10.3 Defective issues

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who buys the securities when they are first issued and containing the terms of issue. In addition to the rules set up by the contractual arrangement between issuer and investor, their relationship may also be subject to statutory rules. In the case of shares, in particular, the German and Austrian laws on the joint stock company contain a number of rules regulating the rights and duties of shareholders and issuers.15

If the contract under which the securities were issued was defective, the issuer may be able to raise equities against the investor who first bought the securities. The question arises if the issuer is also able to raise these equities against any other investor who subsequently bought the securities on the market. German and Austrian law have rules that allow contractual parties also to raise equities that arose out of the contract against the original contractual partner against the person to whom an obligation was subsequently assigned. This rule, however, applies only when obligations are transferred by way of assignment. By classifying securities as tangibles, Austrian and German law are able to avoid the rules on assignment but even though the rules do not apply to transfers of securities, the question arises if the issuer is able to avoid liability by arguing that the rights embodied in the securities certificates can be exercised only subject to the contractual arrangement underlying the issue. The German and Austrian rules relating to defective issues will be examined in subsections 10.3.1 and 10.3.2. In both jurisdictions, the issuer’s ability to raise equities against subsequent purchasers of securities is restricted.

10.3.1 German law

The BGB contains two provision restricting the issuer’s ability to raise equities against the subsequent purchasers of securities.16 German legal doctrine reads the two provisions together; the orthodox view is that, taken together, they enable the issuer to avoid liability if the certificates are forged. Other grounds permitting the issuer to avoid payment are: lack of capacity of the issuer upon issue, lack of authority of an agent

15There exists a doctrinal debate in German and in Austrian law as to whether purchasers of shares are protected against adverse claims. Some scholars propound the view that such protection exists only for debt securities, but not for shares. On the other hand, there exist good reasons to treat debt securities and shares alike (for an overview of the debate and for a view in favour of protecting shareholders against defective issues, see Micheler, Wertpapierrecht 168–171, 212–220).

16BGB, ss. 794, 796.

purporting to act on behalf of the issuer and coercion.17 The issuer is also able to avoid liability if he has a claim arising out of his personal relationship with the holder of the bearer bond securities. Finally, the issuer can rely on all grounds that appear on the face of the certificates. This enables the issuer to refer to the content of the prospectus under which the securities have been issued provided that the certificates explicitly refer to that prospectus.18

Otherwise the position is that the person appearing as the issuer on a bearer bond certificate is liable if he has created securities certificates which have not been issued but which have nevertheless found their way into circulation. This applies irrespective of whether the certificates have been stolen, lost, or are otherwise circulating without having been duly issued by the issuer.

The statutory provisions giving rise to the issuer’s liability in this context do not contain any further requirements; in particular, they do not explicitly require the bearer of the certificates to have acted in good faith upon acquisition. German legal doctrine has, nevertheless, introduced a subjective element on the part of the bearer that needs to be satisfied for the issuer to be liable in circumstances where he did not properly issue the bearer bonds.

The prevailing view is that the rule on issuer’s liability as implemented by the BGB does not amount to strict statutory liability, but is to be classified as liability arising out of a representation made by the issuer.19 The purpose of the statute is not to hold the issuer liable in all circumstances. The issuer is liable because he has created certificates that, on the face of them, appear to be validly issued. By printing such paper documents, the issuer represents that the rights which appear to be embodied in the certificates have been validly created. The issuer is bound by this representation but the issuer’s liability is limited to circumstances where the bearer of the certificates relies upon the representation contained in the certificates.

17Marburger, J. von Staudingers Kommentar, s. 796, para. 3; Uwe Hu¨ ffer, in Peter Ulmer (ed.),

Mu¨nchener Kommentar zum Bu¨rgerlichen Gesetzbuch, vol. 5, 3rd edn. (Mu¨ nchen: Beck, 1997),

s. 796, paras. 8–9.

18 ¨

Marburger, J. von Staudingers Kommentar, s. 796, para. 7; see also Klaus Hopt, ‘Anderung von Anleihebedingungen – Schuldverschreibungsgesetz, x 796 BGB und AGBG’, in Steindorf Festschrift (Berlin: Walter de Gruyter, 1990) 362–363; in favour of a more generous approach, see Dieter Heckelmann, in Harm Peter Westermann (ed.), Ermann Bu¨rgerliches Gesetzbuch, 10th edn. (Ko¨ ln: Dr. Otto Schmidt, 2000) s. 796, para. 4.

19Ernst Jacobi, in Victor Ehrenberg (ed.), Handbuch des gesamten Handelsrechts, vol. IV/1 (Leipzig: O. R. Reisland, 1917) 286.

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The issuer is, therefore, not liable if the contract under which the certificates have been issued is defective and if the certificates are still with the person to whom the securities have been first issued. The first purchaser from the issuer did not buy the securities in reliance on the representation made through the certificates, but subject to the contract which governs the issue. The issuer can raise all equities arising out of the defective contract against the first purchaser provided that she still holds the securities.20

The issuer is also not liable if the bearer of the securities knew – or, as a result of her gross negligence did not know – that the securities had not been validly issued.21 In those circumstances, the bearer of the securities has not bought the securities in reliance on the representation contained in the certificates. A purchaser of securities which have not been validly issued, but who has, nevertheless acquired them in reliance on the securities certificate, cannot claim only against the issuer; she is also able to transfer the entitlement arising out of the certificates to a third party. The purchaser from such a transferee does not have to satisfy the subjective requirements.22

10.3.2 Austrian law

The ABGB does not contain rules that govern the issuer’s liability in cases of defective issues. Austrian legal doctrine nevertheless accepts that the person who appears as the issuer on a securities certificate is liable to honour the rights incorporated in the document.

Different scholars have put forward different explanations for this.23 The current prevailing view is that there exists a general legal principle that a person who makes a representation is liable to indemnify those who rely on it. This principle also applies to bearer securities.24 The

20Marburger, J. von Staudingers Kommentar, s. 794, para. 1; Hu¨ ffer, Mu¨nchener Kommentar, s. 794, para. 4; Jacobi, Handbuch des gesamten Handelsrecht 284–285; Zo¨ llner,

Wertpapierrecht 41–42; Hueck and Canaris, Recht der Wertpapiere 34–35.

21Marburger, J. von Staudingers Kommentar, s. 794, para. 3; Jacobi, Handbuch des gesamten Handelsrecht 300–301; Hu¨ ffer, Mu¨nchener Kommentar, s. 794, para. 4.

22Zo¨ llner, Wertpapierrecht 135; Micheler, Wertpapierrecht 93–94; for a different view on this point, see Lutz Sedatis, ‘Absoluter und relativer Erwerb im Wertpapierrecht’, in Rehbinder Festschrift (Mu¨ nchen: Beck, 2002) 741–758.

23See Micheler, Wertpapierrecht 77–87.

24Roth, Wertpapierrecht 17; Zo¨ llner, Wertpapierrecht 37–39; Hueck and Canaris, Recht der Wertpapiere, 33–35; Baumbach and Hefermehl, Wechselgesetz 16–19; Locher,

Wertpapierrecht (Mohr: Tu¨ bingen) 35; Jacobi, Handbuch des gesamten Handelsrecht 308–310; Ernst Jacobi, Grundriss des Rechts der Wertpapiere im allgemeinen, 3rd edn. (Leipzig: OR