Between Property Law and Contract Law: the Case of

Securities
Prof. Dr. Matthias Haentjens

Hazelhoff Research Paper Series No. 2

Hazelhoff Centre for Financial Law

Leiden Law School

Submitted to SSRN 14 May 2014

Electronic copy available at: http://ssrn.com/abstract=2436906

Please note:
This paper was first published by Matthias Haentjens in The Future of European
Property Law and should be cited as Haentjens M. (2012), Between Property
Law and Contract Law: the Case of Securities. In: Erp, S. van (Eds.) The Future
of European Property Law: Sellier. This version uploaded to SSRN is a working
paper and should not be cited in publications. The article published in The
Future of European Property Law should instead be referred to.

Abstract:
Grotius and Von Savigny made a strict distinction between property law
interests and contract law interests. This distinction still influences current
European law systems, both continental and Anglo-Saxon. The Draft Common
Frame of Reference (DCFR) also seems to build on the same distinction. Yet 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. 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.

Keywords:
Securities; financial law; property law; contract law; Draft Common Frame of
Reference; DCFR; harmonisation

Electronic copy available at: http://ssrn.com/abstract=2436906

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

1. INTRODUCTION

I do not know how many people in the audience own securities. But if you do, it is
likely that your securities are either (very) old, aesthetically appealing certificates, or,
and perhaps more likely, they are credited to your securities account. In the first case,
they have probably been acquired by you or your predecessor by way of physical
delivery. It the latter case, they are probably acquired through one of the billions of
securities transactions that are concluded in the EU every day. These securities
transactions, typically concluded on an exchange, ultimately result in a debit-entry in
the securities account of the transferor, and in a credit-entry in the securities account
of the transferee.

Grotius and Von Savigny would probably have difficulty classifying the securities
transaction just described. These lawyers made a strict distinction between iures in rem
(what we would call property law interests) and iures in personam (what we would call
contract law interests).1 This distinction still influences current European law systems,
both continental and Anglo-Saxon.2 The Draft Common Frame of Reference
(DCFR) also seems to build on the same distinction, as may be inferred from the
arrangement of, for instance, Books III (Obligations and corresponding rights) and
IV (Specific contracts and the rights and obligations arising from them) on the one
hand, and Books VIII (Acquisition and los of ownership of goods) and IX
(Proprietary security in movable assets) on the other hand.

I would submit that a strict distinction between contract law and property law is
virtually impossible to maintain, i.e. that contract law and property law are
intrinsically intertwined, so that one cannot exist without the other.3 This holds true
for certain categories of assets, such as securities credited to a securities account (in
short: book-entry securities), and similar modern assets that are credited by book-
entry, such as emission rights, landing rights, and intellectual property rights, 4 but it
also holds true for transfers in general, i.e. for transfers of all categories of assets.

Consequently, an eventual CFR without books VIII et seq., i.e. an eventual European
instrument of private law harmonisation that would not include property law, would
not be advisable. If it is concluded that European contract law must harmonise, then
property law should be harmonised simultaneously. My central thesis for discussion
today would therefore be: contract law harmonisation would be meaningless without
simultaneous property law harmonisation and vice-versa.

1
See, e.g., E.B. Rank-Berenschot, Over de scheidslijn tussen goederen- en verbintenissenrecht (1992), 13 et seq.
and 241 et seq. and T.H.D. Struycken, De numerus clausus in het goederenrecht (2007), 206.
2
In this regard, the English system of law does not seem to fundamentally differ from continental law systems.
See Comments (A) on Article VIII 1:202 DCFR and, e.g., Struycken, loc. cit., 795.
3
Cf., e.g., J. Smits, Van partijen en derden: over de interpretatie van numerus clausus van zakelijke rechten, 13
Groninger opmerkingen en mededelingen (1996), esp. 50 et seq., who takes this even further and argues that in
general, modern legal practice can draw little benefit from a (sharp) dogmatic boundary between property law
and contract law as Von Savigny had advocated.
4
Cf. S. van Erp, Security interests: A secure start for the development of European property law, ZERP
Diskussionspapier 8/2008, 20-21.

Electronic copy available at: http://ssrn.com/abstract=2436906

To that end, I will provide an introduction on the type of assets referred to above, viz.
book-entry securities, and to the transfer of these assets, so as to show that both as
regards the object of a securities transaction, viz. book-entry securities themselves, and
as regards the transaction and its consequences, property law and contract law as
traditionally understood are intrinsically intertwined. I will conclude with some
remarks on the desirability of securities law harmonisation.

But first, by way of introduction, let me refer to the Comments to Article VIII
1:101(4)(a) DCFR, which explain why the DCFR provisions of book VIII on the
transfer of ownership do not apply to company shares and, in short, certificated
negotiable instruments. Pursuant to these comments, the said assets are not included
in the categories of assets subject to book VIII DCFR on the following four grounds:
(i) company law has been kept out entirely, so that no provisions on the acquisition of
shares should be given; (ii) negotiable instruments are governed by specific rules; (iii)
negotiable instruments are served by specific transfer means and effects; and (iv)
some of these areas are subject to international harmonisation instruments. These
four grounds will be discussed in the following.

2. WHAT ARE BOOK-ENTRY SECURITIES?

2.1 Introduction

Traditionally, securities include shares, i.e. interests of investors in an issuer, and

bonds, i.e. claims of investors against an issuer. The DCFR, nor this contribution
concern the investor issuer relationship, which relationship is governed by rules that
are commonly labelled as company law. The DCFR and this contribution concern the
relationships between investors and third parties, which are governed by rules that are
commonly labelled as private law. I would submit that the private law rules relevant to
securities are autonomous and should be addressed as such. Admittedly, company law
rules may influence the relationships between investors and third parties, for instance
where company law forbids or limits the transfer of certain securities. But, in the same
vein, rules of public law may influence the transfer of securities, for instance when
public law forbids the transfer of certain securities, and no one would argue that a
private law act should not prescribe the rules for the acquisition of securities on the
ground that the same act should not concern public law. It is unconvincing, therefore,
that the DCFR does not address the acquisition and loss of certain categories of
securities, viz. shares and certificated negotiable instruments, on the ground that such
would belong to the realm of company law.

Book VIII DCFR does not apply to shares and certificated negotiable instruments, and
neither does it apply to book-entry securities. Pursuant to the DCFR definition of
'goods', goods are corporeal movables. Book-entry securities, or, to be more precise,
interests that are evidenced by a credit-entry in a securities account, do not qualify as
goods, because these interests are not corporeal (which, under the DCFR, means
'having a physical existence in solid, liquid or gaseous form'). Consequently, Book
VIII does not apply to book-entry securities, for Article VIII 1:101 states that this
Book (only) applies to goods. Book-entry securities may not be 'goods', but what are
they?
Matthias Haentjens, Between Property Law and Contract Law: the Case of Securities

Whereas transferable shares are (at least) as old as 1602,5 the concept of securities
being credited to an account is a relatively new phenomenon. It is only since 1968,
that most securities world-wide are administered this way. Prior to 1968, but certainly
prior to World War II, for each and every transaction, securities certificates had to be
manually transported between banks (and brokers) holding those securities for their
clients. When, in 1968, the New York financial system clogged up in and securities
trades took months to settle, a multi-tiered securities custody system was
implemented whereby all physical certificates are held with a central securities
depository (CSD), major banks and brokers maintain securities accounts (on behalf
of clients and themselves) with the CSD, and clients/investors maintain securities
accounts with the banks.6

Consequently, securities owned are held in a securities account with a bank or

broker, and the bank or broker provides periodic statements of the securities account
to evidence the entitlement. Acquisition and disposal of securities can happen only
through (transfer orders given to) the relevant bank or broker, as a result of which the
securities designated are credited and debited to the relevant securities account. In a
very similar manner, cash accounts are administered.

All this seems to have little to do with property law. Accordingly, most legal systems
classify the holding of a cash account as a contractual interest. The Comments to
Article VIII-1:101 DCFR state, for instance, Bank account money [] being a right
against the bank and not a corporeal asset. Most legal systems, however, treat interests
in book-entry securities as property law interests. This has the following background.7

2.2 Historical and current characterisations

The custody of securities was first regarded as depositum, as was the case with the
earliest custody of money.8 This Roman law term characterises the situation in which
the depositor has traceable property rights in individual deposited assets 9 and meant

5
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) marks the beginning of the
securities trade. However, it has even been argued that a lively trade in corporate shares existed in ancient Rome;
U. Malmendier, Roman Shares, in The Origins of Value, 31-42 (W.N. Goetzmann & K.G. Rouwenhorst eds.,
2005).
6
R.D. Guynn et al., Modernizing Securities Ownership, Transfer and Pledging Laws (1996), 21-24. This
centralized system of securities custody was invented as a result of yet another crisis: 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. See U.
Drobnig, Dokumenteloser Effektenverkehr, in: Abschied vom Wertpapier? Dokumentloser Wertbewegungen im
Effekten-, Gtertransport- und Zahlungsverkehr (K. Kreuzer ed., 1988), 17 and cf. M. Haentjens,
Harmonisation of Securities Law (2007), 32-35. The three-tiered custody structure described here, is a
simplified example. In practice, many more intermediaries may be interposed between the CSD and the ultimate
beneficial owner/investor. The legal principles, however, remain the same.
7
The following paragraphs build on my book, Harmonisation of Securities Law (2007), 33 et seq. and 256 et
seq.
8
R.D. Guynn et al., Modernizing securities ownership transfer and pledging laws (1996), 20.
9
J. Inst. 1.3.14.3. See also G.R. Rutgers, Monografien Nieuw BW, B37 Bewaarneming (1996), 20 and 50, n.22,
and 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, Christophe Bernasconi, The law applicable to dispositions of securities held

5
 in practice that the custodian had to register the numbers printed on each securities
certificate held for each individual investor. However, this practice involved
increasingly burdensome administrative costs as the volume of securities in smaller
denominations increased enormously, and eventually led to, inter alia, the 1968 paper
crash referred to above.10

Many legal systems therefore replaced depositum by so-called depositum irregulare,

which refers to a mixture of the Roman law concept of mutuum (loan)11 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). 12 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 custodians 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 custodians
insolvency.13 Different, sometimes statutory solutions have therefore been developed
to deal with this problem.14 The principal distinction between the solutions
contemporarily chosen is between jurisdictions that confer investors with some kind
of co-property interest in their securities and still regard securities as tangible
movables, and jurisdictions that have developed other views.

Co-property interests are known in civil law jurisdictions such as Germany, Spain and
the Netherlands, where it is based on the Depotgesetz, the Ley del Mercado de Valores
and the Wet giraal effectenverkeer, respectively. Fungible custody in Belgium and
Luxembourg is based on Koninklijk Besluit (Royal Decree) no. 62 and several
Rglements grand-ducal (Grand-ducal Decrees) respectively, which establish co-
ownership in notional pools of securities.15

through indirect holding systems (November 2000) (Preliminary Document no. 1 to the Hague Conference on
Private International Law), available at www.hcch.net.
10
Cf. 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.
11
See G. Inst. 3.90 and J. Inst. 3.14 on mutuum. Cf. also article 1932 of the French Code Civil (Civil Code).
12
Cf. the BIS-Glossary definition of fungibility: a concept that characterises the method of holding securities by
a 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 R.
Goode, Contract and Commercial Law: the Logic and Limits of Harmonisation, ius commune lectures on
European Private Law, 2003, 211.
13
Although in some jurisdictions this can be prevented contractually; R. Goode, The nature and transfer of rights
in dematerialised and immobilised securities, 4 Journal of International banking and financial law (1996), 167-
176.
14
The following categorisation is largely based on Bernasconi (2000), loc. cit., 20 et seq.
15
Of 17 February 1971, of 8 June 1994, of 7 June 1996, of 16 August 2000 and a statute of 3 September 1996. See
also the EU Clearing and Settlement Legal Certainty Group Questionnaire ('EU Questionnaire') (2007), 130,
available at http://ec.europa.eu/internal_market/financial-markets/clearing/certainty_en.htm.
Matthias Haentjens, Between Property Law and Contract Law: the Case of Securities

Although the precise classification of investors interests in securities is unclear under

French law, it is undisputed that investors do not have a co-ownership right in pools
of securities. Under UK and US law on the other hand, investors enjoy a bundle of
rights in rem as well as in personam against their intermediary. In the UK,
accountholders contractual rights follow from their contract with the custodian, while
their property law rights classify as co-ownership rights, which may follow from the
concept of trust.16 In the US, the Uniform Commercial Code (UCC) Article 8
provides investors with proprietary and contractual rights in respect of the securities
to which they are entitled. Italian and Brazilian law present yet a different solution, by
a legal fiction that regards custody on a fungible basis as depositum, i.e. the
administration of individual assets per individual client.

2.3 Both property law and contract law interests

Although none of the national systems above classify accountholder interests as solely
contractual in nature, it follows from the above that no international consensus exists
on what the dogmatic nature, or legal classification of accountholders rights would
be.17 General consensus does seem to exist, on the other hand, on what the effects of a
credit in a securities account should be; from an accountholders perspective, these
effects include the right to dispose of and to vest security interests in his securities, the
right to enjoy the fruits (i.e. dividends etc.) and the exercise of corporate actions
attached to his securities, as well as the right to revendicate and retrieve his assets.
These rights are all elements of the traditional concept of ownership in European
jurisdictions18 and it has therefore been argued that investors entitlements should be
classified as constructions of (co-)ownership. In this view, accountholder entitlements
that are contractual and not proprietary in nature provide less investor protection,
also because, contrary to contractual interests, a proprietary entitlement may be
asserted erga omnes.19

Yet investor protection may be ensured by other means than a traditional property
right. A contractual right with an absolute priority or a statutory obligation of an
insolvent intermediarys liquidator such as provided for under French law 20 for
instance, guarantee the protection of investors interests in an intermediary
insolvency. A prohibition for intermediaries to dispose of accountholders assets
(without proper authorisation) would further contribute to that protection. With
such rules, a contractual regime protects accountholder interests in a way that is
similar to any proprietary regime, especially because a proprietary entitlement can
normally, i.e. outside of intermediary insolvency situations, only be enforced against
the immediate intermediary.

Moreover, an accountholders right of ownership with regard to his book-entry

securities is not as absolute as a typical ius in rem would be. Other than an owner of

16
See EU Questionnaire (2007), 143-144.
17
See, e.g., Legal Certainty Group Advice (2006), 4.
18
Cf. Article VIII 1:202 DCFR.
19
Than in R.D. Guynn et al., Modernizing securities ownership, transfer and pledging laws, (1996) (1996), 76.
Cf. S.L. Schwarcz, Indirectly Held Securities and Intermediary Risk, 2 Uniform Law review (2001), 295 et seq.
20
Article L. 431-6 C. mon. fin.

7
 corporeal assets who is in principle free to use and dispose of his assets as he
pleases, an accountholder is dependent on his bank or broker should he wish to use or
dispose of his securities. Additionally, other than in the case of corporeal assets,
possession of book-entry securities is not possible in most legal systems, as under all
European systems, possession is only possible of corporeal assets.21

Under Belgian law, for instance, accountholders enjoy a right of co-ownership with
respect to the securities that their securities accounts refer to. This co-ownership right,
however, may be enforced only against an accountholders immediate intermediary
and is effective erga omnes solely in the instance of the immediate intermediarys
insolvency. In Dutch law, accountholders co-ownership rights are also not
enforceable erga omnes. Moreover, they also differ in other aspects from the private
law rules on co-ownership. In other countries, the distinction between a contractual
and a proprietary interest has become so fuzzy where it concerns accountholder
entitlements that authors disagree vehemently as to the correct classification. In
France, for instance, accountholders rights can be asserted against third parties, but
the intangible character of dematerialised securities, the object of these rights, does not
allow classification as a right in rem.

Because of these (and other) difficulties, the drafters of the 1994 US UCC reform
decided to refrain from a property or contract law classification and to introduce the
concept of securities entitlement. This sui generis concept was considered to refer
most adequately to the fundamentally hybrid character of accountholder interests. UK
law, where the dogmatic background is not undisputed, yields a similar result.22

2.4 Securities and the DCFR

In conclusion, an entitlement to book-entry securities has some property law aspects
(such as a revendication right, for instance), but certainly also lacks typical property
law characteristics (such as the possibility of possession, and to dispose without
dependency on a third party).23 Possibly for this reason, the DCFR does not follow a
clear course as regards (interests in) securities that are evidenced by book-entry in a
securities account. On the one hand, book-entry securities are classified as

21
See, e.g., Notes I.1 to Article VIII 1:205 DCFR.
22
See EU Questionnaire (2007), 143.
23
As a consequence, the harmonisation initiatives that have already been initiated in this regard, viz. the Geneva
Securities Convention, the Hague Conference and the Legal Certainty Group, considered a functional approach
the best course to take. In such an approach, legislation refrains from prescribing any legal classification.
Although characterisation plays an important role in the private international law of many jurisdictions, the
Hague Securities Convention avoids all substantive classifications and provides a conflict of laws rule that
expressly caters for accountholder interests of both a purely contractual and proprietary nature. See M.
Haentjens, The law applicable to indirectly held securities (2006), 97-98. The UNIDROIT instrument neither
requires its participating states to characterise accountholder interests nor to implement a specific legal
construct, but focuses on the effects of a credit entry and provides minimum standards with regard to these
effects. In first instance, however, UNIDROIT considered the introduction of a securities entitlement concept; see
P. Paech, Harmonising Substantive Rules for the Use of Securities held with Intermediaries as Collateral: the
UNIDROIT Project, 4 Uniform law review (2002), 1160. The Legal Certainty Group ultimately copied this
approach, although some members of the group expressed their strong disagreement with the position. Legal
Certainty Group Advice, 3-4 and Annex to the advice of the Group (July 2006), 11-12 (Italian contribution). See
also the earlier draft of the groups advice (LCG Draft Advice), 10-11, where the group considered advising the
introduction of a new name for the package of accountholder rights.
Matthias Haentjens, Between Property Law and Contract Law: the Case of Securities

incorporeal property (see above, para. 2.1.2).24 Consequently, under the DCFR
(unlike many jurisdictions, such as France), book-entry securities can be owned,
since pursuant to the DCFR definition of Property, incorporeal assets can be owned.
Perhaps for that reason, the drafters of the DCFR have expressly included securities
where the DCFR concerns rules on sale (albeit with appropriate adaptations).25 For
instance, Article IV.A 1:202 DCFR prescribes that a seller must transfer ownership to
the buyer.

Moreover, securities are included in the scope of Book IX DCFR on security interests,
as Book IX applies to moveable property, and incorporeal property is included in the
DCFR definition of movables.26 Book IX distinguishes between financial
instruments or financial assets and physical securities, defined as negotiable
instruments and documents and certificated shares and bonds. For instance,
pursuant to Section IX 3:204 DCFR, security rights in book-entry securities are
made effective (against third parties) by control.27

On the other hand, however, under the DCFR (as under most jurisdictions), book-
entry securities cannot be possessed.28 Moreover, securities are excluded from the
scope of book VIII DCFR, although this book concerns the acquisition and loss of
ownership (and book-entry securities can be 'owned' under the DCFR).29
Unfortunately, no reasons for this choice are given, so that one can only guess at the
drafters' motives. They might be driven by the hybrid nature of book-entry securities
and the interests therein.

3. HOW ARE BOOK-ENTRY SECURITIES TRANSFERRED?

3.1 Introduction
As stated above, the DCFR does not address the acquisition and loss of ownership of
book-entry securities, nor of company shares and certificated negotiable instruments,
inter alia on the grounds that the latter types of assets are governed by specific rules
and that these assets are served by specific transfer means and effects. It follows from
the preceding paragraphs in which the hybrid nature of book-entry securities has been
explained, that a transfer of book-entry securities is not a traditional, property law
transfer of corporeal assets. But are book-entry securities governed by specific rules
and served by specific transfer means and effects?

24
See Article IV.A 1:101(2)(b) and (c) DCFR. Interestingly, no distinction is made here between certificated
securities and book-entry securities, whereas the DCFR does distinguish between physical money, i.e. banknotes
and coins, and bank account money. See, e.g., Comments F (Money) to Article VIII 1:101.
25
See also, e.g., Article IV.A 1:101(2)(b). We must therefore understand Article IV.A 1:202 DCFR where it
reads the seller, undertakes to another party, the buyer, to transfer the ownership of the goods so as to mean
the seller, undertakes to another party, the buyer, to transfer the ownership of the incorporeal assets," where it
regards book-entry securities.
26
Article IX 1:101. See also, e.g. Article IX 1:201(7) and IX 3:204.
27
Following the UCC as an example, pursuant to Article IX 3:204(2) DCFR, control is effectuated by
instruction to the financial institution maintaining the relevant securities account, by book-entry into a special
account, or if the secured creditor is the financial institution just mentioned. If control has been established, the
security right so vested takes super-priority over all other security rights, even if the latter have been vested
earlier; Article IX 4:102 DCFR.
28
See, e.g., Comment to Article IX 2:111 DCFR and Comment B to Article IX - 2:302 DCFR.
29
Article VIII 1:101(4)(a) DCFR.

9
 First, this question demands a further investigation of how book-entry securities are
transferred in practice. To establish a transfer of book-entry securities, both transferor
and transferee usually give a transfer order to their respective banks to dispose of and
to acquire, respectively, certain designated securities. In a simplified fact pattern, a
transaction is subsequently concluded on a market by representatives of the banks.
Finally, the securities account of the transferor is debited and the account of the
transferee is credited. Transferor and transferee commonly are unaware of each
others identity and between the respective debit and credit entries usually lie at least
three business days.

3.2 Governed by specific rules?

A securities transfer as just described seems fully contractual in nature: it is initiated
by a transfer order, services are subsequently carried out which result in an agreement
of sale, and in conclusion of the transactions, the interests of the transferor are
extinguished by means of a debit-entry, while the rights of the transferee are created
by means of a credit entry. In short, a transfer of securities by book-entry closely
resembles a bank money transfer. Most legal systems acknowledge that a bank money
transfer does not classify as an assignment of a claim (against the bank).30 But many
legal systems classify a securities transfer as a transfer of ownership of the securities in
question from transferor to transferee.

Under German and Dutch law for instance, a book-entry securities transfer is
generally classified as a (property law) transfer of the book-entry securities, i.e. a
transfer of the (co-)ownership right in the securities.31 In many jurisdictions,
including France, the Netherlands and the UK, however, it has been argued that a
closer analysis of, especially, a securities transfer between clients of different account
providers shows that the transferee does not acquire the very same (accountholder)
interest which the transferor had, but obtains a new interest against his own account
provider.32 Thus, a securities transfer by book-entry would involve the cancellation of
the transferors interests and the subsequent creation of corresponding interests in the
transferees name, and could therefore be classified as a novation, rather than as a
transfer.

Yet the classification as a novation is not generally accepted, so that most legal systems
apply property law principles of general private law on transfers, as if a book-entry
securities transfer would concern a transfer of (certain interests in) assets (rather than
novation). These principles include, first, the property law principle that a transferee
can only acquire what his transferor has to transfer (nemo dat quod non habet). This
principle is also applied in the DCFR.33 As a result of this principle, transferees that

30
But cf. Article III 5:101(2) DCFR. It is not entirely clear, however, whether this provision includes securities
transfers by book-entry, which are necessarily subjected to the requirement that credit- and debit entries have
taken place.
31
See, e.g., J. Benjamin, Interests in securities, a proprietary law analysis of the international securities markets
(2000), 155, n. 38, R. Goode, Legal problems of credit and security (3d ed. 2003), 215, n. 40, J.H. Dalhuisen &
L.D. Van Setten (2003), Zekerheid in roerende zaken en rechten (2003), 124, M. Haentjens, Privaatrechtelijke
aspecten van giraal effectenverkeer, 6582 Weekblad voor Privaatrecht, Notariaat en registratie, 472-481 (2004),
478- 481, B.F.L.M. Schim (2006), Giraal effectenverkeer en goederenrecht (2006), 133 et seq.
32
EU Questionnaire (2007), 165-171.
33
Article VIII 2:101(1)(c) DCFR, Comments H(c) to the same, and Comments (A) to Article VIII 3:101.
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 transferees 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

34
Article VIII 2:101(1)(d) and Comments (E) to the same.
35
Article VIII 2:101(1)(e), and Comments (B) and (C) to the same.
36
In 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-
42.
37
EU Questionnaire (2007), 300-301 and 307-308, respectively.
38
UCC 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
intermediarys 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 transferees 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.

39
Compare 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.
40
Applicability 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.
41
Act 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
transferees 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

42
E.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.
43
Section 929 Civil Code.
44
Section 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.
45
KB 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.
46
Article 3:84 BW.
47
Articles 1583 C. civ. (France) and 1583 BW (Belgium).

13
 against third parties, neither earlier, nor later than the crediting of a transferees
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 transferees 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 CSDs system of custody nor transferred
via a regulated stock exchange are effected by a credit entry in the transferees
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 transferees 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

48
Cf. 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.
49
Articles 17 and 41 Wge.
50
UCC 8- 501(b).
51
UCC 8- 501(b).
51
Articles L. 431-2 C. mon. fin. and L. 228-1 ninth paragraph C. com. respectively. See also EU Questionnaire
(2007), 222-224.
52
Art. 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 book-
entry 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.

53
Giovannini Group, Cross-border clearing and settlement arrangements in the European Union (November
2001), ii, available at ec.europa.eu.
54
See www.hcch.net.
55
See http://ec.europa.eu/internal_market/financial-markets/securities-law/index_en.htm.
56
Cf. S. van Erp, Security interests: A secure start for the development of European property law, ZERP
Diskussionspapier 8/2008, 20-21.

15