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11.3 Global certificates

German and Austrian market practice continued to develop along the path it had previously adopted. German and Austrian bearer securities are traditionally issued in the form of individual certificates. The issuer produces one certificate for each unit of every type of security issued. These certificates need to be protected against forgery; issuers therefore need to be careful about the quality of the paper and the type of printing they use and incur significant expense in arranging for the production of individual certificates.

Once most certificates had been deposited in a central depository, it became apparent that individual certificates had ceased to perform their original purpose of circulating between market participants. A large number of individual paper certificates were produced, only to be stored with a central depository. Issuers realised that the cost involved in producing certificates could no longer be justified and the depositories found that individual certificates consumed a significant amount of space and required maintenance, both of which caused unnecessary expense.

The issue of cost first arose during the Second World War. At the time, paper was a rare and expensive commodity and it seemed wasteful to print individual certificates only for them to disappear in a vault.10 It would have been possible to re-think the transfer regime that governed securities and to fully dematerialise securities transfers. This, however, was not done. Issuers rather resolved to issue one global certificate instead of individual ones.

Global certificates can be issued in two forms. They can be issued as temporary global certificates giving the investor a right to have, if she so wishes, individual certificates issued to her. They can also be issued as permanent global certificates denying the investor a right to individual certificates. Both types of global certificates began to replace individual certificates in Germany and Austria during the Second World War.

Today most issues of debt securities are represented by a permanent global certificate. Shares and other equity securities tend to be represented by a temporary certificate giving owners the right to request the issue of individual certificates.11

10Paul Fleischmann, ‘Wertpapiere im totalen Krieg’, [1943] Bankarchiv 9; Fritz Fabricius, ‘Zur Theorie des stu¨ ckelosen Effektengiroverkehrs mit Wertrechten aus Staatsanleihen’, (1963) 162 Archiv fu¨r die civilistische Praxis 460.

11Micheler, Wertpapierrecht 252–260.

This changeover from individual to global certificates is significant from a legal point of view because it is no longer possible to allocate particular certificates to particular owners. It cannot be said that individual owners have a legal relationship such as possession with a particular number of securities. German and Austrian law overcame the allocation problem in a fashion consistent with the path previously adopted. Rather than creating a new doctrinal solution German and Austrian legal doctrine expanded the scope of application of the rules of possession. The current orthodox view is that if securities are issued in the form of global certificates, investors have joint possession of, and are co-owners of, the underlying certificate.

This analysis makes it possible for German and Austrian lawyers to continue to apply the rules on tangibles to transfers of securities. Securities are for all practical purposes transferred by way of book entry. From the point of view of German and Austrian legal doctrine, however, the transfer involves a change in possession of the underlying document. The transferee is considered to acquire joint possession of, and a co-ownership right of, the underlying global certificate upon credit of the securities to her account. Investors do not own individual certificates but are nevertheless deemed to have a proprietary relationship with a tangible securities certificate.

The prevailing view is that the assumption that investors continue to hold and transfer possession to a tangible certificate is necessary to allow German legal doctrine to continue to rely on the rules of good faith acquisition of ownership rights to tangibles in order to protect transferees against adverse claims.12

11.4 Government bonds

German Government bonds are perhaps the most striking example of the impact of legal doctrine on institutional development.

On 31 May 1910, Germany passed a special law on the register of public debt (Reichsschuldbuchgesetz).13 Based on that law, German Government bonds were not issued in the form of bearer or any other kind of paper certificates. Instead, the German state created a register in which the names of the owners of the securities were entered.

12Micheler, Wertpapierrecht 161–171.

13Reichsgesetzblatt 1910, I 840; Hans Lessing, ‘Das Reichsschuldenbuch’, (1915/16) 15

Bankarchiv 293.

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Ownership rights to public debt securities were transferred by way of entry in that register.14

The German register for public debt created a paperless transfer system for securities. This register was established before the German economy slid into the financial crisis that dominated the 1930s; the transfer system for Government bonds at the time was less costly than the transfer system for private sector securities. It did not require intermediaries to maintain files for individual customers from which securities certificates had to be physically moved to effect a transfer.

Germany already had a paperless transfer mechanism in place when it became clear that the transfer procedure for paper securities was too expensive. Given that a model for paperless transfers already existed it is surprising that the German banks did not build on that model when they introduced reform. They did not introduce a central register of securities; they rather chose to create a central depository. They felt constrained by existing legal doctrine, as we have seen; they wanted to create a transfer system which would continue to operate on the basis of the rules on tangible movables.

Legal doctrine not only caused Germany not to take a path of reform that could well have generated more benefits than the system that was actually implemented, it also affected the development of the law relating to public debt securities. German banks not only held private sector securities for their clients, they also offered services in relation to Government bonds. Over time, transfers of Government bonds were integrated with transfers of other securities.15 This was done by entering the name of the central depositories on the register of Government bonds. The central depository would act as a trustee for the benefit of the banks, which in turn would act as trustees for their clients.

At first, it was unclear how transfers of Government bonds were to be analysed. In 1937, Government bonds were explicitly made subject to the law on securities deposits. Depotgesetz 1937, s. 42 states that the rules of the Depotgesetz can, by way of a statutory instrument, also be made applicable to merchants who hold public debt securities as trustees for clients (see

14For an account of the historic background of the German register for public debt, see also Berthold Wagner, ‘50 Jahre Bundesschuldenverwaltung’, [1999] Wertpapier Mitteilungen 1949.

15Georg Opitz, Depotgesetz, 2nd edn. (Berlin: Walter de Gruyter, 1955) 435–436; Einsele,

Wertpapierrecht 15–17; Bruns, Das Depotgescha¨ft 45–47; Klaus Peters, Wertpapierfreies Effektensystem (Go¨ ttingen: dissertation, 1975) 74; Fabricius, Zur Theorie des stu¨ kelosen Effektengiroverkehrs, 456.

subsection 12.1.2). Statutory instruments to that effect were enacted in 1940 and in 194216 and these rules continue to be applied today.17

The effect of this statutory intervention is that Government bonds are considered to be governed by the rules on tangibles, notwithstanding the fact that no paper certificate representing the instrument exists.

Orthodox German legal doctrine justifies the application of the rules on tangibles by way of a legal fiction, which is that as a result of the statutory incorporation of Government bonds into the system for transfers of bearer securities, Government bonds are deemed to be tangible movables18 and their transfers governed by the rules on tangibles movables.

When Government bonds are credited to the transferee’s account, this is legally analysed in the following terms. The transferee is deemed to have acquired possession of the certificates, the existence of which is also deemed. The transferee is also protected against adverse claims by the rules on tangible movables.

This development of German law exemplifies two phenomena. The first is that law develops by legal doctrine refining existing concepts rather than by creating new solutions from scratch. The example of Government bonds shows that German legal doctrine, when faced with the choice, preferred to operate a legal fiction to adopting a transfer system that would require the creation of a new legal basis. The second is that the legal doctrine steered the German market infrastructure towards immobilisation and prevented the development of a paperless central register for government securities from developing. The central register for Government bonds was instead integrated into the immobilised transfer system which requires legal doctrine to operate on the basis of fictitious documents. That route, however, is perceived to be safer than creating a paperless transfer system from scratch.

16Verordnung u¨ ber Verwaltung und Anschaffung von Reichsschuldbuchforderungen vom 5.1.1940 (Reichsgesetzblatt 1940, I 3); Verordnung u¨ ber die Behandlung von Anleihen des Deutschen Reiches im Bankund Bo¨ rsenverkehr vom 31.12.1940 (Reichsgesetzblatt 1941, I 21); Zweite Verordnung u¨ ber die Behandlung von Anleihen des Deutschen Reiches im Bankund Bo¨ rsenverkehr vom 18.4.1942 (Reichsgesetzblatt 1942, I 183).

17Bundesanleihegesetz dated 29.3.1951 and Art. 2 Depotgesetznovelle 1972; Wolfgang

Go¨ ßmann, in Herbert Schimansky, Hermann-Josef Bunte and Hans-Ju¨ rgen Lwowski (eds.), Bankrechts-Handbuch, vol. II, 2nd edn. (Mu¨ nchen: Beck, 2001), s. 72, para. 68; Peters, Wertpapierfreies Effektensystem 21–23; Peter Scherer, in Karlheinz Boujong, Carsten Thomas Ebenroth and Detlev Joost (eds.), Handelsgesetzbuch, vol. II (Mu¨ nchen: Beck/ Verlag Franz Vahlen, 2001), s. 42 DepotG, para. VI 586.

18Fabricius, ‘Zur Theorie des Stu¨ ckelosen Effecktengiroxerkehrs’ 463–464; Opitz, Fu¨nfzig depotrechtliche Abhandlungen 538, 722.