6. Rights in respect of a limited interest, including a security interest

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CHAPTER II – RIGHTS OF THE ACCOUNT HOLDER

III- 6. Rights in respect of a limited interest, including a security interest

9-28. A credit of securities to a securities account does not always represent the fullest possible interest in intermediated securities. Article 11(4) states that a security interest, or a limited interest other than a security interest, may be acquired by a credit. Under Article 12, intermediated securities may be charged with one (or more) security or other interest in favour of the intermediary or a third party. This may also occur by a disposition made under the non-Convention law in accordance with Article 13.

9-29. The types of interests that can be credited to a securities account or that can be charged over intermediated securities are not determined by the Convention, but exclusively by the non-Convention law.

9-30. For example, the non-Convention law will determine what type of security interest can be granted to a secured lender by having securities transferred to its account, and which rights accrue to him in respect of these intermediated securities.

9-31. Therefore, Article 9(3) acknowledges that the non-Convention law determines the limits on the rights of an account holder who has obtained a limited interest by a credit to its securities account.

9-32. Article 9(3) does not refer to Article 12 because it only addresses the effects of a credit of securities where such credit only conveys a limited interest in intermediated securities. Article 12 may also be used to convey a limited interest, but it does not do so by a credit to a securities account so that it needs not be mentioned in Article 9(3).

Article 10

Measures to enable account holders to receive and exercise rights 1. An intermediary must take appropriate measures to enable its account holders to receive and exercise the rights specified in Article 9(1).

2. This Convention does not require the relevant intermediary to establish a securities account with another intermediary or to take any action that is not within its power.

Commentary

I. Introduction

10-1. Article 10(1) provides for the most basic obligation that an intermediary owes to its account holders. It must take the appropriate measures so that its account holders enjoy the rights provided in Article 9(1). However, Article 10(2) sets some limits on this obligation as well as other Convention obligations of an intermediary. An intermediary is not required to open an account with another intermediary or to take actions that are not within its power. Note that an intermediary’s obligations under this article as well as other obligations of an intermediary under the Convention may be limited as well by the operation of Article 28.

II. History

10-2. Article 10 has its roots in Article 2(3) which was drafted by the Study Group (see UNIDROIT 2004 – Study LXXVIII – Doc. 18, p. 3-4).

10-3. The provision was further developed in Versions A and B of paragraph 5 of Article 4 (the predecessor of Article 9) of the draft Convention that emerged from the first session of the CGE.

See UNIDROIT 2005 – Study LXXVIII – Doc. 24 (Appendix 1), p. 4 - 5.

10-4. Article 10(1) of the draft Convention adopted at the second session of the CGE was similar in substance and text to the current version of Article 10. See UNIDROIT 2006 – Study LXXVIII – Doc. 42 (Appendix 1), p. 10.

10-5. The provision remained essentially the same during the third session of the CGE (see UNIDROIT 2006 – Study LXXVIII – Doc. 57 (Appendix 1), Article 6) and the fourth session of the CGE (see UNIDROIT 2007 – Study LXXVIII – Doc. 94 (Appendix 1), Article 8).

10-6. During the first session of the diplomatic Conference the first paragraph of the provision was divided into two paragraphs 1 and 2, and the substance of former paragraph 2 was moved to a new Article 8.

III. Analysis

10-7. As explained in the commentary on Article 9, Article 9(1) specifies the rights that an account holder acquires upon a credit to its securities account. Article 10(1) is the mirror image of Article 9(1). It obliges the intermediary to take appropriate measures so that its account holders enjoy the rights provided in Article 9(1). Consistent with the Convention’s functional approach, Article 10(1) describes the results that the intermediary must achieve – providing the rights conferred in Article 9(1) – but does not specify the precise measures that the intermediary must take.

10-8. The measures that an intermediary must take pursuant to Article 10(1) may vary substantially from jurisdiction to jurisdiction by virtue of differences in the applicable law and in the structure of intermediated securities systems. The rights specified in Article 9(1)(a) provide an illustration. In some systems, for example, dividends and voting rights are passed down through tiers of intermediaries. In others, an account holder may enjoy a more direct relationship with the issuer in the context of receiving distributions and exercising voting rights. Articles 9(1)(b) and 9(1)(c) expressly refer to “instructions to the relevant intermediary” as the method by which an account holder may exercise its right to dispose of or grant an interest in intermediated

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securities or to hold securities to be held other than through a securities account, when that option is available under the applicable law, account agreement, or the uniform rules of a securities settlement system. Once again, the measures that an intermediary must take in order to comply with those instructions is not harmonised under the Convention’s functional approach and will depend on the applicable law.

10-9. The obligations of an intermediary under Article 10(1) are not absolute. They are relaxed in two specific ways by Article 10(2). In addition, the obligations must be interpreted and applied by taking into account the provisions of Article 28. Example 28-1 illustrates the operation of Article 10(1).

10-10. Article 10(2) is straightforward. It specifies two types of actions that the Convention does not require an intermediary to take. Note that it addresses what the Convention does not require and in that respect it has a broader reach than an intermediary’s Article 10(1) duties. First, the Convention does not require an intermediary “to establish a securities account with another intermediary”. Second, it does not require an intermediary “to take any action that is not within its power”.

EXAMPLE 10-1: IM is located in State X and the law of State X is the non-Convention law.

IM’s account holder, AH, instructs IM to dispose of shares of Company A that are credited to AH’s securities account. However, AH specifies that the shares should be sold on a stock exchange located in State Y. IM is not a member of the exchange in State Y and has no relationship with a member of that exchange. The only way that IM could follow AH’s instructions would be to establish an account in IM’s name with another intermediary that is a member of the exchange in State Y. Under Article 10(2), the Convention does not require IM to establish such an account.

EXAMPLE 10-2: IM-1, located in State X, is an account holder of its relevant intermediary, IM-2, located in State Y. AH-1 and AH-2 are account holders of IM-1 and there are 100 shares of A Company shares credited to each of their accounts. There are 200 shares of A Company credited to the account of IM-1 on the books of IM-2. A Company is organised under the law of State Z. In accordance with the law of State X, AH-1 instructs IM-1 to vote AH-1’s shares “Yes” on a proposed merger involving A Company. AH-2 instructs IM-2 to vote AH-2’s shares “No” on the merger. IM-1 instructs IM-2 to vote 100 shares “Yes”

and 100 shares “No” on the merger. IM-2 refuses to follow IM-1’s instruction because under the law of State Z, which is not a Contracting State, IM-2 must vote all 200 shares that it holds in A company in the same way; it is not permitted to split its vote. Under Article 10(2), the Convention does not require IM-1 to follow the voting instructions of AH-1 and AH-2 because it lacks the power to do so. It has the power to follow the instructions of AH-1 or AH-2, but lacks the power to follow the conflicting instructions of both.

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