Disposition of securities

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Transfer of individual forms of securities

Section 1103 of the Civil Code stipulates that the ownership right to:

  1. A security to bearer is transferred by a contract upon their delivery.
  2. A security to order is transferred by an endorsement and a contract upon their delivery. The requirements for an endorsement and its acceptance, as well as who is entitled under the endorsement and how this entitlement is proved, are regulated by the provisions of the legal regulation governing bills; however, the transferor of the security is liable for the satisfaction of the rights under the security only if he is specifically obliged to do so.
  3. A registered security is transferred by the contract itself upon its effective date.

When the ownership right to a security is transferred, the right attached to it is also transferred. A security may be transferred for consideration or without consideration.

An endorsement is a unilateral, unconditional and written legal act, the particulars of which are specified, in particular, in Section 12 of the Bill of Exchange and Cheque Act. Individual endorsements are listed under each other with the last person listed as the current owner. A conditional endorsement would be invalid. The endorsement must be written on the security on a slip affixed thereto (allonge). The endorsement must be signed by the transferor of the security. There is also a “blank endorsement”, which does not need to indicate to whom the security is transferred by the endorsement. For example, the beneficiary of a security to order is the person indicated on the endorsement or the person to whom the security has been delivered in the case of a blank endorsement.

Section 1103(2) of the Civil Code stipulates that “the transferor is liable for the satisfaction of rights under the security only if he is specifically obliged to do so”. However, the regulation is different for bills, i.e. the drawer of a bill is liable for both the acceptance and payment of the bill, but the liability for acceptance can be excluded (Section 9 of the Bill of Exchange and Cheque Act).

Securities transfer agreements

There are several types of securities transfer agreements, namely:

  • Agreement on the transfer of securities for consideration – a purchase contract (Section 2079 et seq. of the Civil Code)
  • Agreement on the transfer of securities without consideration – a contract of donation (Section 2055 et seq. of the Civil Code)
  • Agreement on the loan of securities (Section 2390 et seq. of the Civil Code)

Since the law does not require contracts to be in writing, they can also be concluded orally. However, in the case of registered securities, for example, where the new acquirer will not be registered on the deed instead of the original owner (blank endorsement), a written form of contract may be recommended for cases where the acquirer will have to prove his ownership. The same applies to securities to bearer, where the acquirer’s good faith is presumed.

However, a securities transfer agreement may be validly concluded even in a situation where its written form is invalid, provided that the security which is the subject of the transfer is delivered. The delivery of the security itself implies an implicit consent to its transfer.

In some cases, securities can be acquired from a person not authorized to transfer them, i.e. the ownership right to stolen securities can also be acquired, provided the conditions of Section 1109 of the Civil Code are met. It is therefore clear that the possession of the security and its transfer to the acquirer have legitimating effects, especially in relation to the fulfilment of the good faith of the acquirer, which will be proven in the event of acquisition of the security from an unauthorised person.

Procurement contracts

Contracts for the procurement of securities-related matters include:

  • Contracts of mandate (Section 2430 et seq. of the Civil Code)
  • Brokerage contracts (Section 2445 et seq. of the Civil Code)
  • Commission contracts (Section 2455 et seq. of the Civil Code)

These contracts are used mainly to receive or give instructions concerning securities, trade in securities or manage them, advise on securities or draw them up.

Investment services may only be provided by a person who is a securities trader under the authorisation of the Czech National Bank. Contracts of this type must be in writing.

Pledging securities

A contractual pledge is created when the security is delivered to the pledgee, provided that if an endorsement is required, a pledge endorsement is required as well:

  • A written statement by the owner of the security (pledgor) directly on the security or its allonge
  • A “to be pledged” clause or a phrase with a similar meaning
  • Identification of the pledgee
  • Signature of the pledgor

Upon termination of the pledge, the pledgee cancels the pledge endorsement (Section 1328 et seq. of the Civil Code). The pledgee may not transfer the security after that.

The pledge may also arise by delivering the security to a third party for custody at the time of notification of the establishment of the pledge to the depositary, together with the submission of the original or a certified copy of the pledge agreement. The notification is made by the pledgee, the debtor or the pledgor.

The pledge to a book-entry security is then created by the registration of the pledge in the account of the owner of the security in the Central Securities Depository. The order for such registration may be given by the pledgee, the debtor and the pledgor. However, the original or a certified copy of the pledge agreement must be attached here as well, as the pledge agreement must be in writing in this case (Section 1314(1) of the Civil Code). In the event of termination of the pledge, the termination is also recorded in the register in a similar manner. The order must be accompanied by a document proving the termination of the pledge, provided, however, that the order is not made by the pledgee.

Generally, a written form is required for a pledge agreement only if there is no delivery of a movable thing, however, the law stipulates that the creation of a pledge over certificated (not book-entry) securities requires their delivery and, therefore, an oral form of agreement is sufficient. However, for reasons of legal certainty, we recommend that it be in writing.

Pursuant to Section 1315 of the Civil Code, a forfeited pledge of a security may also be negotiated if the requirements for the receivable to be secured by the pledge are met.

In the case of a security to bearer, it is possible to have the pledge entered in the register of pledges. Then a pledge agreement in the form of a notarial deed is required (Section 1314 of the Civil Code). The pledge is thus created at the moment of registration (constitutive registration). However, the pledged item must be handed over to the notary for the entire duration of the pledge.

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

  • How to endorse a security
  • Who endorses securities
  • Transfer of securities to a new owner
  • Types of securities transfer agreements
  • Transfer of securities without a written contract
  • Theft of securities
  • How to sell securities
  • How to draw up contracts regarding the disposal of securities
  • How to provide investment services with securities
  • Transfer of a security to the pledgee
  • Handing over a security to a third party for custody
  • Verification of the duration of the pledge