учебный год 2023 / Haentjens, Between Property Law and Contract Law. The Case of Securities. The Future of European Property Law

Matthias Haentjens, Between Property Law and Contract Law: the Case of Securities

have acquired assets a non domino, i.e. from a transferor who was not entitled to dispose of the assets transferred, are subject to challenges by the verus dominus or the third party that asserts his prior entitlement. Second, under the laws of several jurisdictions, defects in the contract that initiated a transfer of assets affect the validity of the transferee’s interests in those assets, a principle which is commonly referred to as causality. This principle is also applied in the DCFR.34 Third, property laws of the French tradition determine that interests in assets are transferred the moment when an agreement to that effect has been reached. This principle is often known as consensualism. This principle is not (fully) applied in the DCFR. The DCFR chooses a transfer regime under which ownership is transferred when the asset to transfer has been delivered, unless parties have agreed otherwise.35

However, as the comments to Article VIII – 1:101(4)(a) DCFR rightly seem to note, in many legal systems, the above principles are not strictly followed when applied to securities, mainly for practical reasons. In the following, I will discuss some deviations from the principles of nemo dat quod non habet, of causality and of consensualism, in the jurisdictions where these principles follow from general private law, but do not (fully) apply to book-entry securities.

3.3 Negotiability

As a result of the nemo dat quod non habet rule, accountholders in whose name securities are credited would be exposed to the risk of being challenged by domini veri or dispossessed owners with (allegedly) better rights. However, this rule is not always applied. First, a successful claim by a prior entitlement holder presupposes the possibility of tracing the securities transferred from the prior entitlement holder, via a transferor, to the transferee. But in modern, anonymised stock-market environments, in which the transferee is almost always unaware of his transferor, this possibility is virtually non-existent.

Second, the laws of many jurisdictions protect bona fide transferees, i.e. transferees that were not or should not have been aware of the adverse claim of a prior entitlement holder, against claims of prior entitlement holders.36 In German and UK law, this rule of general private law also protects bona fide transferees of book-entry securities without specific (statutory) adaptation.37 In US law, where this exception to the nemo dat quod non habet principle is commonly referred to as the negotiability principle, it has been codified in UCC Article 8, so that it specifically protects bona fide transferees of book-entry securities, as well as takers of security interests in book-entry securities.38 Also under Dutch law, bona fide transferees, as well as bona fide pledgees

34Article VIII – 2:101(1)(d) and Comments (E) to the same.

35Article VIII – 2:101(1)(e), and Comments (B) and (C) to the same.

36In fact, it was this need for the protection of bona fide acquirers of securities that caused German lawyers (notably Savigny) to consider securities as tangibles in the mid 19th century; see E. Micheler, Doctrinal path

dependence and functional convergence: The case of investment securities (2006), available at www.ssrn.com, 37-

37EU Questionnaire (2007), 300-301 and 307-308, respectively.

38UCC §§ 8-502, 8-510(a) and 8-510(b).

11

of book-entry securities are protected under specific provisions of the relevant statute, which are inspired by similar rules of general property law.39

Under Belgian and French law, general private law would not protect bona fide accountholders as its protection provision arguably applies to the possessors of tangible assets only. But (relatively) recent Belgian legislation has explicitly extended its application to good faith transferees of book-entry securities.40 Moreover, as a matter of Belgian and French general private law, assets must be sufficiently individualised to be the object of any proprietary claim and therefore, transferees whose securities have been commingled with other securities (for instance in an intermediary’s omnibus account with the higher tier) cannot be challenged by prior entitlement holders. Finally, under both French and Belgian law, a similar protection must be assumed to apply to pledgees that have been credited with collateralised securities in their (pledge) account.41

On the other hand, as a corollary to the rule that protects bona fide transferees, transferees that were or should have been aware of an adverse claim by a prior entitlement holder are, in many jurisdictions, not protected, but remain, as mala fide transferees, subject to the claims asserted by the holders of an older right. As to these transferees, the nemo dat quod non habet principle thus remains applicable.

3.4 Causality

In the DCFR and in many jurisdictions, with the notable exception of Germany and jurisdictions that are inspired by the German system, the principle of causality applies. In these jurisdictions, defects in the contract that initiated a transfer affect the validity of the transferee’s interests in those assets, which shows that property law (consequences) cannot be analysed separately from contract law. But in as many jurisdictions, the causality principle is not, or not fully applied to book-entry securities transfers.

The application of the causality principle, as does the application of the nemo plus principle, presupposes a possibility of tracing the securities transferred from transferor to the transferee. But, as stated above, the modern, anonymised stock market environment virtually prevents such tracing, as a consequence of which transferors seldom know their transferees. Consequently, third parties should be able to rely on a credit entry as an expression of the relationship of a transferee (or transferor, for that matter) with his intermediary, and deficiencies in the contract between a transferor and a transferee do not affect that relationship between a transferee and his intermediary. Otherwise, market stability would be seriously compromised.

39Compare Articles 19 and 20 Wge with articles 3:88 and 3:238 BW. But these provisions protect fewer good faith acquirers than, for instance, UCC Article 8, as they do not extend to good faith transferees when the prior transfer was invalid because the original transferor lacked the power of disposal; see M. Haentjens, SDU Commentaar Financieel Recht, Commentary on the Wge (2007), comm. at arts. 19 and 20.

40Applicability of Articles 2279 and 2280 BW through KB no. 62 Article 19, Article 475bis W. Venn. and the Act of 2 January 1991 Article 13 bis.

41Act of 2 January 1991 Article 7(3) and Article 470(2) W. Venn. for dematerialised securities, KB no. 62 Article 9(1)(2) for immobilised securities. In French legislation, on the other hand, no explicit provisions to that effect can be found.

Matthias Haentjens, Between Property Law and Contract Law: the Case of Securities

If not analysed as a novation transfer system (see above, paras. 3.2.2-3.2.3), this transfer regime could be classified as a so-called abstract system of transfer, i.e. as a system in which defects in the contract between transferor and transferee may give rise to contractual claims, but do not affect the validity of credit entries made as a result of that contract. Such a system seems to be effective in the US.42 Under German general private law, an abstract transfer system applies, so that a transfer of ownership requires not only delivery but also a property law agreement.43 But, as regards book-entry securities transfers, an even more abstract regime applies: if securities are credited to a transferee's securities account prior to the property law agreement having been concluded, the property law interests in the securities are transferred, the absence of a property law agreement notwithstanding.44

Under French and Belgian law, however, a transfer of property is traditionally linked to the contract that initiated the transfer. The general property laws of these countries provide that the moment when assets are transferred coincides with the moment when the contract is concluded, but also that the validity of the contract determines whether the transfer is (proprietarily) challengeable. In French case law, challenges by transferors/counterparties to a securities transfer have thus been honoured on several occasions, as a consequence of which the transfer in question had to be reversed and the credit entries undone. Under Belgian law, on the other hand, a credit entry in a transferee’s account renders a securities transfer unchallengeable by third parties,45 but the clearing of the transfer by CCP or CSD has also been argued to achieve that effect. In Dutch legal literature also, it is very much debated whether a general provision of property law applies to securities transactions, requiring a flawless contractual relationship between transferor and transferee for the transfer to have proprietary effect, but that seems to be the current law.46

3.5 Consensualism

As has been stated above, general property law of the French tradition determines that interests in assets are transferred the moment when a contract to that effect has been concluded (solo consensu), which transfer law regime is commonly known as consensualism.47 This principle, which also applies (with certain restrictions) in the DCFR, represents a classic example of how contract law and property law coincide. As regards book-entry securities, however, investor protection and market stability require that a transfer of securities should take proprietary effect, i.e. be effective

42E.g. Ennis v. Phillips, 890 So.2d 313, 55 UCC Rep. Serv. 2d 407 (Fla. Dist. Ct. App. 4th Dist. 2004). It is also a general principle of German law; U. Drobnig, Transfer of Property, in Toward a European Civil Code (A. Hartkamp et al. eds., 3d ed. 2004), 737.

43Section 929 Civil Code.

44Section 24 (2) Securities Deposit Act. See EU Questionnaire (2007), 131. Also, a property law agreement may be construed and occurs only implicitly between the banks of the transferor and transferee on their behalf. See EU Questionnaire (2007), 220-221.

45KB no. 62 Article 6(3) for immobilised securities and Article 468(2) W. Venn. and the Act of 2 January 1991 Article 6(1) for dematerialised securities.

46Article 3:84 BW.

47Articles 1583 C. civ. (France) and 1583 BW (Belgium).

13

against third parties, neither earlier, nor later than the crediting of a transferee’s account.48

Under German and Dutch law, transfer of (interests in) property is generally effected by the delivery of that property. In the case of book-entry securities, delivery is considered to occur through credit entries in the transferee’s securities account.49

Under US law also, a transfer of book-entry securities is effected when the transferee acquires a security entitlement, which results in a credit to a securities account.50

Even French securities law derogates from the consensualism principle, in that sales and the subsequent transfers of book-entry securities are governed by different rules. Transfers of securities that take place via a regulated stock exchange as well as transfers of securities that are neither admitted to the CSD’s system of custody nor transferred via a regulated stock exchange are effected by a credit entry in the transferee’s securities account.51 Over the counter transfers of admitted securities on the other hand, take place the moment the transfer has become irrevocable under the rules of the settlement system concerned.52 It has been argued that under Belgian law property interests in fungible securities are transferred the moment when credit entries are made in the transferee’s securities account, but the more generally accepted view seems to be that those interests are already transferred when the transaction is cleared by the CCP/CSD.

3.6 Conclusion

In conclusion, the transfer of securities by book-entry is, in many jurisdictions, indeed governed by different rules than the rules that apply under general property law. A closer examination of these rules of general property law shows that in jurisdictions where the causality principle applies, the property law consequences of a transfer of ownership depend on the contract that initiated the transfer. Moreover, in jurisdictions where the consensualism principle applies, the moment a contract to transfer has been concluded also determines the moment interests in assets are transferred. But, as we have seen in the preceding paragraphs, these rules usually do not fully apply to the transfer of book-entry securities, which transfers can be governed by rules of a strict, abstract nature, under which interests in the relevant securities are transferred when the transferee's securities account has been credited.

4. (HOW) TO HARMONISE SECURITIES LAW?

Economically speaking, securities transactions are a critically important category of transactions, both in terms of volume and net-worth. Yet in the EU, cross-border securities transfers are an astonishing 11 times more expensive than domestic

48Cf. Drobnig (2004-1) loc.cit, 726-733, who advocates that both generally and in view of a possible future European Civil Code, the traditional regime is to be preferred over the consensual regime of transfer.

49Articles 17 and 41 Wge.

50UCC § 8- 501(b).

51UCC § 8- 501(b).

51Articles L. 431-2 C. mon. fin. and L. 228-1 ninth paragraph C. com. respectively. See also EU Questionnaire (2007), 222-224.

52Art. L. 431-2 fourth paragraph C. mon. fin.

Matthias Haentjens, Between Property Law and Contract Law: the Case of Securities

securities transfers, among others because of differences in applicable law.53 From an economic point of view alone, therefore, harmonisation of contract law and property law would be imperative for cross-border securities transactions. Unsurprisingly, therefore, several instruments have been initiated to harmonise rules of national laws on, inter alia, the transfer of book-entry securities.

The most important ones in this regard are the following. First, under the auspices of the Hague Conference for Private International Law, the Convention on the Law Applicable to Certain Rights in Respect of Securities Held With an Intermediary ("Hague Securities Convention"), has been signed on 13 December 2002. This convention provides uniform conflict of laws rules for proprietary issues concerning international securities transactions, but, unfortunately, it has not yet entered into force.54 Second, under the auspices of the International Institute for the Unification of Private Law ('UNIDROIT'), the Convention on Substantive Rules for Intermediated Securities ("Geneva Securities Convention") has been signed on 9 October 2009. Also this Convention has not yet entered into force. On the European level, the European Commission is currently drafting a Securities Law Directive ("SLD"), which seems to cover practically the same areas as the Geneva Securities Convention.55

As a fourth and last ground for not including company shares and certificated, negotiable instruments in the scope of book XIII DCFR, the commentators noted that

‘some of these areas are subject to international harmonisation instruments’, referring to the 1930 Geneva Convention Providing a Uniform Law for Bills of Exchange and Promissory Notes. Although not untrue, this argument is not wholly convincing, because harmonisation instruments in other areas have not prevented the DCFR drafters to extend the scope of the DCFR either. For instance, the Geneva Securities Convention provides rules on, inter alia, the creation of security rights over bookentry securities that are also given in Book IX DCFR.

Whether or not the DCFR would be the appropriate instrument to harmonise securities law, I would argue that a harmonisation of the private law rules concerning securities transfers would necessarily have to include both contract law and property law. First, in the case of book-entry securities, the object of the transaction is hard to classify as either purely contractual, or proprietary in nature. This holds equally true for similar, “modern” assets such as carbon credits, i.e. emission rights, and intellectual property rights.56 Second, specific rules of securities law notwithstanding, contractual and property law aspects of a transfer are virtually inseparable under the general private laws of most jurisdictions, including the DCFR. Thus, more generally, and as stated above, property law harmonisation must accompany contract law harmonisation – and vice-versa.

53Giovannini Group, Cross-border clearing and settlement arrangements in the European Union (November 2001), ii, available at ec.europa.eu.

54See www.hcch.net.

55See http://ec.europa.eu/internal_market/financial-markets/securities-law/index_en.htm.

56Cf. S. van Erp, Security interests: A secure start for the development of European property law, ZERP Diskussionspapier 8/2008, 20-21.

15