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12.4 Transfer of co-ownership

12.4.1 Introduction

The conclusion of subsection 10.1.1 was that, in German law, the buyer acquires ownership to securities if two requirements are met: the seller and the buyer need to agree that ownership passes to the transferee; the buyer also needs to acquire possession to the securities certificates. It was also pointed out in subsection 10.1.1 that under German and Austrian law a wide concept of possession has been adopted. For the buyer to acquire possession it is not necessary that the certificates be physically moved: for possession to pass to the buyer, it is sufficient for the seller to assign her right to the buyer to claim the securities from a third party.

12.4.2 Depotgesetz

These rules also apply to transfers of securities if they are maintained with the central depository. The German and Austrian Depotgesetz does not disapply the general property law in this respect; it only adds a rule which is important mainly from the perspective of retail clients. The provision applies if an investor instructs an intermediary to purchase securities for her provided that the intermediary acts in one of two ways. The rule governs a purchase if the intermediary, when carrying out the transaction for the client, acts either as a commission agent or buys the securities in its own name, but on behalf of the client. In both cases, the investor acquires a co-ownership interest in the securities kept in bulk with the central depository when the securities are credited to her on the books of the intermediary which carried out the purchase in her behalf.23

The rule implements a special regime for intermediated purchases of securities. Its doctrinal significance lies in the fact that the point in time at which the buyer of securities acquires ownership can be determined without reference to the rules on possession. In practical terms, the rule creates certainty for retail clients. It determines when they acquire a co-ownership interest irrespective of whether the intermediary has itself received a credit of the securities on its own account further up the chain.24 If intermediaries credit securities to the account of a client

23Depotgesetz, s. 24; Austrian Depotgesetz, s. 17.

24If the intermediary purchasing securities on behalf of clients receives the client securities before it credits them to the client’s account, the client acquires property rights at the point in time at which the intermediary receives the securities (Micheler,

Wertpapierrecht 205–209).

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before they have themselves received a corresponding credit on their own account further down the chain, the client credit will very probably be conditional upon the intermediary itself receiving credit of the securities. In cases where an unconditional credit to the client account is effected prior to the credit on the intermediary’s account, however, the client will be considered to be a co-owner from the time when the credit on her account was effected. In such cases, the securities held by the respective intermediary on behalf of its clients are considered to belong to all its clients. Until the intermediary has received a corresponding credit there will not be sufficient securities in the client pool held by the intermediary to satisfy the claims of all its clients. Should the shortfall prove to be permanent, all the clients of that intermediary will share it on a pro rata basis.

The rule applies only to purchases carried out through intermediaries; it does not apply if investors purchase securities in their own name and have them transferred to their securities accounts. It does not, for example, apply if banks or other financial service providers purchase securities for their own accounts. In those cases, the point in time at which the purchase acquires a co-ownership interest in the securities is determined by applying the general rules, which will be analysed below.

12.4.3 German property law

The analysis in subsection 10.1.1 led to the conclusion that two requirements needed to satisfied for a buyer to become the owner of securities under German law. These requirements will now be analysed in turn.

The first requirement for ownership to pass is that both parties need to agree that the transferee is to become the owner. German law distinguishes between the sales contract, which creates an obligation of the seller to transfer ownership to the buyer, and an additional agreement, which effects the transfer of ownership to the buyer. This second agreement can be concluded at the same time as the sales contract is made: this will be the case, for example, where a tangible item is sold for cash and delivered to the buyer on conclusion of the sales contract. If the parties agree to postpone completion to a point in time after the sales contract has been entered into, the agreement to transfer ownership will be concluded at this later time. Contracts for the sale of securities are not normally completed on conclusion of the sales contract; there is frequently a time lag between the sales contract and the delivery of the securities and the purchase price.

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Moreover, if a sales contract for securities has been made on the stock exchange, the buyer and seller do not communicate directly and do not know each other’s identity. The parties continue to deal on an intermediated basis after the sales contract has been concluded and throughout the completion process. The orthodox view, therefore, is that the parties conclude the agreement which transfers ownership to the buyer through their intermediaries. The seller is said to make the respective offer to transfer the securities to the buyer upon instructing the central depository either itself or through an intermediary.25 For an agreement to arise, the buyer then needs to accept the offer. However, the buyer does not accept the offer herself, and there is a debate among German scholars as to who acts as the buyer’s agent in this context. Some scholars write that the offer is accepted by the central depository which acts on the buyer’s behalf,26 others that, in a chain of intermediaries, the buyer’s intermediary accepts the offer on her behalf.27 For the purposes of this book there is no need to investigate this question further; it suffices to note that the completion of a sales transaction involves an agreement which is additional to the sales contract and which causes the buyer to acquire ownership. This agreement is entered by intermediaries on behalf of the buyer and seller. It is worth noting that both offer and acceptance are not concluded in the ultimate buyer’s name; the respective acting intermediary is considered to act as an agent for an undisclosed principal.28

The second requirement for ownership to be transferred to the buyer is that the buyer needs to acquire possession of the securities certificates. When securities are kept in a bulk with a central depository, no documents will be physically delivered to the buyer. The securities certificates are also not transferred to a file which would be attributable

25Ku¨ mpel, Bankund Kapitalmarktrecht, para. 11.371–4; Einsele, Wertpapierrecht 59.

26Ro¨ gner, in Christian Huber (ed.), Bankrecht (Baden-Baden: Nomos, 2001) 336f; in 2003, the German central depository introduced settlement through a central counterparty. Since then, the offer is said to be accepted by that central counterparty rather than by the central depository (Ku¨ mpel, Bankund Kapitalmarktrecht, para. 11.382–7; Norbert Horn, ‘Die Erfu¨ llung von Wertpapiergescha¨ften unter Einbeziehung eines Zentralen Kontrahenten an der Bo¨ rse’, [Sonderbeilage 2/2002] Wertpapier Mitteilungen 11);

27Go¨ ßmann, Bankrechts-Handbuch, s. 72, para. 108; Heinsius, Horn and Than, Depotgesetz, s. 6, para. 84; Canaris, Bankvertragsrecht, para. 2019; Einsele, Wertpapierrecht 63.

28Ku¨ mpel, Bankund Kapitalmarktrecht, para. 11.393–9; Heinsius, Horn and Than, Depotgesetz, s. 6, para. 84; Einsele, Wertpapierrecht 48–50; Ro¨ gner, in Huber (ed.), Bankrecht 336–337; Horn, ‘Die Erfu¨ llung’ 11; for a different view see Canaris, Bankvertragsrecht, para. 1891.

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to the buyer; they remain at the same location in the vaults of the central depository.

Transfers are effected by way of book entry on the accounts of the transferee and of the transferor if they both hold accounts with the same bank. If they hold accounts with different banks, the bank of the transferor will transfer the securities to the bank of the transferee, which will in turn credit the transferee’s account. If both intermediary banks are directly linked with the central depository, the transfer will involve the following debit bookings. There will be a debit on the transferor’s account on the level of her intermediary bank and a debit on the intermediary bank’s account on the level of the central depository. Corresponding to these debit bookings there will be two credit bookings. On the level of the central depository, the securities will be credited to the account of the transferee’s intermediary. On the level of the transferee’s intermediary bank, the securities will be credited to the transferee’s account.

German law classifies these book entries in terms of the law of possession. The analysis develops the concept of possession, starting from the assumption that the possession of physical documents is a legal relationship between a person and a tangible. Possession normally involves a person physically holding particular identifiable tangible movables. In the context of deposited securities, German law has modified this basic concept of possession in two ways. The first is that investors in securities which are kept in bulk do not have a relationship to individual certificates. They are co-owners of the bulk. This also means that they jointly hold possession of the bulk as a whole. They do not individually have possession of individual certificates but each investor has what could be called ‘co-possession’ of the whole bulk of securities. When securities are transferred this involves the transfer of that possessory interest rather than a transfer of possession to specific documents. The second modification involves the assumption that possession or co-possession is a legal relationship which is capable of being subjected to a division of labour. The ultimate possessor can arrange her relationship with the tangible such that some elements of co-possession are exercised by a different person on her behalf. The analysis distinguishes between holding direct and holding indirect co-possession of securities certificates. It also introduces the concept of holding co-possession, directly or indirectly, on behalf of a third party.

In the analysis, the central depository holds direct possession of the documents, but does so on behalf of the ultimate investor. The intermediaries further up the chain hold indirect co-possession of the