorised transfers that supplemented the common law. The changes that appear to have occurred as a result of the implementation of the new transfer regime have caused English law to become more like German and Austrian law. These similarities, however, have also occurred at a functional rather than a doctrinal level.

England uses trust as the doctrinal tool to protect investors who hold securities indirectly through intermediaries. Investors who hold securities indirectly under English law acquire property rights in these securities if a trust is established for their benefit. The current position is that investors hold proprietary rights even if securities are held on a commingled basis in pooled or omnibus accounts. A law reform confirming this position has been proposed, and again, the protection afforded by English law is functionally but not doctrinally similar to the protection available under German or Austrian law.

After this analysis of English law, the German and Austrian law of securities will be examined in part II of the book. As with the analysis of English law, the discussion on German and Austrian law will at first focus on the historical background of the law of securities in both

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jurisdictions. After that, the current theory underlying securities and their transfers in German and Austrian law will be examined, including defective issues and unauthorised transfers. Paper transfers will be addressed first. Transfers that are effected without the need to move paper documents will then be analysed.

P A R T I I

German and Austrian law

In German and Austrian law most securities are issued in the form of bearer instruments1 and these instruments are considered to be tangibles. The underlying theory in modern German law is that securities certificates are paper documents of a very special type. The right to which the paper document relates materialises in the document and can therefore be transferred according to the rules governing tangibles. If the paper document is transferred, the buyer not only acquires title to the paper, but also becomes entitled to the right to which the paper relates. The German-language term for German securities is ‘Wertpapier’ and is used in both German and Austrian usage. The word ‘Wertpapier’ literally means ‘paper of value’ and the term refers to the fact that the document relating to the security embodies a valuable right. The term is also designed to reflect the theory underlying German and Austrian securities, that the rights to which the securities certificate relates and the certificate merge and become one tangible asset. As a result, securities, their transfers and indirect holdings of securities are all subject to the rules governing tangible assets.

The analysis adopted by modern German and Austrian law, however, emerged only some time after securities were first issued. In chapter 9, the historic starting point and the development that led to the modern German theory will be examined. First, the rules governing securities when they emerged will be analysed (section 9.1). It will be shown that securities were at the time classified as debt and that transfers of securities were analysed in terms of assignment. The law of assignment, however, had significant disadvantages, examined in section 9.2. To overcome them, legal scholars propounded several theories during the

1 Some companies have now replaced bearer shares with name shares (see chapter 13).

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first half of the nineteenth century, analysed in section 9.3. The theory that developed into the modern German orthodox view was originally put forward by Friedrich Carl von Savingy, who advanced the view that securities were to be classified as tangibles (section 9.4). Savigny’s theory, however, became generally accepted only after the German and Austrian law of tangibles had adopted certain doctrinal rules. The conclusion of chapter 9 will be that Savigny’s view became generally accepted only after the doctrinal framework of all the states of Germany and also Austria had implemented a rule that protected the purchaser of tangibles against adverse claims. The modern German approach did not develop as a theory that would be independent of the legal rules that were in place in other areas of the law and it rests firmly on certain rules governing the law of tangibles.

In chapter 10, the rules governing securities in modern German and Austrian law will be analysed. It will be shown how the law of tangibles is applied to securities and their transfers in both German and Austrian law and the analysis will focus on securities which are not held with intermediaries. The German and Austrian rules will also be compared to the English rules, followed in section 10.1, by those governing the transfer of ownership. After that the rules governing unauthorised transfers and defective issues will be examined (section 10.2 and section 10.3, respectively).

Chapter 11 deals with the impact of the legal analysis of securities and the doctrinal rules governing their transfers on the institutional setup of German and Austrian market infrastructure. It will be shown that in both Germany and Austria securities depositories have emerged as the prevailing type of service provider assisting clients who wish to hold securities indirectly. The analysis contained in chapter 11 will lead to two conclusions. The first is that the rules governing securities and their transfer – in particular the rule protecting the purchaser against adverse claims – facilitated the development of this particular type of service provider in the German and the Austrian market (section 11.1). The second is that the fact that securities are governed by the rules on tangibles has inspired Germany and Austria to eliminate paper from the transfer process by way of immobilisation rather than by way of dematerialisiation (section 11.2).

In chapter 12 the legal position of investors holding securities indirectly through intermediaries will be analysed. It will be shown that in German and Austrian law the law of bailment is applied in order to enable investors to create property rights in indirectly held securities. In

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order to facilitate indirect holdings, German and Austrian law have also developed a sophisticated doctrine of co-ownership and co-possession. This particular form of doctrinal analysis has emerged in both Germany and Austria because securities have become classified as tangible movables. This legal analysis provides the normative framework within which the securities market, and the legal rules supporting it, have developed. The analysis impacted on the way in which paper was eliminated from the transfer process, notwithstanding the fact that Germany had implemented an alternative transfer system for Government bonds which could have served a model for creating a paperless transfer system.

Chapter 13 offers an analysis of the emergence of name shares in the securities market practice and it will be concluded that this is an example of functional rather than doctrinal convergence.