2. “determining whether a person ought to know of an interest or fact”

Dans le document Draft Official Commentary on the draft Convention on Substantive Rules regarding Intermediated Securities (Page 82-86)

CHAPTER III – TRANSFER OF INTERMEDIATED SECURITIES

III- 2. “determining whether a person ought to know of an interest or fact”

17-7. Articles 18(1) and 18(2) protect an acquirer of an interest in intermediated securities, unless the acquirer at the “relevant time” (see below) either actually knows or ought to know of a conflicting interest or a defective entry. The rule of construction provided by paragraph (b) explains the determination of “whether a person ought to know of an interest or fact”.

17-8. Sub-paragraph (b)(i) makes clear that the “ought to know” element is to be applied in light of the unique circumstances applicable to intermediated securities. Traditional notions of “good faith” or “innocence” are inappropriate in the sui generis context of intermediated securities systems. Courts should not seek guidance from the applicable law with respect to the good faith purchase of movables more generally.

17-9. Transactions in intermediated securities are very often entered into and executed on a rapid basis; acquisitions are very often effectuated through impersonal markets; and acquisitions are very often relied on as the basis for further onward transfers or other actions by the acquirer.

These circumstances, among others, impose a distinctly heightened necessity for innocent acquirers to have ex ante confidence in the rights that they are acquiring. The distinctions between these systems of acquiring and holding securities and traditional markets for movables generally are obvious. Moreover, as explained next in connection with sub-paragraph (b)(ii), the attributes of intermediated holding systems reflect the futility and inappropriateness of imposing any general duty of inquiry or investigation on an acquirer.

17-10. Sub-paragraph (b)(ii) further makes it clear that the “ought to know” standard imposes on an acquirer no general duty of inquiry or investigation. In most acquisitions by way of a credit or designating entry, it would be impossible for the acquirer to discover any conflicting claims or defective entries, because the acquirer must rely entirely on the intermediary. Similarly, in most acquisitions by way of a control agreement, or by an intermediary by agreement with its account holder, the acquirer will ordinarily have no practicable and conclusive way of discovering the interests or facts with which Articles 18(1) and 18(2) are concerned. It follows that requiring an acquirer to somehow undertake due diligence by way of inquiry or investigation would undermine the very efficiencies that intermediated systems are intended to capture. Accordingly, innocent acquisition protection is generally available under this article even to an acquirer who is concededly oblivious, ignorant, and uncurious – subject to the standards of honest behaviour and wrongful knowledge discussed below.

17-11. By no means does the “ought to know” standard protect a person who fails to observe appropriate standards of honest behaviour. Indeed, the “ought to know” standard is expressly designed to hold a dishonest person responsible for any interest or fact of which an honest person would have actually known. For example, if a person actually knows of very suspicious circumstances, and consciously decides not to make any inquiry, and that decision is made so that the person will avoid actual knowledge of a fact, then the person “ought to know” of that fact.

However, the nature of transactions in intermediated securities is such that this standard will rarely apply outside of an acquirer’s actual collusion with a wrongdoer, or in highly suspicious circumstances when the acquirer’s knowledge falls just short of “actual knowledge”.

EXAMPLE 17-1: Wife (W) informs the relevant intermediary that (i) the securities credited to the securities account of her Husband (H) are jointly owned by W and H (although the account is in the name of H alone), (ii) that they are parties to a divorce proceeding, and (iii) that her husband moved the securities into his sole account from their joint account with another intermediary. In the meantime, however, H granted a security interest in the intermediated securities to a lender (L) to secure a new loan and the securities have been

UNIDROIT 2009 – CONF. 11/2 – Doc. 5 – Article 17 77.

credited to L’s account with another intermediary. L was aware (from a credit application) that H is married but was unaware of the pending divorce proceeding.

L is an innocent acquirer, as he had no wrongful knowledge and was not aware of any suspicious circumstances. L’s knowledge that H is married is not a highly suspicious circumstance that would be a sufficient basis to conclude that L purposefully failed to make inquiry in order to avoid wrongful knowledge. (Note that the facts of Example 17-1 would not occur under a system in which W, not being an account holder, would not have a property interest in the securities credited to H’s account or in a system in which joint accounts are not permitted.)

EXAMPLE 17-2: The facts of Example 17-1 apply except that L’s loan officer handling the transaction knew (i) of the divorce proceeding, (ii) that it is typical in such proceedings that the transfer of an interest in assets other than in routine transactions is prohibited, and (iii) from documentation provided to L’s loan officer, that prior to the security interest being granted the securities were transferred from a joint account in the name of H and W to the account in the sole name of H.

L’s failure (i.e., the loan officer’s failure) to make any inquiry that might have revealed W’s proprietary claim and the wrongfulness of the grant of a security interest to L make it plausible that L ought to have known about the claim and the violation of W’s rights. If that is so, then L would not be protected under Article 18(1). (Of course, no simple example that does not assume actual knowledge can be sufficiently rich in factual detail to support a definite conclusion on the “ought to know” issue.)

EXAMPLE 17-3: Public Company (PC) owned dematerialised shares of M Co., also a public company, registered in PC’s name on the books of M Co. PC instructed M Co. (or its transfer agent) to transfer the shares to Closely Held Co. (CHC). M Co. (or its transfer agent) registered the shares in the name of CHC. The correct, authorised person gave the instructions on behalf of PC to M Co., but that person was acting wrongfully and without actual authority. CHC then granted a security interest to lender (L) to secure a new loan and the securities were credited to L’s account with its intermediary. Under the applicable law, PC is entitled to rescind the transfer to CHC and to recover the securities. L’s loan officer handling the transaction knew that (i) PC had made public filings in the past stating that PC owned a large block of M Co. shares, (ii) Maxwell Roberts (MR) owns a controlling interest in PC and in CHC (making the two companies affiliates), and (iii) MR and the companies he controlled were rumoured in the financial press to be experiencing some financial distress.

As in Example 17-2, L’s failure (i.e., the loan officer’s failure) to make any inquiry that might have revealed PC’s proprietary claim and the wrongfulness of the grant of a security interest to L make it plausible that L ought to have known about the claim and the violation of PC’s rights. If that is so, then L would not be protected under Article 18(1). (To reiterate, no simple example that does not assume actual knowledge can be sufficiently rich in factual detail to support a definite conclusion on the “ought to know” issue. Note as well that the facts of Example 17-3 could not occur in a dematerialised system in which investors must hold through intermediaries and may not hold directly on the books of an issuer.)

17-12. Paragraph (b)’s rule of construction does not deny Article 18 protection to an acquirer merely because a third party has made or given a public filing, registration, recordation or other notice with respect to the third party’s interest in the intermediated securities. In some

jurisdictions, such a public notice is a means by which the third party may protect its interest against certain claims. However, to require an acquirer, in advance of a transaction, to undertake a search for such notices would impose substantial delays and costs that have no place in modern securities markets. Accordingly, under sub-paragraph (b)(ii), an acquirer “is under no general duty of inquiry or investigation” with respect to such notices, and similarly under sub-paragraph (b)(i),

“the characteristics and requirements of securities markets, including the intermediated holding system” make clear that an interest or fact is not among those of which an acquirer “ought to know” merely because the interest or fact is reflected by such a notice.

17-13. This analysis does not differ merely because the acquirer has read or is otherwise aware of the third party’s public notice (unless the acquirer actually knows or ought to know, not only that the third party has an interest in the intermediated securities, but also that the acquirer’s acquisition violates the rights of the third party). An acquirer’s awareness that another person has an interest in the intermediated securities does not, by itself, constitute awareness that the acquisition “violates the rights of that other person” (Article 18(1)). On the contrary, it is common for a third party who has filed a public notice nonetheless to permit and desire the account holder to sell or otherwise transfer the intermediated securities, e.g., in order to generate funds with which to pay the third party. An acquirer is entitled to presume, without inquiry or investigation, that such is the arrangement in any particular transaction (unless the additional circumstances mentioned above are present).

EXAMPLE 17-4: As collateral for its obligations to lender L, account holder A has granted L a security interest in intermediated securities credited to A’s account maintained by IM.

Under applicable law, L’s interest in the securities has been made effective against third parties by means of a publicly filed notice describing such interest (see Article 13). Later, A sells an interest in the same securities to B, and IM duly debits A’s account and credits B’s account. If B at the time of the acquisition is not aware of the contents of L’s notice, or if B is aware thereof but the notice merely specifies L’s interest without also making clear that the transfer by A would violate L’s rights, then under paragraph (b)’s rule of construction, B is not deprived of protection under Article 18(1). (By contrast, if in addition to being aware of the contents of L’s notice B has also been told by L that A has promised not to sell the intermediated securities, then the circumstances taken together make it plausible that B ought to know about the violation of L’s rights. Here again, no simple example that does not assume actual knowledge can be sufficiently rich in factual detail to support a definite conclusion on the “ought to know” issue.)

III-3. Circumstances in which “an organisation [...] ought to know of an interest or fact”

17-14. The standards of actual knowledge or “ought to know” of Articles 18(1) and 18(2) apply to organisations just as they apply to other acquirers. The only additional consideration is that organisations generally involve multiple individuals, and consequently present threshold questions concerning the individuals to whom the “ought to know” standard applies, and when. These threshold questions are addressed by the rule of construction provided in paragraph 1(c). It does not alter the more substantive point that organisations are governed by the standards of Articles 18(1) and 18(2).

17-15. Paragraph 1(c) is important for two reasons. First, an organisation cannot have knowledge except through particular individuals. Second, most acquisitions of intermediated securities are by organisations, composed by or otherwise linked to numerous individuals having widely varying levels of knowledge and widely varying roles.

UNIDROIT 2009 – CONF. 11/2 – Doc. 5 – Article 17 79.

17-16. This rule of construction provides guidance for whose knowledge counts, while preventing abuses and not imposing undue burdens. It focuses not only on “the individual responsible for the matter” but also on the time at which a relevant interest or fact is “or ought reasonably to have been brought to [the responsible individual’s] attention”. The rule’s reference to reasonableness is important in at least two ways. First, if reasonable action would bring the interest or fact to the attention of the individual responsible for the matter, then the organisation acquiring the intermediated securities is charged with that knowledge, whether the organisation did in fact act reasonably or not. (This is clear from the “or ought reasonably” clause.) Second, the concept of reasonableness enables the rule to apply flexibly in a wide variety of circumstances.

17-17. As one important example of this flexibility, whenever the circumstances are such that an organisation acquiring intermediated securities should reasonably acquire information from a source outside the organisation, then the test requires the organisation to do so. In other words, nothing limits the reasonableness requirement to sources within the organisation itself. This point directly forecloses abusive manoeuvres, such as a commercial actor with relevant knowledge attempting to insulate itself from that knowledge by artificially arranging for intermediated securities to be acquired through a nominee, affiliate or outsourcing partner. The organisational knowledge test should prevent this abuse by being flexible enough, under proper circumstances, to charge an acquiring organisation with the knowledge even of individuals who are outside the organisation.

17-18. The flexibility of the test’s reasonableness concept is important in other circumstances as well. For example, reasonableness should not require that every single one of an organisation’s employees, even those that have no role in a particular acquisition of intermediated securities, report his or her relevant knowledge to the individual responsible for the acquisition. An organisation should not be discouraged from enjoying the benefits of a division of labour within the organisation. But a duty to report would exist under certain circumstances, such as where the reporting of the knowledge is part of the employee’s prescribed duties (as, for example, with a bank employee responsible for monitoring financial newspapers for stories about the bank’s prospective transactions), or where the employee otherwise has reason to know that his or her knowledge, if shared, would have an important effect on the acquisition.

17-19. Finally, the term “organisation” is not defined in the Convention, and it should be interpreted broadly. It includes any person other than an individual natural person, including a corporation, partnership, government, governmental subdivision or any other legal or commercial entity that has the power and capability to acquire an interest in intermediated securities and to incur legal and contractual obligations, powers and capabilities that an account holder must possess.

EXAMPLE 17-5: The facts of Example 17-3 apply except that it was not L’s loan officer who had the knowledge but instead L’s trust officer who had the knowledge. The trust officer handled MR’s family trusts, worked at another branch of L in another city, and had no knowledge of the loan transaction.

Under the special rule for when an organisation has knowledge or ought to know of an interest or fact, Article 17(c), the above circumstances raise the question whether the facts known to the trust officer “ought reasonably to have been brought to the attention of” the loan officer by the time that the credit was made to L’s account (the “relevant time” under Article 17(e)).

Dans le document Draft Official Commentary on the draft Convention on Substantive Rules regarding Intermediated Securities (Page 82-86)