Custody of securities

The custody of securities is subject to not only the special provisions of the Civil Code on the custody of securities under Section 2409 et seq., but also the general provisions on custody under Section 2402 et seq. of the Civil Code.

The law generally defines custody as a contract by which the depositary undertakes to take over a thing to hold it in custody for the depositor (Section 2402 of the Civil Code). This is a consensual contract. It is therefore not necessary to hand over the object of custody for it to arise. The parties to the contract are the depositary, i.e. the one who takes over the item, and the depositor, i.e. the one who entrusts the item to someone for safekeeping. It is the duty of the depositary to take over the item and to safeguard it against damage, loss or theft. By taking over the item, the depositor does not lose his ownership right to it, except in cases where he hands over items of a specified kind for safekeeping. In such a case, however, the depositary will deliver to the depositor items of the same quantity or kind. However, the depositary is not necessarily the owner of the item.

The object of custody may also be an immovable object.

The duration of the custody can be agreed. If it is not agreed, both parties may terminate the contract at any time. If the duration of custody is agreed, the depositor may demand the release of the item from custody anyway. The depositary does not have this right. However, he may do so without the consent of the depositary only if he cannot hold the item in custody safely or without incurring damage due to an unforeseeable circumstance (Section 2403 of the Civil Code).

The contract is conceptually informal (it can be concluded orally) and gratuitous, but nothing prevents the parties from agreeing otherwise. However, the depositor, despite the fact that the contract is gratuitous, pays the necessary costs to the depositary – these consist, for example, of the costs of preserving the item.

In this context, it should be remembered that the right to release the thing from custody is time-barred within a general period of three years from the expiry of the agreed custody.

Securities custody contract

The regulation of custody of securities (Section 2409 et seq. of the Civil Code) follows the general regulation of custody. Book-entry securities (Section 525 et seq. of the Civil Code) may not be the object of custody as only tangible items can be held in custody. The depositary holds the securities in custody separately from the depositary’s own securities and securities of other depositors. The depositary then has the option to deliver to the depositor the identical security that was handed over to the depositary. However, the obligation of separate custody does not apply to collective custody (Section 2410) or where so agreed. The depositary keeps records of the securities in custody, which include the identification of the depositor and the place of custody of the securities. Identification of individual securities is also appropriate.

On the other hand, in the case of collective custody, the securities are kept together with the securities of other depositors, but separately from the depositary’s securities (Section 2410 of the Civil Code). Only securities that are fungible (Section 516 of the Civil Code) between individual depositors may be held in this custody. The depositor is then not entitled to the return of the identical (or “own”) securities that he has put into custody, but is entitled to the return of as many securities as correspond to his share in the collective custody of securities. The share of each depositor is determined as the ratio of the sum of the nominal values of the securities put into custody to the sum of the nominal values of all securities in the same collective custody (Section 2411 of the Civil Code). Depositors become the owners of a share of the mixed securities. In the case of securities that do not have a fixed nominal value (for example, no-par value shares), the depositor’s share is determined by the number of units of the securities. In contrast to the general custody regulation, the depositary may transfer the securities to another depositary for custody even without an agreement with the depositor.

If the securities are taken into custody by an attorney, the matter is subject to specific provisions of Section 56a of Act No. 85/1996 Sb., on legal profession. According to them, the attorney is obliged to deposit the securities taken into custody into a special account with a bank or another person authorised under special legislation to receive deposits or to manage securities. The client (depositor) is obliged to reimburse the lawyer for the costs associated with the management of the assets. This regulation is more elaborated on in Resolution of the Board of Directors of the Czech Bar Association No. 7/2004 of the Journal on the implementation of custody. According to the Resolution, the person who gives securities to the attorney for custody must be identified in the escrow contract.

Securities administration contract

The securities administration contract used to be regulated by Section 36 of the now ineffective Act No. 591/1992 Sb., on securities. The current legislation does not explicitly cover this type of contract. However, this does not prevent the parties from negotiating such a contract.

Pursuant to Section 1746(2) of the Civil Code, parties may also conclude a contract that is not specifically regulated as a type of contract. This type of contract is subject to the general provisions of the Civil Code on contracts and the provisions on similar types of contracts – contracts of mandate and commission contracts. It is also advisable to draw up the contract based on the ineffective regulation. The aforementioned Section 36(1) provided that, under a contract on the administration of securities, the administrator undertakes to perform all legal acts during the term of the contract that are necessary for exercising and retaining the rights connected with a certain security, and the owner of the security undertakes to pay a fee for it. Therefore, this contract entitles the administrator to perform the acts and exercise the rights attached to the securities of the owner (who, for example, may not have the time or knowledge required). The contract specifies the rights and obligations of the securities administrator and should specify the securities received for administration. The owner should provide the necessary cooperation to the administrator.

The contract needs not to be concluded in writing, however, it is recommended with regard to the nature of the matter. A fee can be agreed for the administration of securities. It may also include costs incurred by the administrator in fulfilling its obligation. Under the contract, the administrator is obliged to perform all the acts necessary to exercise and retain the rights attached to the securities, in particular, to demand fulfilment of the obligations attached to the securities.

Administration can be carried out either on behalf of the owner (in the case of registered securities or securities to order) or on behalf of the administrator (in the case of securities to bearer). The owner of the securities can give instructions to the administrator.

The securities that may be administered include, for example, shares, common share certificates, bills, cheques, coupons and so on.

What situations do we typically handle for our clients regarding the custody of securities?

• Drawing up a securities custody contract
• What if no custody period is agreed
• Procedure in the event of a time-barred custody period
• Where securities can be held in custody
• Attorney’s escrow of securities in our law firm
• Fees for the custody of securities
• Negotiating terms for the custody of securities with banks
• Alienation of securities from custody