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what was termed ‘delegation’.36 The issuer, when first issuing securities, took upon himself two sets of obligations. He promised to pay the bearer a sum of money specified in the document; he also gave the first bearer and any subsequent bearer an irrevocable power of attorney to agree on his behalf to pay the sum of money promised to any subsequent buyer. As a result, a transfer of securities did not involve an assignment of an obligation and transfers were rather carried out by way of novation. When securities were transferred the seller was deemed to act in two capacities. He would on his own behalf agree to give up his entitlement and to transfer it to the buyer. The seller would also exercise the power of attorney and agree on the issuer’s behalf to pay the buyer the amount for which the security was issued.

The theory identified a way of avoiding the rules on assignment. It suffered, however, from the same flaw as the theory discussed in the subsection 9.3.2. Like the previous theory, it had the disadvantage that it could not rely on documentation containing explicit terms providing for a power of attorney for the benefit of the bearer or containing an agreement between the issuer, the seller and the buyer upon transfer of the securities.

9.3.4 Conclusions

The three theories analysed in subsections 9.3.1–9.3.3 are evidence that the law of assignment was, in principle, considered to apply to securities transfers and that that was considered to have significant shortcomings. The rules on assignment were perceived by the legal community as a hindrance to market practice. Several prominent scholars suggested ways in which these deficiencies could be overcome but none of the theories proved to be influential in the long term. What became the modern theory appeared in the mid-nineteenth century and will be examined in section 9.4.

9.4 Securities as tangibles

The solution that developed into the modern orthodox view was put forward by Friedrich Carl von Savingy.37 He began by analysing

36Unger, Die rechtliche Natur der Inhaberpapiere 87–120, 149.

37Savigny is widely considered to have developed the theory that later came to be known as ‘Verko¨rperungstheorie’: Heinrich Brunner, in Wilhelm Endemann (ed.), Handbuch des deutschen Handelsrechts, vol. II (Leipzig: Fues’s Verlag, 1882) 143; L. Goldschmidt, System des Handelsrechts, 4th edn. (Stuttgart: Verlag von Ferdinand Enke, 1892) 165; Dorothee Einsele, Wertpapierrecht als Schuldrecht (Tu¨ bingen: J. C. B. Mohr (Paul Siebeck), 1995) 5.

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securities in terms of the German common law – that is, the legal rules that applied in the German territories before the civil codes were implemented. He concluded that German common law could not enforce contracts giving rights to an unascertained creditor such as the bearer of the document evidencing the entitlement.

Savigny also thought that classifying the process whereby securities were transferred as an assignment would have the disadvantage that the buyer would not be protected against adverse claims. He expressed the view that the widespread use of the instruments and the practical need for transferability led the law to recognise that the instruments and their transfer were governed by special rules that did not involve the application of the law of assignment.

Savigny proposed that the rules on assignment could be avoided by accepting that custom had created new law: commercial practice had caused the law to recognise a new legal method for the transfer of obligations. This method used paper certificates issued to the bearer for the transfer of certain obligations. The form so developed made it possible for the law to apply the rules governing the transfer of tangibles to the transfer of obligations and thereby to avoid the disadvantages of assignment.38

Savigny’s approach was motivated by the insight that securities required special transfer rules. It is important to note that the theory provides a satisfying explanation of the special rules governing securities only in the context of a particular doctrinal framework. It does not provide an explanation that could be applied in a jurisdiction that does not have rules protecting the bona fide purchaser of tangibles against adverse claims.

When Savigny’s theory was first formulated Austria and Prussia had a general rule on the good faith acquisition of tangibles and one on the good faith acquisition of bearer securities. In both jurisdictions, the theory helped explain why obligations evidenced in bearer securities received the same preferential treatment as tangibles. The theory also worked in German states which had no rules protecting the bona fide buyer of securities, but did have rules protecting the bona fide buyer of tangibles. Applying the theory made it possible to justify the application of the rules on tangibles to securities but it did not work for those jurisdictions which had no such rule.

38Savigny, Das Obligationenrecht als Theil des heutigen ro¨mischen Rechts, vol. II (Berlin: Bei Veit und Comp, 1853) 97–100.

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As a result, when it was first formulated the theory was not universally accepted in all German states. This hypothesis is supported by the discussion that took place in the committee that drafted the General German Commercial Code (Allgemeines Deutsches Handelsgesetzbuch) which came into force in 1871 and was written to be implemented in all German states and in Austria.39 It was also drafted with a view to suiting the needs of those states who were not governed by the ALR or the ABGB. As usual in German and Austrian legal systems, the discussions of the drafting committee were officially recorded and published and unlike English explanatory notes these protocols were considered to be authority for the interpretation of the code.

The protocol reveals that the drafting committee discussed whether to insert a provision in the code that would classify securities as tangible goods which would have implemented the view put forward by Savigny and other academic commentators. The draftsmen decided against doing this because not all German states that were going to adopt the General German Commercial Code of 1871 (HGB) contained rules protecting the bona fide purchaser of tangible goods. Because such a purchaser of tangibles could not rely on a rule providing for the good faith acquisition of title in all German states, the theory that securities were tangibles was rejected. It would not have achieved the desired result; in those states where tangibles could not be acquired in good faith, the purchaser of securities would, like the purchaser of tangibles, have been subject to adverse claims. This was considered to be ‘highly inappropriate’ (‘ho¨chst bedenklich’).40 Rather than classifying securities as tangibles and thereby adopting the modern orthodox theory of securities, the draftsmen of the HGB went on to insert a provision that provided for the good faith acquisition of title to tangibles in general and of title to securities in particular. The purpose of specifically stating that securities were subject to the good faith acquisition rule was to protect purchasers against adverse claims irrespective of whether securities were classified as tangibles or as intangibles. The appearance of this rule in 1871 in all German states and in Austria coincided with Savigny’s theory becoming the prevailing view. Whether or not there is

39L. Lutz (ed.), Protokolle der Kommission zur Beratung eine allgemeinen deutschen Handelsgesetzbuches (Wu¨ rzburg: Verlag der Stahel’schen Buchund Kunsthandlung, 1858) 432.

40Lutz, Protokolle 432, 440.

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a causal link between the two we can observe that, by the end of the nineteenth century, the modern theory had become generally accepted.

The theory contends that rights issued in the form of securities are transformed from intangibles to tangibles upon issue of the securities. Classifying securities as tangibles helps to explain the rules by which they are governed. The metaphor that the rights materialise in the paper document operates as a theoretical explanation why the transfer of securities is not effected by way of assignment, but rather (like the transfer of tangibles) by way of delivery of the asset. The theory also helps to explain why the bona fide purchaser of securities is protected against adverse claims whereas the assignee of debt is not.

The theory became the basis upon which modern German law was drafted. The rules on securities and their transfer which are contained in the ALR/BGB reflect this theory and they will be analysed in chapter 10. In contrast, the Austrian rules on securities and their transfer were adopted in 1811 which was well before the modern theory had established itself. Securities and their transfers, as we have seen, are regulated in the section of the law on assignment in the ABGB. Notwithstanding this, modern Austrian law adheres to the theory because it helps to explain why securities, even though they are regulated in the context of the law of assignment, are not subject to the rules on assignment. It also explains why the purchaser of securities is protected by the ABGB against adverse claims arising out of unauthorised transfers whereas the assignee is not. Austrian law will be analysed alongside German law in chapter 10.

9.5 Summary of the analysis

Sections 9.1–9.4 show that German and Austrian legal doctrine struggled for the better part of the nineteenth century to find a generally accepted theoretical explanation for the rules governing securities. The problem was that the rules on assignment which were considered to govern securities and their transfer did not fully satisfy the needs of market participants in relation to securities transfers. Legal scholars tried to find a way through which the obstacles provided for by the law of assignment could be overcome.

A generally accepted theory emerged only after all the German states had rules on tangibles that suited the then prevailing market practice for bearer securities. The German doctrine on securities did not develop as a free-standing theory that could be applied independently of the

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legal rules governing other areas of the law. The doctrine relied on certain rules regulating the law of tangibles and it was not until the rules on tangibles contained a provision protecting the bona fide purchaser against adverse claims that the current orthodox view became generally accepted.

In chapter 10, it will be shown that once the theory that securities were tangibles had become the prevailing view, it set the limit within which market infrastructure, and the law regulating it, was able to develop further. It will be shown in chapter 11 that the theory that securities were tangibles shaped the type of infrastructure provider that emerged in both Germany and Austria. In addition, it will also be shown that the prevailing theory also determined the form in which paper documents were eliminated from the transfer process. When paper documents became too cumbersome to handle, Germany and Austria did not abolish them altogether but opted for immobilisation. In order to be able to maintain the existing legal analysis, paper documents had to continue to exist: rather than implementing a new legal framework for securities that did not require the existence of some tangible asset, law reformers in Germany and Austria preferred to adhere to the legal analysis already in place.

Before the implications of the modern theory for the legal and institutional development of the twentieth century are analysed, and in order to prepare the ground for the analysis of this development, the rules governing securities which are held directly will be examined, in chapter 10.