This introductory chapter sketches the themes to be addressed in the book. It first sets out the context and highlights the aims and the structure of the theoretical inquiry on the relationship between comparative law and legal change, the underlying themes of the book. It then outlines how such inquiry operates in the specific analysis of the transfer of (directly and indirectly held) shares in England.

The idea of comparative law as a way of building bridges between legal systems and even cultures is fascinating and has stimulated interesting initiatives for the use of such methodology. One particular debate looks at the relevance of foreign law and foreign legal ideas as a means of shaping national law. The fundamental idea is that legal comparison is a powerful tool to unveil the interaction between different jurisdictions, and to uncover the circumstances and the mechanisms by which law develops. In the wake of the lively discussions on globalisation, convergence among legal systems and on the unification of private law, the exact significance of how legal paradigms are connected and circulate across national frontiers is, however, still largely uncertain. The comparative conundrum, in particular, rests on the appropriateness of describing the movement of law from one country to another by employing the metaphor of ‘legal transplant’.

Broadly put, two approaches have emerged. These are, it would seem, irreconcilable. One school of thought, greatly relying on legal history, maintains that the evolution of law is primarily a function of rules being imported from other legal systems in accordance with the unpredictable directions imposed by domestic lawyers. It follows from this perspective that legal growth is largely autonomous from society. It operates in its own dimension, oft en detached from those of other social institutions. Postmodernist theorists, on the contrary, claim that legal transplants are an imaginative scholarly construction. Reasoning, language and judgement are at large determined by inescapable and incommensurable epistemic, linguistic, cultural and moral frameworks. The development of law mirrors, and is necessarily responsive to, a specific legal culture. It cannot take place through borrowing because rules are culturally situated phenomena and not simply bare prepositional statements. In Chapter 1, this study contends that both perspectives offer elements of truth, but that they also contain flaws in explaining the process of the diffusion of law and the pattern of legal change.

Registered shares and share warrants to bearer express the same economic function as units of the corporate capital. They differ in terms of their legal nature and modes of circulation. It has already been pointed out that this has an historical explanation.

Within the theoretical boundaries of this study, Chapter 5 investigates the historical evolution of the transfer of share warrants to bearer. It shows that some of the roots of the current legal characterisation can be found in certain Italian notarial exchange contracts used to obviate the risk of physical transport of money for long-distance trade in the Middle Ages. These instruments were received in English commercial practice in the fifteenth century and developed later on through a process of hybridisation.

This chapter is organised as follows. Section 1 establishes where the law related to share warrants to bearer currently stands. As was the case in Chapter 4 with respect to registered shares, the goal of this chapter is to offer a coherent overview of the subject matter before embarking on a historical discussion.

The fundamental finding in section 1 is that share warrants to bearer are negotiable instruments. Building on this, section 2 examines the origin and development of the concept of negotiability. It discusses the Italian contract of cambium and then deals with the gradual process of recognition of the alienability of rights in personam embodied in the documents in England.

Section 3 assesses the significance of market practice as the medium for exporting the Italian scheme for negotiable instruments and traces the history of the bills of exchange within the debate on the role of merchant law for the development of the common law. The arguments on the possible incorporation of the law merchant into common law by adapting old legal principles to new commercial necessities are tackled in some detail so as to show how legal growth has occurred via hybridisation. Section 3 also offers additional arguments for assessing the extent of borrowing and the pattern of legal change. In particular, it considers the precise position of the innocent purchaser for value of negotiable instruments, suggesting that the holder in due course doctrine has not been a key element of the law in that area from its earliest stages, but it has been a later indigenous achievement.

This Part focuses on the second leg of the case study on comparative jurisprudence according to the scheme outlined at the end of Part I. By looking at the evolution of the methods by which shares are transferred in financial markets, it considers prospectively (de iure condendo) certain themes on cultural interaction originated in the postcolonial debate. In essence, Part III examines the limits of current practice of holding and disposition of shares through intermediaries and discusses the initiatives for modernising the existing legal framework. In doing so, it suggests that the concept of hybridisation presented in Part I and discussed in Part II with respect to the non-hegemonic scheme of borrowing, also applies outside that specific context.

The inquiry is specifically grounded on the process of formation and possible implementation in the UK of the UNIDROIT Convention on Substantive Rules for Intermediated Securities adopted by the diplomatic conference in Geneva on 9 October 2009 (hereinafter, the ‘Geneva Securities Convention’) as the most advanced and sophisticated legislative achievement in the area of the circulation of indirectly held securities. It is argued in this Part that, by analogy to the pattern of legal change based on borrowing, the model arising from a regulated mechanism of harmonisation set out by the contributions of delegates and national experts at international sessions and diplomatic conferences also involves a form of hybridisation. This pattern (unlike the one based on borrowing) consists of a two-step process where cultural interactions occur both at the formation of the international instrument and at the time of its hegemonic implementation in the domestic legal framework. In the light of the existing uncertainty on whether the Geneva Securities Convention will be ratified in the UK, only the first step can be properly addressed in this study. With respect to the second one, supportive reference to the arguments on hybridisation will be made by referring to comparable paradigms.

Part III is divided into two chapters. They consider at different levels and with a variety of emphases the evolution of law in the area of holding and transfer of shares in financial markets.

Chapter 6 takes a broad perspective. As a preliminary matter it tackles the economic themes underlying the evolution of market practice.

Part II investigated the historical evolution of the mechanisms by which shares in English companies are transferred. In line with the themes presented in Part I, it redefi ned Watson's thesis on legal transplants with arguments on cultural interaction originated in the postcolonial debate. More precisely, it suggested that contrary to the conventional interpretation, the original form of the joint stock company and its structural elements of association were not a spontaneous indigenous creation. They were borrowed from abroad and progressively integrated through a process of hybridisation in the preexisting English legal framework starting from the sixteenth century with the growth of international trade.

The inquiry distinguished between the transfer of registered shares and share warrants to bearer. Although they both enjoy the same economic function of units of the corporate capital, they are nevertheless different in terms of legal nature, regulation and modes of circulation. The explanation is historical.

Chapter 4 examined registered shares. Section 1 identified the subject matter of the inquiry by describing where the law currently stands. It found that a share today is a bundle of contractual rights with certain unique proprietary characteristics and that the certificate (capable of possession) in the case of registered shares is not evidence of legal title. Legal title passes upon the entry of the transferee into the register of members according to a tripartite scheme of transfer akin to novation. Section 2 focused on the modes of circulation of registered shares from an historical perspective. Building on the legal framework outlined in section 1, it set out the links between the growth of the legal tradition and the present characterisation. The analysis on the concept of incorporation, in particular, suggested that the historical connections between the development of the partnership model and the evolution of the company form were very strong at least until the enactment of the Joint Stock Companies Act of 1844. The discussion on the mechanism of transfer of legal title to shares, both for incorporated and unincorporated companies, supported this view, evidencing among other things, the similarities with the current legal characterisation based on novation.

The growth of financial intermediation in today's world presents challenges for sound regulation and has the potential, ultimately, to undermine the stability of markets. One of the challenges which has been prominent among those considered by supranational and national authorities alike is the increased legal uncertainty caused by a mismatch between the practice of holding interests in securities through intermediaries and the jurisprudence of ownership, which itself reflects concepts long since settled in every legal jurisdiction round the globe.

If we are to negotiate this minefield of legal uncertainty successfully, we will need to think broadly and deeply in order to gain a rich understanding of this relatively new practice of holding and circulating interests in securities through intermediaries. And if we are to do that, then we can do no better than to start with this hugely valuable and clever book.

Dr Matteo Solinas does not stop, however, at proposing a new cross-cultural understanding of the law on securities intermediation. He has a much higher purpose. He would like to give the world a new intellectual framework within which to understand legal change and its complexities. In this respect, as in others, we should regard his book as an exercise in thought leadership for the modern world. If the defining legal philosophical task of the twentieth century was to account for the legitimacy of law in a world of conflicting political and moral rights, that of the twentyfirst century will undoubtedly be to explain and justify the law in a world of rapid social and industrial change.

I first met Matteo through the work of the Financial Markets Law Committee, which is greatly indebted to him for the painstaking research he undertook, informing several of its most important papers. Matteo's highly perceptive analyses revealed his intellectual tenacity, his incisive focus and his ability to draw on a broad array of themes from diverse legal cultures. It is these qualities which ensure that this study is not only important and relevant but also one which makes that most valuable of intellectual contributions: a whole new schema within which to reappraise our collective received wisdom.

This book is particularly welcome as dealing with a topic, namely the dematerialisation and intermediation of securities, which has been thrown into sharp relief by the post-2008 financial crisis. The audience to whom the book will be of interest is undoubtedly a large one.

Part III looked at the process of legal change in the area of post-trading following the growth of intermediation in financial markets and considered the mechanism of circulation of (interests) in shares.

Chapter 6 was introductory. It clarified the meaning of the move from direct to indirect (book-entry) holdings, from the pattern of holding shares to the one of holding interests/entitlements in shares where investors purchase and sell and provide collateral to secured lenders on their holdings by means of book-entries made in the securities account kept with the intermediary. It then considered some of the most significant sources of legal risk arising from the evolution of financial practice, giving special attention to certain deficiencies and ambiguities in English law and arguing for law reform. The analysis was carried out by focusing on three examples of substantive English law raised by the FMLC and by sketching the major causes of ambiguity in the area of conflict of laws. Not addressing the uncertainties associated with domestic/cross-border transfers of intermediated shares and the legal risk arising from certain conceptual incompatibilities may leave investors in a weaker position than when they hold the securities directly from the issuer. This was regarded as an unwelcome scenario that might, in turn, undermine the attractiveness of the indirect holding system and, possibly, the efficiency of financial markets. Building on this picture, Chapter 6 assessed the responses to legal uncertainty provided by two of the most relevant existing normative projects with a view to creating an harmonised international regime on the transfer of indirectly held securities: the Geneva Securities Convention and the EU Commission project on clearing and settlement. The analysis was carried out by focusing on three issues of legal uncertainty raised by the FMLC report to see how they had been addressed in the Geneva Securities Convention and in the 2008 LCG Advice/Consultation Document. By considering the process of legal evolution that led to the final text of the Convention and estimating its possible implementation in England, the normative inquiry suggested that that pattern can be described in terms of hybridisation by way of analogy with postcolonial arguments addressed in Part I.

Part I outlined the raison d’ être of this study. It addressed the significance of the concept of hybridity within the comparative debate on legal change. In doing so, it examined the theory that describes the movement of law from one country to another by using the metaphor of legal transplant. Two irreconcilable approaches were discussed. The first one suggested that the evolution of law is largely autonomous from society as it consists primarily of a function of rules being imported from another legal system. The second one established that the development of law cannot take place through borrowing because law mirrors, and is responsive to, situated linguistic, cultural and moral national frameworks. Both views were found to fall short: the first one ignores the relationship between legal comparison and sociology of law, and the second one over-simplifies the concepts of language and culture.

Chapter 1 offered a proposal to tackle the comparative conundrum. The inquiry opened with the observation that borrowing is not necessarily a legal phenomenon, but that it reflects a common trend of social life, a mechanism of culture diffusion. It applies to law because law is itself a form of culture. Building on this, it was, however, noted that the fact of borrowing per se has a mere descriptive value and says little about culture interaction and the assimilation process.

For this reason, Chapter 2 considered recent contributions on culture contact and culture change and concluded that they provide an interesting explanation for the process of borrowing and legal evolution. The analysis centred on the notion of hybridity, a fundamental theme in cultural and post colonialist studies that highlights the ‘in-betweenness’ of people and their actions in colonial situations. By complying with colonial norms and standards and at the same time maintaining the indigenous perceptions, colonial people develop new cultural norms and standards of their own. They create new traditions. The process of hybridisation was illustrated by reference to cases taken from archaeological studies. It was argued that the same dynamics can be used to explain the reception mechanism in law. As with colonial norms and standards, legal paradigms borrowed outside their original meanings become unsettled.

This final substantive chapter draws on the discussion on the general law reform developed in Chapter 6. It considers in greater depth the specific property law issue of whether the innocent purchaser for value of intermediated shares is adequately protected under English law. In line with the FMLC and the Law Commission, section 1 argues that this is not the case. Existing legal concepts do not adequately meet the practical needs of investors in intermediated shares and legislative intervention is highly desirable to keep up with changing financial practice.

Without dwelling on the possible defences against equitable personal claims, section 1 contends, in particular, that there is a disparity in the degree of protection available along the chain of indirect holding, apparently without justification. Building on this inconsistency, section 2 confronts the situation with the Italian legal framework and UCC Article 8 in order to offer a critical comparative background for the discussion on legal change addressed in section 3. It is in that context that the law reform proposals are examined and how they reflect a process of hybridisation of national models is shown. This outcome is consistent with the general analysis presented in Chapter 6 and reiterates with greater emphasis and depth the arguments of this study on the significance of comparative law to understand the pattern of legal evolution in terms of a process of cultural interaction and hybridisation.

The English Legal Framework

As stated in Chapter 6, section 1, the conventional legal characterisation of indirectly held shares in England is based on the device of trust. In the indirect holding system, account holders retain an equitable interest in the pool of shares held by the relevant intermediary. This is different from the pattern of direct holding where investors enjoy a direct relationship with the issuer and maintain an absolute right in the shares.

The distinguishing elements of holding and transfer directly held shares have been spelt out in Chapter 4. This section clarifies the significance for an account holder of having an equitable interest in shares rather than a legal title, and specifies how equitable interests circulate under English law (section 1.1). It is only against this background that the legal position of the innocent purchaser of directly held shares can be evaluated (section 1.2) and properly compared with the one available for the transferee of intermediated shares (section 1.3).

The conventional view is that the genealogy of the modern English limited liability company (and the mechanism of transfer of registered shares) has its roots in the scheme of the partnership and of the unincorporated joint stock company formed by contract or under a deed of settlement. This view identifies an important thread in explaining the history of the current legal framework and highlights the relevance of legal tradition in shaping legal change. It is suggested in this chapter that this view offers, however, a partial representation of the process of legal evolution. This is done in three steps. Section 1 presents the founding elements and characteristics underlying the modern law of registered shares. Section 2 sets out the orthodox interpretation of the immediate genealogy of the modern English company and of the techniques of transfer of membership. Building on this analysis, section 3 argues that the current legal characterisation of the circulation of registered shares has been shaped to a significant extent by legal borrowing from the Genoese model of maritime partnership (the societas maris) employed for part-ownership in ships in England starting from the seventeenth century. It also argues that the reception of that scheme did not occur in its original form, but that it was adapted through a process of hybridisation in accordance with the indigenous fellowship traditions of the guilds.

The Current Legal Framework

The paragraphs below set the boundaries and identify the subject matter of the inquiry. The investigation focuses on the legal nature and the (possible) physical manifestation of registered shares, establishing how legal title is transferred (sections 1.1 and 1.2).

Although this necessarily involves separate studies of the law of certificated and uncertificated shares (section 1.3), the underlying legal characterisation of the nature of the transfer in terms of novation remains identical (section 1.4). Finally, some attention is dedicated to the ‘bona fide purchaser’ defence as a fundamental rule for understanding the nature of transactions related to registered shares (section 1.5). This specific issue will be discussed again in Part III when comparing it with the protection available for innocent purchasers of intermediated shares.

Legal Nature

In order to describe how registered shares are transferred it is first necessary to establish what shares are and, in particular, what their legal nature is. The Companies Act 2006 states that shares are personal property.

These conclusions review the fundamental themes discussed in the preceding Parts and draws together the findings of the investigation.

Part I dealt with the conceptual framework of this study. It examined the comparative debate on the pattern, meaning and significance of the circulation of legal paradigms across national frontiers. The discussion centred on whether it was appropriate to describe the movement of law from one country to another by using the metaphor of a ‘legal transplant’. Broadly, two approaches to this question were explored. The first one, relying on historical evidence, suggested that the evolution of law is largely autonomous from society, as it primarily consists of a function of rules being imported from another legal system driven by legal elites. The second approach was sceptical about the role of history and of comparative law as tools to detect the pattern and the drivers of legal change. It pointed out that the development of law does not take place through borrowing because law mirrors, and is responsive to, situated linguistic, cultural and moral national frameworks. The two approaches are irreconcilable with each other. And both views were found to be misleading, as they overlook the relationship between legal comparison and sociology of law and over-simplify the concepts of language and culture, respectively. To address these shortcomings an original interpretation of the pattern of legal change was offered.

The underlying theme put forward was that the practice of borrowing is not exclusively a legal phenomenon; it reflects a common trend of social life, a mechanism of culture diffusion. It applies to law because law is itself a form of culture. Building on this understanding, Part I proposed a new perspective for considering the significance of legal borrowing and for explaining legal evolution. The main argument was that the movement of legal paradigms from one country to another rarely consists of a mere transplantation of rules. Instead, it generally involves a complex and gradual process of interaction between legal and social consciousness, between imported models and indigenous traditions. From that perspective, specific attention was paid to recent studies on acculturation, colonialism and contact situations in general. The focus of the analysis was on the notion of ‘hybridity’.

Chapter 1 showed the boundaries of the current debate on the diffusion of law and explained the limits of the most influential works in the area. It also introduced the contribution of this study to the comparative discussion. The present chapter develops this. In particular, it addresses the theoretical grounds for explaining the process of legal change through the appropriation of foreign legal paradigms and ideas. In doing so, it focuses on the notion of ‘hybridity’ as shaped in postcolonial studies, and tests it against a number of possible applications, as well as in ‘pseudo-colonial’ situations outside the modern imperialist pattern. A clarification of the impact and relevance of this investigation within the specific debate on legal borrowing will be provided in the next chapter.

The Concept of Hybridity

Foundation

The term hybridity originated in the mid-nineteenth century in the context of biological and evolutionary debates to describe a cross between animal or plant species. Although it has also been occasionally used as a metaphor to indicate a lack of racial purity, the term today defines a research theme in cultural and postcolonial studies involving ‘processes of interaction that create new social spaces to which new meanings are given’.

The Theoretical Background

The concept of cultural hybridity is usually associated with the pioneering works of Homi Bhabha who attempted to overcome the rigid dualist perception of culture in the colonial contexts that neatly distinguished between colonisers and colonised. Bhabha, developing the ‘orientalist’ discourse initiated by Said, essentially criticised the conventional way of binary thinking whereby the inhabitants of a colonised region are regarded as either colonial or indigenous.

The claim for a hierarchical purity of cultures is untenable in colonial situations. So is the picture of a rigid process of acculturation where one group becomes more like another by borrowing discrete cultural traits. Rather, there are areas of ‘in-betweenness’ of people and their actions, and it is the ‘in-between’ space that carries the burden and meaning of culture.

The Contents and the Effects

Building on the above-mentioned findings, Bhabha suggested that the notion of cultural hybridity expresses the result of cross-cultural exchange or ‘the effect of an ambivalence produced within the rules of recognition of dominating discourses as they articulate the signs of cultural difference’.

Understanding the pattern, meaning and significance of the circulation of legal paradigms and ideas across national frontiers is a central theme in comparative law. Recently, this has attracted a great deal of academic interest especially under the impetus of studies on globalisation, convergence among legal systems and the unification of private law.

Many themes and views have emerged, but, for the most part, the debate has centred on the appropriateness of describing and explaining the phenomenon in terms of legal transplants. There is concern both over this mode of innovation in law and over the conceptual framework suggested by the terminology. It is said in particular that borrowing and imitation are not relevant in understanding the pattern of legal evolution and that ‘since a transplanted institution continues to live on its old habitat as well as having been moved to a new one, the choice of the word transplant is inappropriate’.

A critical overview of the theory of legal transplants and a discussion of its major criticisms are presented below.

The Terms of the Debate

Legal Transplants

Orthodoxy

The notion of ‘legal transplant’ as metaphor for the movement of law from one country to another belongs to Alan Watson's pioneering works on legal change. It was later adopted by many and today it represents the predominant terminology.

Observing the historical and comparative pattern of the reception of Roman law in most countries of medieval, renaissance, and nineteenth century continental Europe, Watson suggested that borrowing had been the most fertile source of legal growth. Legal evolution, he maintained with a variety of accents, rarely stems from isolated national innovation (creatio ex nihilo), but is rather the result of borrowing from other jurisdictions, or the ‘moving of a rule […] from one country to another, or from one people to another’. More fundamentally, by contrast to one of the most established preconceptions of modern legal thought, according to which legal development is a rational response to existing social, economic and political circumstances, Watson argued that the scale of the empirical evidence of legal transplants shows that law has a vitality of its own and does not necessarily progress in a rational way. In other words, he rejected the postulate that law is a mirror of society, that there must be a close relationship between law and the society in which it operates.

This is a book on comparative law and legal change. With a focus on corporate law and the law of personal property, it reviews the current state of the comparative debate on the evolution of law.

It takes as a starting point the similarities and differences between legal systems as a means to understand the factors that shape legal growth and tests the well-established thesis according to which law tends to develop as a consequence of the movement of legal rules from one country to another. The analysis carried out in the first part of the book finds this thesis perplexing, as, above all, it does not put forward a persuasive account of the mechanisms of legal reception. In attempting to fill that gap, this study contends that recent contributions on culture contact and culture change offer an interesting explanation for the circulation of juridical models across national boundaries.

In brief, this book suggests that the notion of ‘hybridity’, as originated in postcolonial theory, provides a valid conceptual means to examine the intricacies of legal evolution, to refine and to give content to the observation of the reception of law. The notion of hybridity overcomes the rigid dualist perception of culture in the colonial contexts that neatly distinguished between colonisers and colonised and promotes the view that cultural norms in colonial contexts are more than the result of the fusion of features of colonial and indigenous background. They are neither colonial, nor indigenous ‘in disguise’, but they occupy a ‘third space’ between colonial and indigenous cultures. In this light, hybridity is a powerful tool in explaining the pattern of cultural change in social sciences in general and in law in particular. Borrowing reflects a general trend of social life, a mechanism of culture diffusion. It applies to law too because law is itself a form of culture. As with colonial norms and standards, borrowed legal paradigms outside their original meanings become unsettled. They interact at different levels with local traditions, with certain indigenous perceptions, and do not survive in their original identities. A new legal tradition, a hybrid space that is peculiar to the specific contact situation is therefore created. Borrowed legal paradigms become almost the same as the original ones, but not quite.

Introduction

This quote comes from the introduction of a French PhD thesis published in 1905. It reveals that already at the start of the previous century, at least some scholars considered the Code civil to be outdated. The author continues by giving examples of these inventions: the steam engine, electricity, trains, etc. It goes without saying that our society has evolved at even a much faster pace since then. So which was true in 1905 is a fortiori true in 2012. The contention that (at least some parts of) the French and Belgian Code civil are outdated, amounts to kicking in an open door.

One striking example of the way contracting has evolved is the use of standard terms. Standard terms are sets of contract terms which are drafted in advance, independently of any specific contractual negotiation and to be used in multiple contracts. The codifications of the 19th century, however, envisage a contract which is concluded between two parties after individual negotiations. Together with the industrial revolution and the corresponding development of a mass society came the mass use of standard contracts and standard contract terms. Standard terms are therefore sometimes called a child of the 19th century, but that is not entirely correct. While it is true that at that time the mass application of standard terms began, its origins lie much further back in history. Already in the ancient world, standard terms appeared in rental agreements. In the Middle Ages, pilgrims for the Holy Land often took a boat from Venice. For some time, they could only choose between two shipping companies that used standard terms which were drafted for their sole benefit. To make matters worse, those companies executed their remaining duties poorly. The Mediterranean legislatures of Venice and Genoa therefore intervened with mandatory law.