Definition and Basic Concept of the Issuance Agreement
Der Issuance Agreement is a civil law contract type that is of central importance, particularly in connection with securities. Under German law, the issuance agreement describes the contractual obligation by which a security is initially put into circulation by the issuer (emittent). The purpose of this agreement is to equip the security with the certified rights and to establish its negotiability. The issuance differs fundamentally from the mere issuance or creation of a document, as only the issuance agreement brings the security into legal existence.
Legal Nature of the Issuance Agreement
Contractual Obligation under the Law of Obligations
The issuance agreement is a legal transaction of its own kind, which—in contrast to the transfer of title—establishes the contractual rights and obligations between the issuer and the first acquirer of the security. The issuer undertakes to provide the acquirer with the performance documented in the security. In return, the acquirer generally has a duty to pay, for example, for shares, bonds, or other securities. Only upon the conclusion of the issuance agreement and delivery of the document (for fungible securities typically processed as securities transactions) does the security become effective and can be placed into circulation.
Principle of Separation and Abstraction Principle
Within the framework of so-called security issuance, a distinction must be made between the issuance agreement as a contractual obligation and the actual issuance (delivery and transfer of the security) as a conveyance. This separation principle corresponds to the general system of German civil law. While the issuance agreement regulates the obligations of the parties and provides the basis for issuance, only the actual delivery and endorsement (in the case of order papers) establish ownership and thus the exercisability of the certified rights.
The Role of Issuance
The legal and economic implementation of issuance often takes place in the context of a public offering. For example, shares are offered for the first time on the stock exchange. However, the term “issuance” primarily refers to the technical act of issuance, not to the underlying contractual relationship. Only the underlying issuance agreement governs the rights and obligations in the context of the initial placement into circulation.
Significance and Areas of Application of the Issuance Agreement
Area of Application for Securities
The issuance agreement applies to all types of securities, in particular:
- Bearer securities (e.g. bearer shares, bearer bonds)
- Order securities (e.g. bills of exchange, checks)
- Registered securities (with or without endorsement)
The issuance agreement is of central importance in classic securities trading, but also in special cases such as mixed-genre securities and certificates.
Issuance Agreement and Types of Securities
The specific legal content and form of the issuance agreement depend on the type of security. For bearer securities, physical delivery of the document is generally sufficient. For order securities, an endorsement is additionally required; for registered securities, the naming and, if necessary, entry of the acquirer’s name in the securities register.
Importance in Capital Market Law
In capital market law, the issuance agreement is the key link between the provisions on securities trading, disclosure requirements, and the underlying contractual relationships. Special laws (such as the Securities Prospectus Act or the Stock Corporation Act) often stipulate additional requirements and obligations, for example relating to the disclosure and transparency in the issuance of shares and bonds.
Requirements and Effectiveness of the Issuance Agreement
Formal Requirements
As such, the issuance agreement is generally not subject to any special form requirements. However, special form requirements may exist for certain securities or their issuance—for example, for bonds and shares, the written form and notarial recording of the resolution to issue.
Agreement and Delivery
The following elements are required for the effectiveness of the issuance agreement:
- Agreement on the issuance of the security
- Preparation and delivery of the certified document (for physical securities) or booking in the collective custody account (for electronic securities)
- Compliance with any special requirements under the respective special laws
Legal Consequences of Nullity of the Issuance Agreement
If the issuance agreement is void (for example, due to a legal violation or lack of required form), the creation of the security under securities law does not occur. The document is then a so-called “blank paper” without the quality of a security. Any transfers already made also generally become ineffective; secondary claims may arise from unjust enrichment or damages law.
Legal Effect and Liability Issues
Legal Position of the First Acquirer
The first acquirer acquires the rights documented in the security through the issuance agreement. In this way, the security becomes legally binding and acquires negotiability. The acquirer may in principle transfer these rights to third parties (“tradition”).
Liability of the Issuer
The issuer is liable to the first acquirer for the proper issuance of the security. For subsequent acquirers, liability results primarily from the general rules on securities law as well as from special protection mechanisms in favor of good faith acquisition.
Errors in Issuance
Errors or irregularities in the issuance may affect the validity of the security. These include, for example, violations of statutory issuance requirements, incorrect statements in prospectuses, or breach of form requirements. Such errors may give rise to claims for damages or rescission.
Issuance Agreement in an International Context
Application of Foreign Legal Systems
The law applicable to the issuance agreement may be subject to international influences, especially in the case of cross-border issuances. In such cases, private international law and, where applicable, the UN Sales Convention (CISG), in each case taking into account the particularities of securities law, must be observed.
European Regulations
In the European context, Regulation (EU) No. 909/2014 on central securities depositories in particular governs the legal framework for securities transactions, including initial issuance by the issuer.
Conclusion
The issuance agreement is a central element of securities law. It forms the legal basis for the initial issuance of securities and is thus a key element in creating and securing negotiability and legal certainty in securities trading. The specific arrangement and legal effect of the issuance agreement depend on the type of security, the applicable national law, and the respective special statutory provisions. A precise understanding of the legal framework is indispensable for the secure execution and validity of securities transactions.
Frequently Asked Questions
What formal requirements apply to an issuance agreement?
An issuance agreement is not generally subject to any special form requirements, unless otherwise expressly provided by law or established by party agreement in an individual case. In most cases, the contract is concluded by offer and acceptance in accordance with the general rules of the German Civil Code (BGB) (§§ 145 ff. BGB). It can therefore be concluded orally, in writing, or even implied by conduct. Exceptions apply to special cases, such as certain documents for which the law explicitly requires written form or even notarial certification, for example for the issuance of registered bonds or securities under the German Safe Custody Act. In practice, however, it is often advisable to record the agreement in writing for purposes of evidence and clarification.
What obligations does the issuer have under an issuance agreement?
The issuer is legally obligated to duly provide the security specified in the contract—such as a bond, share, or bill of exchange—to the first acquirer. This includes both the physical handover of the security and the valid preparation and signing in accordance with the applicable regulations. The issuer must ensure that the security meets the statutory requirements (in particular regarding form and required information) and is free from third-party rights and other encumbrances. If the issuer does not fulfill these obligations, the acquirer may have claims for damages or rescission against the issuer.
What risks are involved in entering into an issuance agreement?
Various legal risks are associated with the issuance agreement. There may, for example, be a legal defect in the security, such as if it is issued invalidly or contains incomplete or incorrect information. A lack of authority on the part of the issuer—such as in the case of stolen or lost securities—may also create risks. There is also the risk of so-called “double issuance” if an issuer issues the security to multiple persons. This can have far-reaching civil and criminal law consequences. Finally, there is the risk that the claim to be certified by the security does not exist or is not enforceable (objection situation).
Can defects in the issuance agreement be remedied?
As a matter of law, subsequent rectification of defects in the issuance agreement is generally possible; economically, however, this depends on the nature of the defect. Formal defects can in certain cases be cured by subsequently fulfilling the required form, provided that invalidity or nullity has not already occurred. Material errors in the security may be remedied by correction or reissuance, provided all parties to the contract agree and there are no overriding interests of third parties. In cases of lack of authority to represent, the represented party may subsequently ratify the transaction (§ 177 BGB). However, the possibility of rectification is not unlimited. For example, some defects, such as the absence of a statutory certification requirement, are not remediable.
How does the issuance agreement differ from an ordinary obligation contract?
The issuance agreement is a special civil law contract designed for issuance, i.e., the initial creation and delivery of a security to the first acquirer. In contrast, the ordinary obligation contract usually relates to the exchange of performances (e.g., a purchase contract). The issuance agreement is often a so-called ‘contractual causal transaction,’ which forms the basis for the transfer of property in securities. While a typical obligation contract is directed at the acquisition of already existing securities through transfer, the issuance agreement first establishes the legal existence and validity of the security and thus constitutes a primary act of issuance.
What rights does the initial holder have under the issuance agreement?
Through the issuance agreement, the initial holder or first acquirer of a security is entitled to the rights documented in the security. These include claims such as payment of a sum of money (in the case of bonds), delivery of goods, or specific other performances. Additionally, the initial holder may have claims arising from general rules on breach of duty, such as claims for damages or rescission, in case of any breach of duty on the part of the issuer. These further claims exist independently of the rights certified in the security itself, but may not, under certain circumstances, be transferable to third parties (e.g., acquirers in subsequent transfers).
Is the issuance agreement subject to special control or approval requirements?
Depending on the type of security and the contracting parties involved, special control or approval requirements may apply. For example, the issuance of bonds, shares, or other financial instruments in Germany is subject to certain regulatory requirements, such as those pursuant to the Securities Prospectus Act or the Banking Act. Regulated issues often require the approval or publication of a securities prospectus. Moreover, for credit and financial services institutions, there are special statutory and supervisory requirements to be observed when entering into issuance agreements. Violations of such requirements may result in sanctions, civil law invalidity, or rescission claims.
