Shares

Modern Registrars

In modern times, technology and the drive for a more efficient system for holding shares have fundamentally changed the means by which shares are held in public companies and in some private companies.  Many transfers are effected by electronic entries in a securities account.

Most publicly traded securities have been dematerialised.  Where not dematerialised, many have been immobilised by the lodgement of the paper certificates in a Central Securities or other intermediary.

Efforts to apply the traditional location rules to such securities have involved looking through tiers of intermediaries to the laws of either the jurisdiction of incorporation of the issuer, the location of the register, or the location of the actual underlying security certificates.  This has led to unsatisfactory results in relation to core issues such as enforceability, perfection and priority of interests. Accordingly, there have been moves at the EU level to bring certainty and to coordinate laws internationally in this area.

Legal Instruments

The Settlement Finality Directive is a step in this direction.  It deals with the choice of law issues in relation to collateral security, where the collateral taker is registered on a register, account or centralised depository system within a state.

The choice of rule under the Directive takes account of the location of the relevant intermediary.  The rights of the collateral holder are governed by the law of the state where the account, central deposit system or register is located.

The Financial Collateral Directive, which is wider in scope, extends this principle in relation to book entry securities held by in a cross-border context and financial collateral.

The Hague Securities Convention   may be ratified by the EU.  Some of the rules under the Convention, diverge from that in EU states.  The Convention harmonises choice of law rules and not substantive rules, relating to certain types of securities held with intermediaries. It applies to all securities held within the intermediary.  It does not apply to directly held securities.

Hague Convention Choice of Law

The Convention applies the place of the relevant intermediary approach.  However parties may exercise a choice of law.

An express agreement between the account holder and intermediary may be made in relation to a choice of law subject only to a qualifying office requirement.  It must be expressly made in the account agreement between the parties as being the state which law governs that account agreement or if the accounts agreement expressly provides that another law is applicable to the issues specified, that other law will govern the issue.

In any case the law chosen will only apply if the relevant intermediary has a qualifying office in that state. There is provision for when the account agreement is amended to change the applicable law.

Hague Convention No Choice of Law

In the absence of an express agreement or in the event of choosing the law of the state in which, at the time of the agreement, the intermediary does not have a qualifying office, a specific provision is made. If the applicable law is expressly stated in an account agreement that it is entered through a particular office, then the law applicable to issues specified is the law of the state in which that office is located.  This only applies if the intermediary has a qualifying office in that state at that time.

In the absence of the above, then the applicable law is the law of the state under whose law the relevant intermediary is incorporated or otherwise organised at the time of the agreement or if there is no such agreement, at the time the securities account was opened or failing that, the law of the state in which the intermediary has its principal place of business.

Matters Disregarded

In determining the applicable law, no account is to be taken of

• the place of incorporation or organisation of the issuer of the securities,
• the place where certificates representing the securities are located.
• the place where a register of holders of securities is maintained by or on behalf of the securities and/or
• the place where any intermediary other than the relevant intermediary (upper tier )  intermediary is located.

There is a public policy exception in standard terms in the Convention.  That application of the presumptive applicable law may be refused only if its effects would be manifestly contrary to the public policy of the forum.  Similarly, mandatory rules of the forum are preserved.