11 Impact on the institutional framework

third party, an investor under German and Austrian law needs to keep securities certificates out of circulation in order to prevent a third party from acquiring possession of – and, consequently, ownership of – bearer securities. Paper certificates need to be kept safe and this need for safekeeping facilitated an important development in Germany and Austria. It created a demand for depository services which was met by German and by Austrian banks, which developed the business of safekeeping securities certificates for investors as a distinct branch of their commercial activities.

Rather than letting depository boxes or vaults to individual investors, banks originally took the securities certificates and kept them for clients on an allocated basis. The banks kept individual files for each customer; the paper documents were not physically held by investors but were nevertheless appropriated to them. The German and the Austrian depository services for securities are an example of how legal doctrine can facilitate the emergence of certain types of infrastructure providers. In a similar way as the English law of novation facilitated the emergence of registrars in England, the German and the Austrian legal doctrine protecting purchasers against adverse claims facilitated the emergence of depositories in those countries.

11.2 Immobilisation

German and Austrian legal doctrine did not only play an important role in the emergence of securities depositories; it also shaped the process through which paper was eliminated from the transfer process.

In the context of German and Austrian legal doctrine, securities certificates perform two important functions. The first is that upon acquisition of possession to the securities certificate the buyer becomes the owner of bearer securities. The second is to provide for a legal explanation of the rules protecting the buyer against adverse claims arising out of unauthorised transfers. German and Austrian modern legal doctrine operates on the assumption that, in both countries, the bona fide purchaser can fend off adverse claims because securities are classified as tangibles. It has already been noted (p. 167) that this analysis is not historically true for Austrian law, where the provisions protecting bona fide purchasers were introduced before the modern theory had established itself. The modern theory is, nevertheless, seen as an explanation of the rules contained in the ABGB. The prevailing view is that, even if historically the explanation of these rules appeared well

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after they had been adopted, the rules still operate only because and if securities are classified as tangibles. For this to be the case, securities certificates need to be issued.

The theory that the classification of securities as tangibles explains the rules that govern their transfer in German and Austrian law is not only understood as providing an explanation of the rules governing securities, it is also understood as having a normative element. The orthodox German and Austrian view is that the special rules governing securities would not apply if securities were not classified as tangibles. This then leads to the conclusion that the existence of paper certificates is essential; if paper certificates ceased to exist, securities transfers would be subject to the rules on assignment.

This normative element of the prevailing German and Austrian theory played an important role when a need to eliminate paper documents from securities transfers appeared in both jurisdictions. This need emerged in the years after the First World War when both countries experienced an unprecedented economic crisis aggravated by rampant inflation. From the point of view of this book, the crisis triggered an important legal development. The crisis was, of course, disastrous for most industries, including the investment industry; securities prices fell sharply. The securities affected most by the decline of the market were those with fixed rates of return, whose prices dropped to a level that made it uneconomical for them to be kept on an allocated basis.

Holding them in separate files meant that they had to be taken out of their files when dividends were due so that the respective coupons could be separated from the main certificate or the attachment to it and presented to the issuer. Transfers involved the physical delivery of certificates. This was relatively easy to achieve when buyer and seller had holdings with the same bank but much more costly when the paper documents had to be physically moved between banks. Depository banks found that the cost of maintaining allocated client accounts exceeded the value of many of the instruments held.1

It became clear that the cost of holding securities indirectly had to be reduced and that this could be done only by reducing the need

1 A. Metze, ‘Das Giro-Effektendepot der Bank des Berliner Kassenvereins’, Zeitschrift fu¨r das

¨

gesamte Handelsrecht, [1927] 376–377; Wilhelm Schu¨ tz, ‘Die Anderung des Depotgesetzes und der Eigentumsvorbehalt bei Wertpapierlieferungen’, Bankarchiv 23 (1923/24) 120; Ulrich Drobnig, ‘Effektenverkehr’, in Karl Kreuzer (ed.), Abschied rom Wert papier? Dokumentlose Wertbewegungen im EffektenGu¨tertransportund Zahlungsverkehr (Neuwied: Alfred Metzher Verlag, 1988) 17.

physically to handle paper certificates. This could have been achieved in different ways: in particular, it would have been possible for the market to adopt the same solution that was already in place for Government bonds. Government bonds at the time were not issued in paper form;2 instead, a register of public debt existed and transfers were effected by means of an entry in that register. This transfer regime could have served as a role model for all other securities. It would have enabled German service providers to abandon securities certificates altogether. This, however, did not happen.

Instead, German and Austrian service providers adopted a solution that maintained securities certificates because securities were deposited with central depositories. Many years earlier, in 1850, the banks in Berlin had established a financial intermediary called the ‘Kassenverein’ which facilitated money transfers between its members.3 Over time, the Kassenverein was also employed by banks to deposit securities they held in their own name.4

During the post-war crisis, the banks decided also to deposit client securities centrally with the Kassenverein and in order to save cost, the securities were to be kept on an unallocated basis. The Kassenverein was to keep records of the entitlements attributed to each of the banks, who in turn kept records of client entitlements. The securities were to be held by the Kassenverein as a bailee albeit with the name of the client owner being undisclosed to them. The identity of the client was, however, ascertainable through the depositing bank.

In 1925, the banks in Berlin approached their clients, asking them to approve of the new arrangement allowing banks to transfer client securities to the Kassenverein and agreeing for the securities to be kept there on an unallocated basis. The clients who felt unable to give their consent were advised that they had to expect a significant increase in fees for deposits kept on an allocated basis.5

2See below section 11.4.

3Georg Bruns, Das Depotgescha¨ft (Frankfurt am Main: Fritz Knapp Verlag, 1962) 35.

4Metze, ‘Das Giro-Effektendepot’ 377; Theodor Heinsius, Arno Horn and Ju¨ rgen Than, Depotgesetz (Berlin: Walter de Gruyter, 1975), s. 5, paras. 2–3; Claus-Wilhelm Canaris, in Hermann Staub (ed.), Großkommentar zum Handelsgesetzbuch, vol. III part 3,

Bankvertragsrecht, 2nd edn. (Berlin: Walter de Gruyter, 1981), para. 1988; Dorothee Einsele, Wertpapierrecht als Schuldrecht (Tu¨ bingen: J. C. B. Mohr (Paul Siebeck, 1995) 12–13.

5Herbert Fu¨ rst, ‘Sammeldepot an Effekten und Effektengiroverkehr’, Zentralblatt [1928] 57; Metze, ‘Giro-Effektendepot’ 377–378; Georg Opitz, Fu¨nfzig depotrechtliche Abhandlungen (Berlin: Walter de Gruyter, 1954) 426–428.

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Banks in Frankfurt am Main, Dresden, Essen and Stuttgart followed the example of the banks in Berlin and created their own central depositories. Austria also created a central depository.6 The result was that a handful of regional depositories held a significant proportion of securities in Germany, linked with each other through accounts.7 Each depository serviced the banks and clients linked to it by acting as a central depository for securities physically located with it but also by acting as an intermediary for securities kept with any of the other depositories.8

When securities were transferred, they no longer had to be physically moved; rather, they were transferred through book entry. If both buyer and seller kept securities accounts with the same bank, that bank would effect the transfer by debiting the seller’s account and crediting the buyer’s account. If buyer and seller kept accounts with different banks linked to the same depository, the seller’s bank would ask the depository to transfer the securities to the account of the buyer’s bank, which would then credit the securities to the buyer’s account. Transfers of securities between buyers and sellers who held their accounts with banks linked to different depositories would be effected through the accounts of both depositories. The depository to which the seller was indirectly linked would transfer the securities from the account of the seller’s bank to the account of the depository to which the buyer’s bank was linked. Then the depository of the buyer’s bank would credit the securities to the account of the buyer’s bank, which would in turn credit the buyer’s account.

The result was that transfers could be effected without the need physically to handle securities certificates which made a significant reduction in cost. At the same time, securities certificates were not abolished altogether and the fact that securities certificates continued to exist was considered to be of significant importance. The common belief was that for clients to continue to hold proprietary rights in securities and for buyers to be protected against adverse claims, securities certificates had to continue to exist because otherwise securities could not be classified as tangibles and the law of assignment would automatically apply to them. This common belief followed from the

6Eva Micheler, Wertpapierrecht Zwischen Schuld and Sachenrecht: Zueiner Kapitalmarktrechtlichen Theorie des Wertpapierrechts (Wien: Springer, 2004), 144.

7Carl Heumann, ‘Die Entwicklung des Effekten Giro-Verkehrs: Notwendigkeiten und Mo¨ glichkeiten’, (1927/28) 27 Bankarchiv 223.

8Metze, ‘Giro-Effektendepot’ 377–378.