4. Acquisition and disposition of securities held with an intermediary

1. Nature of book-entry

According to sec. 2 art. 142 CC “in cases provided by a statute or under a procedure established by a statute, for the exercise or transfer of the rights certified by the securities, proof of their fixation in a special register is sufficient”. The rule is understood as provided that “fixation in a special register” (or book entry in general) is constitutive (i), because no other evidence is required by legislature. If above the book-entry is required, something specified by law (certificate, endorsements) or by fact, book-entry in that situation is one of the specified evidence (ii). And theoretically different situation we may meet, when a law does not call specified evidences, but parties use book-entry by their own decision - in such a case book-entry is mere evidence (iii). In respect of Russian capital market there are all three kinds of book-entry at the same time.

Constitutive book-entries

Almost all securities, which are admitted for trading in organised market, are registered securities (except corporate bonds, which could be issued in the bearer form) and quite recently became mandatory uncertificated. In the beginning the Investment Fund Act 2001 provided that investment units are uncertificated securities (art. 14), then Mortgaged Backed Securities Act 2003 provided for the same rule for mortgage certificates of participation (art. 20). And in the end full dematerialization was achieved after the Revision 2003 in Securities Market Act 1996³, whereby the emissive securities - shares, registered corporate bonds, and options of the issuer - are declared uncertificated securities (art. 17) and rights in respect of them are proved by entries in securities account maintained by the registrar or, in case of immobilisation, by the depositary (part 2 art. 28).

Book-entries as specified evidence

Bearer corporate bonds⁴ may be immobilised (i) with the mandatory deposit of their global certificate in the central securities depositary or (ii) with the voluntary deposit of the individual certificates (art. 16 Securities Market Act). For both situations the Act provides for the same rule that rights in the securities are evidenced “by certificate and entries in books of the depositary” (part 1 art. 28). But indeed legal consequences for mentioned situations are different. When there is centralised deposition the market has full information: prospectus contains the name of the central depository and the global certificate signalised that it is subject for the mandatory depository holding. Naturally, in such cases the book entries commence to play the main legitimate role in reality.

Contrary to this, in case of the voluntary deposition the issuer and third parties can hardly be aware that the specific individual certificate is currently subject to the depositing. To exclude any extraordinary costs the market can only rely on the fact of possession of the certificate (art. 147 CC). In the end, the voluntary immobilisation holding of certificate should be sufficient evidence of the rights, and book-entry can possibly has legitimate effect, if only the issuer or third parties knew or could know that the certificate was deposited. Meanwhile, the issuance of the bearer corporate bonds with the voluntary immobilisation is very rare subject of matter, if any, and there is no legal dispute regarding such corporate bonds.

In respect of “non-emissive” securities (promissory notes), which are traded in the organised capital markets in fact, there is no legal provisions to the effect that in case of the transfer of a promissory note to the depositary, the rights of the investor are evidenced only by book entries (or at least both by “certificate and book entries”). But due to the nature of the promissory note of a “value paper”, the deposition of them will function as factually specified evidence system and, like bearer corporate bonds with the voluntary deposition, the effect of book-entry is limited by notice of issuer or third parties and with the priority of certificate over book-entry.

Book-entry as mere evidence

There is a more complex situation which we may find with the so called “uncertificated promissory notes”, qualified as special patrimonial rights⁵, but, of course, not a promissory note. In respect of these kinds of “notes” there are no special provisions; therefore, the interested party could not be restricted in supplying any other evidence, besides book-entry.