учебный год 2023 / Haentjens, Harmonisation Of Securities Law. Custody and Transfer of Securities in European Private Law

2 System and coherence

Especially in the context of the EU harmonisation of consumer law, it has been noted that EU harmonisation may lead to so-called supererogatory implementation, i.e. broader implementation than the harmonisation instrument required, as EU harmonisation instruments in that field have sometimes been incorporated in a national civil code to avoid the disruption of national coherence.65

However, it is submitted that in the context of securities custody and transfer law, the risk of supererogatory implementation is negligible, considering the fact that in all jurisdictions investigated, securities custody and transfer law has been codified in separate statutes, outside a civil code (when present), and that it is unlikely that these jurisdictions will incorporate a harmonised securities law within their civil codes. Consequently, the implementation of a possible future EU harmonisation instrument in the field of securities custody and transfer law is not likely to result in supererogatory implementation, which may also prevent a lack of clarity with regard to the (supranational) origin of the harmonised rules and facilitate easy future amendments on the supranational level.66

If, in a given national system of law, the rules of securities law form a distinct area of law which contains rules and norms that are different from general private or commercial law, that national system must be considered to be weakly coherent, as it displays little unity but no inconsistency. Consequently, new EU legislation in the field of securities law would probably not lead to inconsistencies within this national system and thus not to incoherence, as the affected body of securities law has no normative and conceptual connections with general law.67 Moreover, if an area of law is thus separated from the rest of the law, it will not be under a continuous threat of disrupting decisions by the ECJ nor the autonomous character of this part of the law. As a result, the said system would continue to be weakly coherent, notwithstanding a radical EU harmonisation of securities law.

It is merely theoretical, it is submitted, that a EU harmonisation instrument would turn a system of weak coherence into a strongly coherent one, since that would imply that the EU harmonisation instrument, when implemented, would fit more perfectly into the national system than its former rules of securities law did. In that scenario, the harmonisation measures would have to adhere to all, or most of the same principles as the general principles of this national system, and would have to give rise to no inconsistencies at all.

65Cf. SMITS (2006), 99-104, and ROTH (2002), 767-769 and 770. WILHELMSSON (2002), 79 has named supererogatory implementation a ‘Jack-in-the-Box effect’ of EU harmonisation. HESSELINK (2006), 302-304, has expressively called it ‘surrender’, as one of three strategies for implementing directives.

66Cf. SMITS (2006), 99-104, ROTH (2002), 770 and 773 and HESSELINK (2006), 296. But see Ch. 12.4.

67Cf. HESSELINK (2006), 299-302, defining this implementation strategy as ‘segregation’.

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2 System and coherence

As this is highly unlikely,68 it is not further considered here, nor in the discussion of the two other possible situations.

If a given national system is strongly coherent, new European harmonisation legislation would probably make that system weakly coherent or incoherent.69 It is unlikely that that system would remain strongly coherent, as radical harmonisation measures probably adhere to some principles that are different from those of the given national system’s general law, which would therefore result in less unity of principle than existed previously. But if the implementation legislation would clarify to which situations the harmonised body of securities law applies and make explicit that these rules of securities law are governed by different principles, the relationship between securities law and the general body of law would be logically valid and would have no inconsistencies. Consequently, weak coherence would be the result.

If, however, the implementation legislation of the given national system would not compartmentalise the harmonised body of securities law in the way just described, the European harmonisation would result in inconsistency, for example because the securities law uses concepts which it has in common with its general law, but which have changed in meaning due to the harmonisation. Inconsistency and thus incoherence would therefore arise between that system’s securities law and its general law. In sum, the (technical) form of the implementation legislation – as to which the national legislator has more or less discretion – determines in a national system of strong coherence whether radical harmonisation measures would lead to weak coherence or incoherence.70

If a national system is incoherent, for example because of inconsistencies between the rules of securities law and the general rules of private law, that system would, after implementation of a radical EU harmonisation instrument in the field of securities law, probably remain to be incoherent, or become weakly coherent. Again, strong coherence would be a highly unlikely result. Should the implementation legislation not clarify that securities law is governed by different principles, rules and norms than general law, the existing incoherence will be retained, but if the implementation would involve a clear compartmentalisation, the relationship between securities law and the general body of law would become logically

68Cf. JOERGES (1997), 396.

69JOERGES (1997), 396 seems to assume that this is the case in all parts of European private law (lato sensu). Therefore, and because he argues that EU private law (stricto sensu) is contingent in nature, he contends that ‘(...) lawyers should not at the outset attempt to develop or promote comprehensive and systematic responses to the integration challenge.’ and ‘(...) the design of new ready-made systems does not seem feasible (...).’

70Cf. HESSELINK (2006), 295-305 on possible implementation strategies for jurisdictions with systematic codifications, with specific attention to the coherence consequences.

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valid and absent of inconsistencies. Consequently, the previous incoherence will be turned into weak coherence, and the coherence of the national system concerned would not be diminished, but even improved.

Should the EU legislature foresee that the coherence of the Member States’ national systems would decrease because of one of its harmonisation measures, it should weigh that decrease in coherence against the optimal realisation of values, i.e. the values expressed by the harmonisation measure in question. As noted above, the weighing of coherence against another principle of systemisation must be carried out according to the metaprinciples of optimisation, consistency and proportionality.71 Since compliance with the principle of consistency would be unfeasible, as it would require an investigation into (all) former EU legislation that conflicted with national coherence, only optimisation and proportionality are relevant here.72 Thus, if the optimal realisation of EU values could be achieved, while coherence could be preserved to some extent and would not be diminished disproportionately, the optimal realisation of EU values should be preferred over retaining coherence.73

If, however, the said decrease in coherence would imply that certain general principles would not be effective and that these principles are considered to be essential to a given legal system, for example because they express general considerations of fairness, the coherence of that system would be diminished disproportionately. Moreover, if it is felt that these general principles should be preponderant over the principles expressed by the intended EU measures, the preservation of coherence should be preferred to the optimal realisation of EU values.74 Consequently, the intended EU legislation should be adjusted to that effect by the European legislature. The optimal realisation of national values is thus weighed via coherence against the optimal realisation of EU values.

2.5 CONCLUSION

In the preceding sections, a non-foundationalist notion of coherence has been developed, which involved that coherence must sometimes recede in favour of the optimal realisation of values, especially when coherence can be preserved to some extent and is not diminished disproportionately. Thus, it has only relative normative power, but it has also been shown that as an

71See supra, s. 2.3.

72Cf. HOMMELHOFF (1992), 81 and 102 with regard to the codification of EU law in German (private) law.

73See HESSELINK (2001), 48-49 and 78. Cf. BLOEMBERGEN (1992-1), 567 and HELLNER (1987), 113-114.

74See JOERGES (1997), 382, 393-394.

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important principle of systemisation, coherence should always be realised to the maximum extent possible, as it furthers equality, legal certainty and rationality in a given legal system.

More in particular, it has been shown that a system of law is considered coherent when its elements, i.e. its norms, values and principles, are logically consistent and show some monism or unity of principle. Logical consistency is established when a given system of law demonstrates a sound internal architecture, i.e. if all norms of a specific area of law fit logically into the more general parts of the law, when it has no intrinsic contradictions and instances of Wertungswiderspruch. If these conditions are not met, the legal system under scrutiny must be considered not to be coherent, or incoherent. If no inconsistencies can be found, but the rules and norms of the given system are supported by many different principles, that system is weakly coherent.

In the following chapters, the relationship between securities law and general private or commercial law within the jurisdictions of Belgium, France, the Netherlands and, to a lesser extent, the US, will be tested as to coherence, especially with regard to the use of legal concepts. The coherence of (a specific part of) the European jurisdictions mentioned will thus be assessed on a conceptual level.75 In addition, it will be ascertained to what extent the securities laws of these jurisdictions share the same principles with the more general areas of law in which those securities laws are embedded. Subsequently, it will be tested how a possible future harmonisation instrument in the field of securities law would affect the coherence of the said jurisdictions.

Then, the relevance of so-called diagonal coherence becomes particularly clear, which refers to the relation between certain rules of supra-national law and the body of national law that these supranational rules do not affect directly.76 For a hypothetical EU proposal that would radically harmonise national securities laws, it has been shown that considerations of coherence should only lead to adjustments to such a proposal if it would lead to a system with strong coherence becoming incoherent or weakly coherent, while coherence could not be preserved to some extent and this coherence would be (felt to be) unjustifiably and disproportionately diminished. Thus, an optimal legislative decision, i.e. one which is both coherent and morally sound would be made.77

75It is reiterated that this conceptual coherence analysis serves as a handle for a coherence test of norms; see supra, s. 2.4.1.

76Cf. BERTEA (2005), 170.

77Cf. SORIANO (2003), 306.

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3 IMMOBILISATION, DEMATERIALISATION AND THE LAW

3.1 INTRODUCTION

As in so many instances, a historical perspective may shed some light on the problems of coherence in the modernisation and harmonisation of current securities custody and transfer laws. In other words, the interplay, or tension between the day-to-day practice of the custody and transfer of securities on the one hand, and the relevant substantive and conflict of laws rules, on the other hand, is not a new phenomenon, but has surprisingly old precedents.

In the following sections, a brief overview of the said interplay will be provided, specifically with regard to the custody and transfer of securities, i.e. of the tradable financial instruments that represent either shares in private companies or debt instruments. Although the present study relates to all financial instruments being credited to accounts with the exception of monetary assets, it is mainly concerned with securities, for it is with regard to these instruments that the main differences in national laws exist and thus the principal difficulties for a possible future harmonisation instruments arise.

It will be shown that the legal framework for the custody and transfer of securities, and also the nature of its problems, is determined, to a large extent, by the conception of securities as intangibles or tangibles. Furthermore, the changes in custody or holding structures that have occurred in the last century will be briefly discussed, while the penultimate section will elaborate on the difficulties that these changes pose to private international law concepts.

3.2 REIFICATION, INTERMEDIATION AND DEMATERIALISATION

3.2.1 Reification

Conventional wisdom has it that the earliest issue of shares, in 1602, by the United Netherlands Chartered East India Company (Vereenigde Nederlandsche Geoctroyeerde Oost-Indische Compagnie, ‘VOC’) marks the

3 Immobilisation, dematerialisation and the law

beginning of the securities trade.1 As these shares represented intangible rights of ownership in the VOC, they were not physically expressed, except for the entry of the shareholders’ names in the books of the company, which therefore also reflected any change of ownership.2 Soon, however, that practice of registration proved to encourage unregistered and unofficial speculation, and it became a constraint on fast and efficient trade.3 As a result, the use of bearer certificates began in the Netherlands, but these documents operated merely as certificates evidencing a listing in the issuer’s register.

Yet trading in securities lato sensu had already begun much earlier, as in the Italian city-states of the 12th and 13th century a lively trade existed in public debt instruments (bonds) that were also generally evidenced by certificates.4 Interestingly, it was even possible to transfer money during that period by oral instruction to the transferor’s bank, regardless of whether the transferee was a client of the same bank, and cross-border transfers occurred via the first international clearing centres.5

However, the said trade in securities took place in documents that merely evidenced an intangible right, and although it facilitated easier transfer, it did not provide the transferee with an indisputable right that could be enforced against third parties before the issuer recognised and perfected the change of entitlement. As a solution, late 19th century German jurists, notably von Savigny, developed the idea that the intangible right that a certificate refers to is incorporated in the certificate itself (reification or Verkörperung). Thus, the law of tangible movables could be applied to securities, and intangible rights such as shares and bonds could therefore be traded and transferred by a mere agreement between the parties to the transfer or by agreement plus the delivery of the certificate. Moreover, a transferee could immediately assert his entitlement against the issuer of the right and other third parties, including a possibly dispossessed verus dominus, on the basis of the possession of the certificate.6

1See, e.g., GRUNDMANN-VAN DE KROL (2002), 3 and the further references provided therein. However, the French city of Toulouse could also make that claim on the basis of an issue of

96shares by the Société des Moulins du Bazacle in 1250; see www.euronext.com. It has even been argued that a lively trade in corporate shares existed in ancient Rome; MALMENDIER (2005).

2BLOM (1998), 183.

3See DE IONGH (1926), 29 with respect to the shares in the Vereenigde Oost-Indische Compagnie.

4See, e.g., PEZZOLO (2005).

5DE ROOVER (1974), 202-204, discussing the 12th century Genoese banks that created accounts, allowed overdrafts and used the fairs of Champagne as an early international clearing centre.

6MICHELER (2006), 19 and 25 et seq. See also DROBNIG (1988), 13: ‘Die Erfindung der Effekten als Wertpapiere ist eine juristische Großtat. Sie sind aber auch eine der entscheidene rechtstechnischen Grundlagen des Hochkapitalismus; denn sie haben die breitgestreute

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However, the protection of possessors of a securities certificate against competing claims found its precedent in the protection of possessors of monetary paper and other ‘commercial paper’ that was transferred by the endorsement of the traded certificate. This method of transfer was probably introduced on the European continent in the early 16th century and is known in the Anglo-Saxon tradition as the negotiability principle.7

English law, however, did not accept the reification theory for securities, which otherwise quickly spread, so that by the mid 20th century, it had been adopted in most Western legal systems.8 In the US, for instance, the application of the negotiability principle to traded stock was codified in the 1909 Uniform Stock Transfer Act.9 Thus, the legal fiction of reification significantly enhanced the tradability of securities, but also served the certainty needed in the securities trade.10

3.2.2 Intermediation

However, the system just described was based on a reality in which investors were either recorded in the issuer’s register or were in physical possession of their certificates, and with quantities of traded (bearer) securities increasing and the services provided by banking institutions improving, more and more investors placed their securities in the custody of banks. Especially because the law now attributed ownership to whoever physically held the certificates, the need to reduce of the risk of loss and theft arose, and again, securities custody followed the practice of money.11

Prompted by the post-WW1 crisis, the banks of Berlin used the Kassenverein, originally established in 1850 for money transfers, as a central securities depository for the processing of securities transfers and their monetary proceeds.12 As a consequence, the investor no longer had a direct relationship with the issuer, but maintained a securities account with his

Finanzierung des modernen Wirtschaft und damit das Privateigentum an den Produktionsmitteln wesentlich erleichtert, wenn nicht ermöglicht.’

7Cf. also DE ROOVER (1974), 220-221 and see ROGERS (1996), 1452-1453, and, extensively, ROGERS (2004).

8But the French lawyer THALLER opposed this theory as early as 1904; DE VAUPLANE & BORNET (2001), no. 47-1 and 47-2.

9GUTTMAN (1990), 443, SOMMER (1998), 1186 and ROCKS & BJERRE (2004), 1.

10Cf. DROBNIG (1988), 13.

11GUYNN (1996), 16. Immobilisation of gold and forms of physical money into the vaults of financial intermediaries and the replacement of physical money with paper certificates took place as early as the fourteenth and fifteenth centuries. But the deposit of money in banks itself is, of course, much older; cf., e.g., DE ROOVER (1974), 201-204.

12DROBNIG (1988), 17 and MICHELER (2006), 44-46.

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bank which, possibly via further intermediaries, either held the investor’s securities in custody (with respect to bearer securities) or was registered as the owner in the issuer’s register.13

The intermediated holding of securities, or indirect holding system, was followed throughout the world, not in the least because the Group of Thirty recommended in 1989 that the custody of securities be centralised in Central Securities Depositories (‘CSDs’) or International Central Securities Depositories (‘ICSDs’).14 At present, the overwhelming majority of certificated securities are held in the vaults of a CSD or its sub-custodian. Alternatively, they are registered in the issuer’s books in the name of the CSD or its nominee in the case of registered securities. In the case of multinational issues, securities are most often held by an ICSD.15

3.2.3 Fungibility and dematerialisation

Thus, in most jurisdictions, a multi-tiered, pyramid-shaped structure of custody was established. In that structure, the first-tier relationship is formed between the CSD and its participants, usually institutional investors or credit institutions, while between these participants and the ultimate investors, several other intermediaries may be interposed.16 Most often, intermediaries pool their clients’ entitlements to securities of the same issue in a fungible or omnibus account with the higher-tier intermediary. In some systems, however, an investor’s interests are separately recorded, not only on the books of the immediate intermediary, but also on the books of the CSD (non-fungible or traceable accounts).17 Yet in all of these multi-tiered structures, the account, rather than the certificates, is the root of the investor’s entitlement.18

Importantly, the systems of fungible custody are based on the interchangeability of securities of the same issue, so that they can be held in pools and transferred without the need for individual administration.

13Consequently, a custodian of securities or an account provider will hereinafter be referred to as an ‘intermediary’, but no distinction is intended between the concepts of account provider, intermediary, or custodian, unless so indicated. See MARKT/G2/MNCT D(2005), available at http://ec.europa.eu/internal_market/, for a memorandum that specifically addresses the use of ‘intermediary’, ‘account provider’ and ‘custodian’ in the context of the Legal Certainty Group’s advice.

14G30 1989 Report, recommendation 3, 7. See BERNASCONI (2000), 12 n.45 for an overview of the history of the world’s CSDs and ICSDs.

15The European ICSDs (Euroclear Bank and Clearstream International) were originally established for the use of the Eurobond market; see Giovannini Group 2001 Report, 9 and 20.

16For some securities, an ICSD forms a top layer above the (national) CSDs.

17See BERNASCONI (2000), 10.

18BERNASCONI (2000), 14.

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Consequently, such fungible custody enables in-house netting for securities transfers between the clients of the same custodian, and, more generally, the transfer of ownership and the creation of security interests in securities without physical movement in the case of bearer securities, or without changing the issuer’s register in the case of registered securities.19

Just as the economic crisis after World War I forced the Berlin banks to centralise the custody of certificated securities, the so-called Wall Street ‘paperwork crisis’ of 1968 forced New York custodians to change to a system of centralised, fungible custody. In both crises, the labour-intensive, time-consuming and expensive methods of physical delivery and administration on an individualised basis could no longer be managed and in both crises, the same solution was chosen.20 In the 1968 paperwork crunch, trading had to be delayed, while securities transactions could take months to be settled, so that centralised custody on a fungible basis proved to reduce the risks of loss and theft, illiquidity costs, and, more generally, systemic risk.21 Furthermore, it reduced the cost of capital to public and private issuers, as well as accountholders by a reduction of the operating costs.22

Due to the movement towards the centralisation of custody, or, more accurately, due to the fact that in the last few decades, custodians are only occasionally required to have physical securities in stock, (bearer) securities are increasingly more often kept in a single vault maintained by the CSD or its sub-custodian. The next step – which was given impetus on the European continent by its monetary unification in 1999 – was the replacement of all the physical securities kept in one place by a single paper, the so-called global share or global bond.23 The process of (gradually) reducing the movements and existence of physical certificates is called immobilisation, which is almost naturally followed by dematerialisation, the process by which all physical certificates are replaced by securities accounts.24 Thus, all physical certificates are replaced by (securities) accounts, and the risk of loss and theft is excluded completely.25

19See GUYNN (1996), 16 and PETERS (2003), 15.

20DROBNIG (1988), 15 and 17 and MICHELER (2006), 44 et seq.

21See GUYNN (1996), 21 and 24 and BERNASCONI (2000), 2 and 12. See infra, Ch. 4.4 for a more detailed discussion of these risks.

22GUYNN (1996), 24.

23See DROBNIG (1988), 20-22, discussing different types of globals. Cf. GOODE (1996), 168. See GOODE, ibid., for the description of different sub-qualifications of immobilisation, such as compulsory and permanent immobilisation as opposed to optional and revocable immobilisation.

24In France, for example, the issue of physical certificates has been forbidden by law since the 1980s; Act no. 81-1160 of 30 December 1981, now codified as Article L. 211-4 C. mon. fin. See Ch. 6.1.3. See also GOODE (1996), 168 and PETERS (2003), 21.

25RIPERT & ROBLOT II (1996), 2. See also BERNASCONI (2000), 9.

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3.2.4 Contemporary legal characterisations

Legally, the custody of securities was first regarded as depositum, as was the case with the earliest custody of money.26 This Roman law term characterises the situation in which the depositor has traceable property rights in individual deposited assets27 and meant in practice that the custodian had to register the securities numbers held for each individual investor. It has been noted, however, that this practice involved increasingly burdensome administrative costs as the volume of securities in smaller denominations increased enormously.28

Many legal systems therefore replaced depositum by so-called depositum irregulare, which refers to a mixture of the Roman law concept of mutuum (loan)29 and the concept depositum just mentioned. Depositum irregulare means that through depositing securities, investors acquire a right against their custodian of the delivery of the same amount of securities of the same kind, since the individuality of the deposited assets is lost as they are held in one single pool (fungible custody).30 Thus, the custody of securities on a fungible basis is a direct result of the fact that custodians no longer administer individual securities for individual clients, but maintain pools in which all securities to which the custodian’s clients are entitled may be found.

In most legal systems however, such a commingling of securities implies the loss of ownership, which could leave the investor with a mere contractual claim against his custodian, and provide little or no protection in the case of the custodian’s insolvency.31 Different, sometimes statutory solutions have therefore been developed to deal with this problem.32 The principal

26GUYNN (1996), 20.

27J. INST. 1.3.14.3. See also GUYNN (1996), 20 and 50, n.22 and RUTGERS (1998), 5 and the further reference provided therein. This is still a rule of law in both civil and common law jurisdictions as regards res mobilia; BERNASCONI 2000, 19.

28Cf., e.g., the Explanatory Notes to the Dutch Wet Giraal Effectenverkeer 1976 (Securities Giro Transfer and Administration Act, ‘Wge’): TK 1975-1976, 13 780, no. 3, 12.

29See G. INST. 3.90 and J. INST. 3.14 on mutuum. Cf. also article 1932 of the French Code Civil (Civil Code).

30Cf. the BIS-Glossary definition of fungibility: “a concept that characterises the method of holding securities by a CSD [Central Securities Depository, MH] or other financial intermediary in which each of a number of issues of physical or dematerialised securities are held in separate fungible pools. No owner has the right to any particular physical or dematerialised security in a particular pool, but has a right to such an amount of physical or dematerialised securities as shown in its account with a CSD or other financial intermediary.” On the precise legal meaning of fungibility in the case of securities however, there is little consensus; see, e.g., Annexe VIII.11 (A. Ghozi) to the CNCT 1997 Report, 188 and GOODE (2003), 211.

31Although in some jurisdictions this can be prevented contractually; GOODE (1996), 170.

32The following categorisation is largely based on BERNASCONI (2000), 20 et seq.

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