2. Recognition of nominee holding structure and split voting: paragraph 2

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CHAPTER IV – INTEGRITY OF THE INTERMEDIATED HOLDING SYSTEM

III- 2. Recognition of nominee holding structure and split voting: paragraph 2

29-19. This Convention could stop with paragraph 1, but it further provides a supplemental rule in paragraph 2, which is of particular importance in cross-border situations. The thought is that as a corollary of the recognition of the intermediated holding system, the recognition of so-called nominee holding and split voting (or split exercise of rights) is desirable for promoting cross-border holding and trading of securities.

29-20. The first part of Article 29(2) requires a Contracting State to recognise the so-called nominee holding mechanism. Under such system, a person (nominee) acts in its own name and on behalf of another or other persons (beneficiaries). Article 29(2) does not use the notion “nominee”

or “beneficiaries”, and rather uses more generic terminology to maintain the Convention’s functional and neutral approach. In any case, a Contracting State must recognise a mechanism by which such nominee holds intermediated securities in its own name and on behalf of the beneficiaries.

29-21. In that situation, the second part of Article 29(2) applies, and the Contracting State must permit so-called split voting and a similar mechanism for the exercise of the rights against the issuer. However, the Convention stops here, and does not prevent the Contracting State from providing conditions for such exercise of the rights. For instance, law in a Contracting State may require the beneficiaries names to be disclosed as a condition for permitting split voting by the nominee.

29-22. There may be different systems of recognising the functionally same result of nominee holding and split voting around the world, and a Contracting State is free to name and prepare its mechanism as far as what is described in Article 29(2) in generic terms is obtained.

29-23. Nominee holding and split voting or split exercise of rights in functional terms typically operate in the following way. For instance, A as a shareholder acts for B, C and D in respect of shares of issuer Z. A may vote differently for B, C and D in Z’s annual shareholders meeting, according to the instructions it receives from the three investors. Other rights relating to, for example, payments such as interests or dividends may also be carried out in different ways in respect of the different parts of a holding of securities of the same description.

29-24. To the extent that Article 29(2) guarantees the nominee holding structure and split voting or split exercise of rights, it is an exception to the general rule declared in Article 8 that this Convention does not affect any right of the account holder against the issuer of the securities (see the commentary on Article 8).

EXAMPLE 29-4: X Inc. is incorporated in Contracting State A. X’s shares are admitted to trading on the national exchange in CS A. The laws of CS A do not allow investors in domestic issuers to hold shares or bonds through nominees. However, a bank incorporated in another country holds shares for several of its customers as nominee, as permitted by the laws and regulations applicable to the bank.

Article 29(2) requires CS A and X Inc. to permit the bank to hold shares as a nominee for investors or beneficiaries. Moreover, the bank must be permitted to exercise split voting in the general assembly of X Inc. For instance, if the bank has 1,000 beneficiaries and 700 want to vote “yes” and 300 “no”, then the bank must be permitted to vote “yes” for 700 shares and “no” for 300 shares. Whether the bank is required to exercise this split voting is another issue; it is dealt with by the applicable law, not Article 29.

EXAMPLE 29-5. In the setting of Example 29-4, the Contracting State may impose conditions where the bank exercises the voting right. Note also that the State may require the name of the bank to be recorded on the shareholder register of the issuer (i.e., the bank must be a registered shareholder) for the bank to exercise the voting right. This point is dealt with under Article 8, not Article 29. The “Subject to” wording in Article 8(1) does not prevent such treatment.

29-25. A few questions may arise. For instance, as noted above, a Contracting State (having an intermediated system) is not required to treat securities issued and held in an intermediated holding system in another State to be held in the intermediated system in that Contracting State (unless they are publicly traded in that Contracting State). In this case, if that State does not permit such foreign securities to be held in the intermediated system, is that State required to recognise nominee holding and split voting for such foreign securities? Is it permitted that a Contracting State does not recognise nominee holding or split voting for its domestic securities at all? The answers depend on how to interpret the words “such securities” in Article 29(2). The answer to the first question should be yes. In other words, if certain securities are held in the

UNIDROIT 2009 – CONF. 11/2 – Doc. 5 – Article 30 137.

intermediated holding system in a State other than a Contracting State, the Contracting State must recognise nominee holding and split voting for those securities even where it does not permit such foreign securities to be held in the intermediated holding system in that Contracting State. The underlying policy is to ensure the compatibility of systems among different States and facilitate cross-border investment. The answer to the second question would be no. A Contracting State must recognise nominee holding or split voting for its domestic securities if they are held by foreign investors in another State.

Article 30 Set-off

As between an account holder who holds intermediated securities for its own account and the issuer of those securities, the fact that the account holder holds the securities through an intermediary or intermediaries shall not of itself, in any insolvency proceeding in respect of the issuer, preclude the existence or prevent the exercise of any rights of set-off which would have existed and been exercisable if the account holder had held the securities otherwise than through an intermediary.

Commentary

I. Introduction

30-1. Article 30 deals with one specific question of whether an account holder which holds certain securities for its own account has a right of set-off against the issuer of those securities in the event of the issuer’s insolvency. On this question, the Convention takes the approach that there must be no discrimination between non-intermediated and intermediated securities. If a right of set-off would have existed and would have been exercisable in a non-intermediated context, it must exist and must be exercisable where the securities are held in the intermediated holding system.

II. History

30-2. The substance of this provision has not given rise to much debate in the negotiation process.

30-3. The first version of this provision was drafted by the Study Group. See UNIDROIT 2004 – Study LXVIII – Doc. 18, Article 18, and the explanations thereto in UNIDROIT 2004– Study LXVIII – Doc. 19, p. 34.

30-4. During the first session of the CGE, only small changes were made to the provision. See UNIDROIT 2005– Study LXVIII – Doc. 24, Appendix 1, Article 20; UNIDROIT 2005– Study LXVIII – Doc. 23 rev., sections 162-164 and 194.

30-5. Hardly any changes were made to the provision during the second session of the CGE (see UNIDROIT 2006– Study LXVIII – Doc. 42, Appendix 1, Article 14; UNIDROIT 2005– Study LXVIII – Doc. 43 rev., sections 130-131), the third session of the CGE (see UNIDROIT 2006– Study LXVIII – Doc. 57, Appendix 1, Article 25; UNIDROIT 2007– Study LXVIII – Doc. 58, sections 78-80 and 159) and the fourth session of the CGE (see UNIDROIT 2007 – Study LXVIII – Doc. 94, Appendix 1, Article 27).

30-6. During the first session of the diplomatic Conference, the second paragraph of (then) Article 27, stating that this Convention does not affect any express provision of the terms of issue of the securities, was deleted because it was felt to be unnecessary. See UNIDROIT 2008– CONF. 11 – Doc. 3, Article 27 and UNIDROIT 2008– CONF. 11 – Doc. 48 Rev., Article 30.

III. Analysis

30-7. Article 30 provides an equal footing rule between intermediated and non-intermediated holding systems with respect to set-off, but only in the insolvency proceeding with respect to the issuer. This provision shows the minimalist approach and is silent about set-off in other contexts.

Thus, this article provides that if the right of set-off were to exist or be exercisable by the account holder against the issuer in the insolvency proceeding with respect to the issuer in case of the non-intermediated holding system in a Contracting State, then such set-off right must exist or be exercisable in case of the intermediated holding system. Article 30 does not cover the right of set-off asserted by the issuer or any situations other than the above.

30-8. For instance, under the non-intermediated system, AH (account holder), who holds a certificate of shares and has rights as a shareholder, may happen to owe obligations to IS (issuer).

In this setting, in most jurisdictions, AH may exercise the right of set-off in insolvency proceedings regarding IS if mutuality of the obligations and other conditions are met. If so, such right of set-off would have to be recognised in the jurisdiction if it is a Contracting State, even where the shares are held in the intermediated holding system.

EXAMPLE 30-1. In a Contracting State’s intermediated holding system, AH holds bonds through its IM (intermediary) and its bondholder rights against IS are only exercisable through the CSD or the nominee for the CSD (like in many common law jurisdictions). One might say that mutuality of the obligations as a condition for set-off is lost here, because IS owes the obligations against CSD or the nominee for the CSD and AH owes the obligations against IS. In this setting, in insolvency proceedings with respect to IS, AH’s right of set-off must be recognised under Article 30.

30-9. The words “of itself” means that Article 30 does not go beyond equal footing between intermediated and non-intermediated holding systems. Thus, Article 30 does not prevent the situation where factors other than the holding pattern itself disallow or limit the right of set-off. For instance, the applicable insolvency law may limit the right of set-off during the suspect period, and if so such law applies. This result is not obtained from Article 7 (general exclusion of insolvency law matters), but from “of itself” under Article 30. In other words, Article 7 provides “unless otherwise provided in this Convention”, and Article 30 covers one of the cases on which rules are “otherwise provided in this Convention”.

CHAPTER V – SPECIAL PROVISIONS WITH RESPECT TO

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