- •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
4Impact on the institutional framework
One of the conclusions of chapters 2 and 3 was that the legal doctrine that prevailed when securities first emerged impacted on the process through which paper documents were eliminated from the transfer process. The influence attributable to the legal doctrine that governs investment securities will be further explored in this chapter.
The first observation to be made in this context is that English legal doctrine had an impact on the type of service provider that emerged in England to support transfers of securities. Because the law of novation became the legal doctrine according to which securities were transferred when they first emerged in England, the issuers became involved in the administration of securities transfers. Over time, service providers came into existence that assisted issuers to maintain registers. These service providers are referred to as registrars; their business is to maintain registers on behalf of issuers. The emergence of this particular type of financial services industry can be explained by the legal doctrine that governs securities transfers.
Moreover, because English registered securities do not constitute negotiable instruments, but are documents of evidence only, English market participants do not have the same need as German or Austrian market participants to keep certificates safe.1 If an English certificate is stolen or lost, the owner does not need to fear that a third party may acquire the securities in good faith.2 This helps to explain why England
1For this, see chapter 11.
2The fact that the English registered securities do not constitute negotiable instruments does not mean that the purchasers of such securities are not protected against adverse claims. English law uses the rules on estoppel to protect buyers in certain circumstances in the case of unauthorised transfers. Other than in German and Austrian law, however, the buyer is compensated by the issuer and the original owner does not lose her title for
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did not develop depositories for the purpose of handling registered securities; it also helps to explain why England may have found it easier to create dematerialised securities than Germany or Austria, where securities are considered to be tangibles.
It has already been mentioned that the law of novation is likely to have shaped the transfer rules that govern transfers carried out through paper documents.3 The paper transfer process has in turn shaped the procedural rules that govern transfers of uncertificated securities within CREST.4 Both observations go to show that legal doctrine has an influence on the type of infrastructure that emerges in a particular market.
Ever since the 2001 reforms, CREST has centrally maintained the registers of uncertificated securities other than shares. The register of uncertificated shares has also been centralised in the sense that the particulars contained on the CREST register have priority over the particulars contained in the issuer register. The way in which the central registers are organised also shows the influence of legal doctrine on market infrastructure.
There are two principal ways of organising a central register of securities. It is possible to structure such a register according to owners: if that is done, there will be an entry for every investor, against which the securities held by that person are recorded. The alternative is to organise a central securities register according to issuer: in that case, entries are made for every type of security issued by an individual issuer. Against those entries, the names of investors are recorded. Both methods achieve the same result: they provide for a means of identifying the individuals who hold title to securities.
Which of the two approaches is implemented in a particular legal system can nevertheless be explained as a function of the original path it adopted. In England, securities transfers are traditionally administered by issuers. It is no surprise, then, that USR 2001 requires the central register to be organised according to issuer. USR 2001, reg. 20 (1) explicitly states that ‘in respect of every company . . . there shall be a register . . .
maintained by the operator’. The structure of the current settlement system is shaped by the path originally adopted by English law.
the securities, Eva Micheler, ‘Legal Title and the Transfer of Shares in a Paperless World – Farewell Quasi-Negotiability’, Journal of Business Law 2002 358; Robert Pennington, Company Law, 8th edn. (London: Butterworths, 2001) 407–416.
3 See section 2.3. 4 See section 3.3.
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The examples referred to in this chapter show that legal rules are more than a function of the balance of economic power prevailing between market participants. Market participants operate within a given legal framework; they are not restricted in innovating new ways of carrying out their business. The legal form which such innovations takes, however, is determined by existing legal doctrine. Once a new form has established itself, market participants innovate further and create service providers corresponding to this structure. The type of service provided by these new institutions – and, therefore, the setup of the new market infrastructure – continues to be subject to the doctrinal legal framework within which market participants have to operate.