The law of 6 April 2013 on dematerialised securities (the “Law”) has introduced in Luxembourg law a flexible and secured legal framework for investors and issuers of Luxembourg dematerialised securities.
A pressing environment
The introduction of the Law responds to a pressing need for a domestic legal framework to this regard, while -- at the European and international level -- guidelines, principles, and regulations have already been issued. It must also be noted, since Luxembourg commercial and corporate laws are largely inspired by Belgian and French law, that dematerialisation of securities has already been regulated in France and Belgium years ago.
A step forward standardisation: integration of existing texts
The Law pursues a major objective: increasing the protection of securities holders and safety of securities transactions, in particular concerning securities circulation. Such an objective is of prime interest in an international context, where investors’ rights depend upon a string of intermediaries who are not all located in the same jurisdictions.
To achieve this purpose, standardisation is unavoidable and urged the Luxembourg legislative process. This has resulted in a flexible legal instrument in line with the European and international economic and legal environment, without creating unnecessary complexity for the investors, issuers of Luxembourg securities, and legal practitioners.
The Law integrates most provisions of the Geneva Securities Convention1 (e.g. investors’ rights to instruct intermediaries, segregation of investors’ patrimony, transfer process, protection in case of insolvency of the account provider) and some of the Securities Law Directive2 principles (e.g. supervision of the activity of securities safekeeping and administration, investors’ protection in the event of an account provider becoming insolvent). This, thereby, progresses towards harmonisation of the conditions of issuance, conversion, and deposit of dematerialised securities with European and international existing regulations and strengthens the legal certainty of transactions involving Luxembourg securities.
Creation of a new type of securities v. replacement of existing ones
Rather than eradicating existing securities, the Law creates a new sui generis category of securities that can be optionally chosen by investors, whether via issuance or conversion process. Dematerialised securities can be:
- existing registered or bearer shares converted into dematerialised shares;
- shares newly issued under dematerialised form;
- existing debt securities converted into dematerialised debt securities; and,
- debt securities newly issued under dematerialised form.
With respect to equity securities, only shares from Luxembourg stock companies (“sociétés par actions”, typically sociétés anonymes and sociétés en commandite par actions), common funds (fonds communs de placement), and representative of share capital can be issued or converted into dematerialised securities. As regards debt securities, any Luxembourg law governed debt securities may be issued or converted under the Law. The conditions under which issuance of dematerialised securities or conversion of existing securities into dematerialised securities may take place will be contractually agreed and shall be inserted, with respect to equity securities, in the articles of association of the issuer.
Scope of the law regarding existence, disposal, and circulation of securities
The Law governs the issuance, conversion, and deposit of dematerialised securities, whereas it refers to the law of 1st August 2001 on securities circulation, unless otherwise contractually agreed, for their circulation aspects and practicalities.
Issuance of dematerialised securities is realised through their registration in the issuance account3, which shall be held either by central account providers or securities settlement systems. Investors may freely opt for a central account provider or a securities settlement system, save that the latter is mandatory for dematerialised securities admitted to trading on a regulated market or a multilateral negotiation system.
Transfers of dematerialised securities are performed through the transfer of account entries4.
Central account providers are a new category of qualified entities supervised by the Commission de surveillance du secteur financier5. Securities settlement systems refer to securities transactions settlement systems under the law of 10 November 2009 on payments services, on the activity of electronic money institution and settlement finality in payment and securities settlement systems. Both central account providers and securities settlement systems are key parties of the issuance, disposal, and circulation process, acting as registration and transfer agents; the time-tested well-tried Clearstream Banking S.A.’s system will be used in practice for registration and transfers of dematerialised securities.
Participation to general meetings and, to a greater extent, exercise of securities holders’ rights are ensured by providing a certificate issued by the account holder and attesting the number of securities held. No further restrictions regarding participation to general meetings can be required. As regarding dividend payments, they are validly carried out by payments on the issuance account.
The relationship between investors and account holders follows the rules set forth regarding custodian agreements.
Salient points of the Law
The following facets of the Law may attract investors and issuers:
- supervision and qualification of the account providers (e.g. a minimum share capital of EUR 730,000 is required for central account holders);
- easy tracking of the beneficial owner and securities;
- no public disclosure of the beneficial owner identity;
- legal certainty regarding ownership title over the securities;
- segregation of the issuance account (e.g. it shall not be affected by netting procedures or seizures and shall remain a patrimony distinct from the account holder’s one, and will not be part of the so-called “masse” in the framework of a bankruptcy proceeding);
- no detrimental impact on existing rights under collaterals arrangements;
- division of ownership expressly allowed;
- diminution of the risk of scattering and/or vanishing, loss, and deterioration attached to bearer securities;
- third parties information, where equity securities are issued or converted into dematerialised ones, as to the identity of the central account holder or securities settlement system via publication in the Luxembourg official gazette and local newspapers, ensuring national dissemination;
- cost-efficient instrument that circles overcomes the costs incurred by securities safekeeping; and,
- centralisation in the same account of securities of a like nature, issued in the same currency, having the same nominal value, and being part of a single issuance.
Further progress could include introducing the obligation for securities admitted to negotiation on a regulated market to be dematerialised under the conditions of the Law.
Furthermore, and given the key position of the account holders, the Law could have imposed a registration or verification method, as well as a reporting duty towards investors on account entries.
Lastly, practitioners will need to rely on clear conflict rules provisions regarding dematerialised securities.
Outlook: Main European and international texts pertaining to dematerialised securities
- Directive 98/26/CE of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems, the main purpose of which is to mitigate the risks caused by insolvency procedures regarding payment systems and securities transactions;
- Geneva Securities Convention (convention UNIDROIT sur les règles matérielles relatives aux titres intermédiés) of 9 October 2009, entrusting the deposit of dematerialised securities with intermediaries according to a most secured system, thereby increasing the security of the circulation of such securities;
- International standards for payment, clearing, and settlement systems, issued on 16 April 2012 by the Committee on Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commissions (IOSCO); and,
- Draft directive SLD (Securities Law Directive) issued by the European Commission and aiming at providing a harmonised frame for intermediated securities and better protection of investors' rights enshrined in their securities, centered around: (i) the legal framework of the holding and disposition of securities held in securities accounts, and covering aspects belonging to the sphere of substantive law as well as conflict-of-laws, (ii) the legal framework governing the exercise of investor's rights flowing from securities through a "chain" of intermediaries, in particular with regard to cross-border situations, and (iii) supervision of any activity of safekeeping and administration of securities under an appropriate supervisory regime.