Table of contents

  1. Introduction to Securities Law
  2. The basics of securities law
    • Legal sources of securities law
  3. The different types of securities
    • Bearer securities
    • Order papers
    • Registered securities
  4. The transfer of securities
    • Transfer of bearer securities
    • Transfer of order papers
    • Transfer of registered securities
  5. The negotiability of securities
    • Trading on the stock exchange
    • Over-the-counter trading
    • Pledging of securities
  6. The importance of securities law for investors
  7. Conclusion

Securities law: an introduction

Securities law is an important part of private law and deals with securities. These documents serve to securitise private property rights and can present themselves in various forms.

German securities law is based on various laws, including the German Civil Code (BGB) and the German Commercial Code (HGB). In addition, there are special laws, such as the German Stock Corporation Act (AktG), the German Investment Code (KAGB), the German Cheques Act (SchG) or the German Bills of Exchange Act (WG).

In this blog post, we want to give you a comprehensive overview of securities law and go into detail about the different types of securities, their transferability and marketability.

The basics of securities law

Securities law is an important part of private law and regulates the issuance, transfer and sale of securities. A variety of laws and regulations play a role, ranging from general rules to specific rules for certain types of securities.

The basic legal provisions of securities law relate to the legal structure and regulation of securities and their trading. Securities law is a complex and constantly evolving area of law that relates to various types of securities, including shares, bonds, options, futures, derivatives and investment funds. The most important aspects of securities law include the issue, transfer, sale, redemption and registration of securities, as well as the regulation of issuers, exchanges and broker-dealers.

Securities law is also closely related to other areas of law, such as commercial law, company law, labour law and tax law. Securities transactions are often complex and require compliance with numerous regulations and laws at the national and international level. A sound knowledge of securities law is therefore essential for investors, issuers and other market participants to avoid legal problems and risks and to protect their interests.

In the following, the most important legal remarks on securities law are explained, with particular reference to the different types of securities and their transfer.

Legal sources of securities law

Securities law is based on various legal sources, which primarily include the German Civil Code (BGB) and the German Commercial Code (HGB) as well as special laws such as the German Stock Corporation Act (AktG), the German Investment Code (KAGB), the German Cheques Act (SchG) and the German Bills of Exchange Act (WG).

The German Civil Code contains general provisions for securities. For example, § 793 para. 1 BGB defines a security as a document evidencing a private property right. § Section 807 BGB regulates the transferability of securities and provides that bearer securities are transferable by delivery and order securities by endorsement. Registered securities, on the other hand, require a declaration of assignment (cession) in order to be transferred.

The Commercial Code regulates trading in securities in particular. § Section 343 HGB deals with the issuance of securities and obliges the issuer to provide complete and correct information. § Section 366 HGB regulates the transfer of securities by endorsement.

Special laws such as the Stock Corporation Act, the Capital Investment Code, the Cheques Act and the Bills of Exchange Act contain specific regulations for certain types of securities.

There are also European legal sources for securities law, such as the Market Abuse Regulation (MAR) and the Prospectus Regulation (EU) 2017/1129, which regulate the issuance and marketing of securities. MAR aims to prevent market abuse such as insider trading and market manipulation, while the Prospectus Regulation sets out certain requirements for the preparation and publication of prospectuses for securities offerings and admissions to regulated markets.

In addition, court decisions and administrative regulations can also play an important role in securities law. Courts can, for example, rule on the interpretation of securities contracts and regulations in disputes between investors and issuers. Supervisory authorities such as the Federal Financial Supervisory Authority (BaFin) can also issue regulations and guidelines that are relevant for trading in securities.

The different types of securities

There are different types of securities that can be distinguished in terms of their transferability and marketability. An important distinction is between bearer securities, order securities and registered securities.

Bearer securities – Securities law

Bearer securities are securities where the holder of the security is also the owner of the underlying claim. This means that the owner of the security can dispose of the claim without needing the consent of the original creditor. The transfer of bearer instruments takes place through in rem agreement and transfer. The transferee thus acquires ownership of the claim.

Good faith protection for bearer instruments

Bearer securities enjoy a particularly extensive protection of good faith. This means that the purchaser of a bearer instrument becomes the owner of the claim even if the seller had no right to dispose of the instrument. However, this only applies if the acquirer acquired the security in good faith, i.e. he did not know and did not have to know that the seller was not entitled to dispose of the security.

Example: An employee of a company steals shares in the company and sells them to a third party. The third party acquires the shares in good faith, assuming that the employee was entitled to sell the shares. The third party becomes the owner of the shares and can also keep them if the company notices the theft and demands the shares back.

Types of bearer securities

Bearer securities come in different forms. They can take the form of bonds or shares in companies, such as shares or bearer bonds. The best-known bearer securities are:

  • Shares: Shares are the best-known form of bearer securities. They represent a share in the equity capital of a company. The shareholder thus has a right to vote at the general meeting and can participate in profit distributions. Shares can be traded on the stock exchange or sold over the counter.
  • Debt securities: Debt securities are securities with which a debtor raises a certain amount of capital and undertakes to repay it together with interest. With the bond, the creditor acquires a claim to repayment of the debt and to the agreed interest.
  • Bearer bonds: Bearer bonds are similar to debentures, but are structured as bearer securities. This means that the transfer takes place by handover and no endorsement is required.

Significance for investors and companies

Bearer securities are of particular importance for investors and companies. Shares in particular are an important form of raising capital and offer investors the opportunity to participate in the profits and developments of the company. Bearer securities can also be used for the financing of companies

Bearer securities can also be of great importance for the financing of companies. Companies can issue bonds or bearer bonds to raise capital.

However, bearer securities also entail risks. In the case of shares in particular, the price trend can fluctuate and the value of the investment can rise as well as fall. Investors should therefore carefully consider whether they are prepared to take this risk and, if necessary, develop an investment strategy to minimise losses. Debt securities may also be subject to default risks if the debtor becomes insolvent.

Legal issues in connection with bearer securities

There are numerous legal issues in connection with bearer securities that must be considered by companies and investors. In particular, the rules on transferability and protection of good faith play an important role. The courts have also issued numerous rulings in this context.

One example is the ruling of the Federal Supreme Court (BGH) of 17 July 2012 (Ref. XI ZR 367/11). In this case, a bank had handed over a promissory note to a customer as a bearer instrument. The customer subsequently sold the promissory note to a third party. When the customer no longer paid the debt, the bank demanded repayment of the promissory note from the third party. The BGH ruled in this case that the third party was not obliged to repay because he had acquired the promissory note in good faith and did not have to assume that the client was not entitled to dispose of the promissory note.

Conclusion on bearer instruments

Bearer instruments are an important form of securities that are particularly important for companies and investors. Due to their nature as movable property, they are particularly easy to trade and offer investors the opportunity to participate in the profits and developments of companies.

However, bearer securities also entail risks and it is important to inform oneself about the legal requirements and risks in connection with the acquisition and sale of bearer securities. Court rulings can also serve as guidance in this regard.

Securities law: Order papers

Order papers are securities for which an endorsement is required in addition to the transfer. The endorsement is a special form of transfer and consists of a signature on the back of the paper. Here, the transferee can also transfer ownership to a specific person. The endorsement is therefore an important instrument for ensuring the creditworthiness of the issuer.

Known order papers are, for example:

  • Order bonds: These are bonds where the issuer owes the holder a certain sum and the transfer is made by an endorsement on the back of the certificate.
  • Order cheques: These are cheques where the drawer must pay a specified sum to the holder of the instrument and the transfer is made by an endorsement on the back of the cheque.

Overall, order papers are less common compared to bearer papers, as they are less suitable for trading due to their higher formalities and the associated complexity.

  • For investors, order papers can offer a higher level of security as they can only be transferred by endorsement on the reverse side in the event of loss or theft of the instrument.
  • However, investors should note that order papers are less common in trading due to their formalities and complexity and may therefore be more difficult to sell or buy.
  • Investors should therefore carefully inform themselves about the modalities and risks before purchasing order securities and, if necessary, seek the assistance of a securities law attorney.
  • If an investor intends to purchase or sell order securities, he should ensure that he has sufficient knowledge of the endorsement and the applicable formalities and carries them out correctly in order to avoid legal problems and losses.
  • The endorsement on the back of order papers must be in a certain form to be valid. Investors should therefore familiarise themselves with the formalities of the endorsement and ensure that they carry them out correctly in order to avoid legal problems.
  • Once an investor has acquired an order security, he must report it quickly in case of loss or theft to avoid legal problems. As a rule, in the event of a loss or theft, he must have the order paper blocked and inform the issuer.
  • Investors should be aware that order securities, especially order bonds, may pose a higher risk to the investor because they are issued by a specific issuer and are not traded on an exchange. Investors should therefore conduct a careful analysis of the creditworthiness of the issuer before purchasing order securities and, if necessary, seek the assistance of a securities law attorney.

Registered securities

Compared to bearer and order securities, registered securities are a special form of securities in which the transfer of the property right is not effected by handover or endorsement but by a declaration of assignment (cession). The previous holder must submit a written declaration of transfer to the debtor of the security. The new creditor is then registered as the holder of the security.

Compared to bearer and order securities, registered securities offer the advantage of greater transparency and better identification of the owners. In the case of registered securities, for example, the name of the holder is usually entered in the share register or promissory note register, which makes it easier to identify the owner of the security.

However, registered securities are often less common in trade because of the formalities and the additional administrative burden. In practice, however, registered securities can offer advantages in certain cases, for example when issuing securities to employees or when controlling shareholding relationships.

The best-known registered securities in the context of securities law include:

  • Registered shares: these are shares where the name of the holder is entered in the share register of the issuer.
  • Registered bonds: These are bonds where the name of the creditor is entered in the issuer’s register of promissory notes.

Legal texts and court rulings that refer to registered securities are, for example:

  • § 67 AktG: This regulates that registered shares may only be made out to the bearer and the name of the holder must be entered in the share register.
  • BGH, judgement of 27 February 2006, file no. II ZR 271/04: Here it was decided that the transfer of registered shares by a simple contract of sale is invalid and a declaration of assignment is required.
  • § SECTION 808 BGB: Here it is ruled that in the case of registered securities the debtor is only liable to the registered creditor.

The transfer of securities

The transfer of securities is subject to certain formal requirements, which may vary depending on the type of security. In general, there are three types of securities that differ in terms of transfer:

  1. Bearer securities: Bearer securities can be transferred by merely handing over the certificate. A change of ownership occurs independently of an entry in a register or registration with the issuer. Examples of bearer instruments are shares, bearer bonds and bearer cheques.
  2. Order papers: Order papers can be transferred by surrender and endorsement. The endorsement is a special form of transfer and consists of a signature on the back of the paper. In this case, the transferee can also transfer ownership to a specific person. Known order papers are order bonds and order cheques.
  3. Registered securities: Registered securities can be transferred by means of a declaration of assignment (cession). In this case, the previous holder must submit a written declaration of transfer to the debtor of the security. The new creditor is then registered as the holder of the security. The best-known registered securities include registered shares and registered bonds.

However, other regulations must also be observed when transferring securities. For example, bearer securities must be reported quickly in the event of loss or theft in order to prevent misuse of the certificate. Here it is important to have the certificate blocked and to inform the issuer.

When transferring order securities, investors must strictly observe the formalities of the endorsement in order to avoid legal problems and losses. When transferring registered securities, investors must submit a written transfer declaration and register it with the issuer.

  1. Missing endorsements in the case of order securities: In the case of order securities, it may happen that the endorsement is missing or incorrect. In this case, the transfer is invalid and the transferee has no claim to the security. Investors should therefore ensure that the endorsement has been properly executed when purchasing order securities.
  2. Restrictions on transfer of securities: There may be restrictions on the transfer of certain types of securities. For example, registered shares may have a lock-up period that restricts the sale or transfer for a certain period of time. Investors should therefore inform themselves about possible restrictions before purchasing securities.
  3. Conformity of certificate and registration: In the case of registered securities, the registration of the new owner in the issuer’s register must match the transfer deed. Investors should therefore ensure that the transfer has been duly effected and that the registration has been made with the issuer.
  4. Loss of securities: In the event of a loss of securities, investors must act quickly to avoid legal problems and losses. Here it is important to inform the issuer and, if necessary, have a replacement certificate issued.
  5. Fees when transferring securities: Fees may be charged by issuers, banks or other intermediaries when transferring securities. Investors should therefore inform themselves about possible fees before buying or selling securities and take these into account in their calculations.

Overall, it is important to inform oneself carefully about the modalities and risks before buying or selling securities and, if necessary, to seek the help of a securities law attorney.

Transfer of bearer securities

Bearer securities are securities that can be transferred by merely handing over the certificate. Unlike registered securities, no declarations of assignment or registrations are required. Rather, the transfer is effected by agreement in rem and delivery of the paper. Here, the paper must actually be handed over in order to make the transfer effective.

When transferring bearer paper, the paper may pass through several hands before finally ending up with the new holder. The new holder acquires ownership of the paper regardless of any claims against the issuer of the paper. Here, the protection of the acquirer’s good faith is particularly strong. This means that the new owner is basically protected if he acquires the paper in good faith and without knowledge of any defects or infringements.

However, there are also certain risks and legal challenges when transferring bearer securities. For example, the paper may be stolen or lost, rendering the transfer of ownership invalid. In this case, it is important to report the loss quickly and have a replacement certificate issued if necessary.

Another risk in transferring bearer paper is that the paper may be forged or tampered with. Here, investors should pay attention to certain features and security precautions to protect themselves against forgeries.

Overall, it is important to carefully inform oneself about the modalities and risks before buying or selling bearer securities and, if necessary, to seek the help of a securities law attorney.

Transfer of order papers

Order papers are securities that require an endorsement in addition to a mere handover in order to be transferred. The endorsement is a special form of transfer and consists of a signature on the back of the paper. Here, the transferee can also transfer ownership to a specific person. In contrast to bearer papers, the new owner of an order paper must therefore not only acquire the paper itself, but also the endorsement.

The transfer of order papers is therefore associated with additional formalities. When transferring, investors must ensure that the endorsement has been properly executed and that there are no restrictions on the transfer. In addition, order papers may be transferred several times before they finally reach the final recipient. Investors should ensure that the paper has not already been transferred more than once and that the transfer is legitimate.

All in all, it is important to inform oneself carefully about the modalities and risks before buying or selling order papers and, if necessary, to seek the help of a securities law attorney.

Transfer of registered securities – securities law

Registered securities are securities where the transfer is effected by a written declaration of transfer (assignment). The previous holder must submit a written declaration of transfer to the debtor of the security. Unlike bearer and order securities, in the case of registered securities the holder of the security is entered as the creditor in the securities.

The transfer of registered securities is therefore associated with additional formalities. When transferring, investors must ensure that the transfer declaration has been properly executed and that there are no restrictions on the transfer. In addition, the entry of the new owner in the issuer’s register must match the transfer deed.

Another important aspect of the transfer of registered securities is that the creditor of the security can make claims directly against the issuer of the security. Unlike bearer and order securities, where the owner of the security has no direct claims against the issuer, the creditor of a registered security can make claims directly against the issuer.

Here are some other aspects to consider when transferring registered securities:

  • Restrictions on transferability: registered securities may be subject to restrictions on transferability laid down in the memorandum or articles of association of the issuer. Here, for example, blocking periods may apply to the sale or transfer of registered shares.
  • Notification of changes: In the case of registered securities, changes such as changes of address or name must be reported to the issuer. Only in this way can any claims and dividends be paid to the correct creditor.
  • Fees on transfer: When transferring registered securities, fees may be charged by issuers, banks or other intermediaries. Investors should therefore inform themselves about possible fees before buying or selling registered securities and take them into account in their calculations.

Overall, it is important to inform oneself carefully about the modalities and risks before buying or selling registered securities and, if necessary, to seek the help of a securities law attorney.

The negotiability of securities

Securities are in principle freely negotiable and can be sold or pledged to third parties without any problems. In this context, there are various ways of settling trades in securities. Some of the most important aspects are listed below:

  • Stock exchange trading: Many securities are traded on stock exchanges, where buyers and sellers are brought together via an electronic trading venue. Exchange trading is often associated with high costs, as fees for the trading venue and the banks involved may be incurred in addition to the actual trading.
  • Direct trading: In direct trading, securities are traded outside the stock exchange, for example via banks or online brokers. Direct trading can often be cheaper than stock exchange trading, as there are no additional fees for the trading venue.
  • OTC trading: OTC (over-the-counter) trading refers to trading in securities outside the regulated stock exchanges and trading venues. Here, buyers and sellers can trade directly with each other without having to involve an intermediary. OTC trading is often found in less liquid securities.
  • Pledging: Securities can also be pledged as collateral for loans or other liabilities. In this case, the owner of the security transfers the right of pledge to the creditor and receives a credit amount in return. In the event of the debtor’s insolvency, the creditor can realise the pledge.
  • Voting rights: With many securities, ownership is also associated with voting rights, which can be exercised at the issuer’s general meeting. Here investors can influence decisions of the issuer, for example in the election of the supervisory board or the determination of the dividend.
  • Risks: Despite the fundamental marketability of securities, there are also risks that should be considered when investing in securities. These include, for example, issuer risk, price risk or currency risk. Investors should therefore carefully inform themselves about the possible risks and opportunities before buying or selling securities and, if necessary, seek the help of a securities law attorney.

All in all, trading in securities is a complex subject in which there are many legal and economic aspects to consider. Investors should therefore inform themselves carefully before buying or selling securities and, if necessary, seek the help of an experienced lawyer.

Trading on the stock exchange

The stock exchange is a public market where securities are traded. Supply and demand meet here and prices are set for the traded securities. Bearer, order and registered securities can be traded on the stock exchange. There are various trading centres, such as the Frankfurt Stock Exchange or the Stuttgart Stock Exchange.

The stock exchanges have their own rules for trading in securities, which regulate in particular the admission of securities, the fixing of prices and the settlement of transactions. Some important aspects of trading on the stock exchange are listed below:

  • Admission to the stock exchange: In order for a security to be traded on the stock exchange, it must fulfil certain requirements and be admitted by the exchange supervisory authority. This may involve, for example, certain requirements regarding corporate structure, accounting or transparency.
  • Price formation: Prices on the stock exchange are determined by supply and demand. There are various types of orders that can be used by market participants to place buy or sell orders. The best-known order types include, for example, the limit order, the stop order or the market order.
  • Trading hours: There are certain trading hours on the stock exchange during which securities can be traded. The exact trading hours vary depending on the stock exchange and market segment, but can usually be viewed in advance.
  • Settlement: Exchange transactions are settled via a clearing process in which the participating banks and trading partners offset their obligations against each other. This also involves the transfer of ownership rights to the traded securities.
  • Stock exchange fees: Trading on the stock exchange is often associated with fees charged by the trading partners and the banks involved. These include, for example, brokerage fees, transaction fees or custody fees.

Overall, trading on the stock exchange is an important aspect of securities law that holds many opportunities for investors, but also risks.

Securities law: Off-exchange trading

In addition to trading on the stock exchange, there is also off-exchange trading in securities. In this case, trading takes place outside the regulated stock exchange markets, for example via banks or brokers. Here, too, there are various forms of trading, such as direct trading, auctions or the use of trading platforms.

Some important aspects of off-exchange trading are:

  • Flexibility: In contrast to trading on the stock exchange, securities that are not listed on the stock exchange can also be traded in off-exchange trading. In addition, trading hours are often more flexible and there are often no minimum trade sizes.
  • Costs: Off-exchange trading can often involve lower fees than trading on the stock exchange. However, there may also be higher risks involved, as there is often less transparency and regulation.
  • Liquidity: Off-exchange trading can have lower liquidity than on the exchange, especially for smaller or less well-known securities. This can result in longer waiting times until a buyer or seller is found.
  • Risks: Trading outside the stock exchange is often associated with higher risks than trading on the stock exchange, as there is often less regulation and control. This can, for example, encourage insider trading, price manipulation or fraud.
  • Advice: Even in off-exchange trading, sound advice from a securities lawyer or an experienced broker is recommended in order to minimise the risks and maximise the chances of success.

Pledging securities

Securities can also be pledged as collateral for loans. In this case, the security is given to the lender as collateral. In the case of a pledge, however, ownership of the security remains with the debtor, so that the latter can continue to assert claims from the security.

Some important aspects of pledging securities are:

  • Extent of pledge: The scope of the pledge may vary. For example, only a part of the claims arising from the security may be pledged. The amount of credit secured by the pledge may also vary.
  • Entry in the land register: For certain securities, such as land charge certificates, the pledge must be entered in the land register. This ensures that the creditor can access the security in the event of the debtor’s insolvency.
  • Risks: The pledging of securities involves risks, as the creditor can sell the security to satisfy his claims in the event of the debtor’s insolvency. This can cause the debtor to lose his investment in the security.
  • Advice: Before pledging securities, sound advice from a securities lawyer or an experienced broker is recommended to minimise the risks and maximise the chances of success.

The importance of securities law for investors

It is important for investors to be aware of the legal requirements and risks associated with the purchase and sale of securities. In particular, the creditworthiness and performance of the issuer play a role here. Investors should therefore inform themselves about the issuer before buying a security and, if necessary, seek expert advice.

  • Information duties: Issuers of securities have information duties towards potential buyers. For example, prospectuses must be published containing all relevant information on the securities. Investors should therefore inform themselves about the issuer and the security in question before buying a security.
  • Risk assessment: Investors should be able to realistically assess the risk of investing in securities. Expert advice from a securities law attorney or an experienced broker can be helpful in this regard.
  • Disputes: Disputes in connection with securities may involve different areas of law, such as capital markets law or stock corporation law. Expert advice from a lawyer with expertise in securities law can be helpful here in order to examine the legal options and determine the best course of action.
  • Claims for damages: In the event of damages due to incorrect or insufficient information provided by the issuer, investors can assert claims for damages. In this case, expert advice from a lawyer can be helpful in order to check the legal requirements and possibilities.
  • Court rulings: Court rulings can serve as a basis for asserting claims. Rulings by the Federal Supreme Court (BGH) or other supreme court rulings may be relevant, such as the BGH ruling of 10 November 2003 (Case No. II ZR 54/02), which dealt with the liability of members of the management board of a public limited company.

Securities Law Summary

Securities law regulates the issuance, transfer and sale of securities. Various legal sources and types of securities play a role. The transfer of securities is subject to certain formal requirements and may vary depending on the type of security. Securities can be traded on the stock exchange or over the counter and can also be pledged as collateral for loans.

It is important for investors to inform themselves about the legal requirements and risks associated with the purchase and sale of securities. Court rulings can also serve as guidance in this regard. Overall, securities law is a complex and multi-layered topic that is equally important for investors and companies. In case of questions or disputes in connection with securities, it is therefore advisable to consult an expert lawyer.

If you need expert advice due to questions or disputes in connection with securities law, the Herfurtner law firm will be happy to assist you. Our specialised lawyers advise and represent companies and individuals in all areas of securities law, both nationally and internationally. Please feel free to contact us for a non-binding initial consultation or further information.