www.TheDefiningTension.com

[No. 30] Book Review: Financial Law In The Netherlands

I’ve just finished reading a new book titled “Financial Law in Netherlands”, published by Kluwer and edited by Marcel van den Nieuwenhuizen. This book will undoubtedly find its way to the bookshelves of corporate lawyers both at home and abroad, for it is one of the few and surely the best and most recent English language books on financial law in the Netherlands. It’s written largely by practitioners, and as such will surely be of tremendous value in corporate legal practice. In addition, the book should nicely complement the libraries of law faculties around the world.

The book consists of 16 chapters, each written by a leader in the field, mostly partners and associates of the major corporate law firms. The chapters address such topics as Securities Offerings, Investment Firms, Takeover Bids, Securitization, Investment Funds, Prospectus Liability, and so on. While it’s not feasible to offer a detailed review of each chapter, I’ll share a couple of thoughts that occurred to me while going through the book.

To begin, what is a logical structure for a book of this kind? While the chapters of the book each address an important topic, it’s not fully clear to me how the various chapters relate to one another and why these particular topics were chosen, and others, such as for example insider trading, were not. I suppose that one can define the term financial law in different ways, and it would be interesting to know what was the editor's definition that shaped the book.

One definition might be the law that governs the various ways in which business activities are financed. In this respect, I was somewhat surprised to read in one of the chapters that business activities “are mainly financed through exchange markets.” Internal capital markets and bank finance are, of course, at least as important sources of finance. And while the legal dimension of internal finance may be modest, bank finance obviously has a major legal dimension to it, including loan agreements and security rights.

Fortunately, this is recognized in the book, which currently focuses mostly on financial markets but which in the introductory chapter announces that the next edition of the book will also cover the topics of banking and project finance. Moreover, the introductory chapter provides a useful introduction to these topics.

Apart from the definition of financial law, there’s also the interesting question of what we talk about when we talk about financial law in the Netherlands. If we look at the topics covered in the various chapters, it appears that there are distinct three sources of law, each of which are relevant in the Netherlands but two of which do not have Dutch roots. The first such source is European law. Indeed, a number of chapters begin by outlining the relevant rules promulgated at European level. Some, such as the prospectus regulation (discussed in chapter 3), are directly applicable in all EU member states. Others, such as the UCITS directive (chapter 9), the Markets in Financial Instruments Directive (MiFID, chapter 4) or the Takeover Directive (Chapter 8), have been implemented in national laws. Either way, lawyers from other EU Member States should be fairly familiar with these rules and thanks to the book should be able to quickly gain an understanding of how they operate in the Dutch legal environment.

[No. 29] The World's First Stock Exchange

This post comes from

Matthijs J. de Jongh

History never gets out of date (it already is). For those who would like to know more about the history of corporate law and the development of capital markets, I’d recommend the recent PhD-thesis by economic historian Lodewijk Petram. In his book, Lodewijk analyzes the emergence of the world's first stock exchange: How the Amsterdam market for Dutch East India Company shares became a modern securidies market, 1602-1700. The thesis (written in English) can be downloaded here.

Here’s the summary:

It is well-known that the Dutch East India Company (VOC) issued shares on its founding in 1602, that these shares were transferable and that there existed a secondary market for shares in seventeenth-century Amsterdam. The VOC was not the first company in history that issued shares, but what makes the history of VOC shares so special is that they were very actively traded. Lodewijk Petram analyzes the quick development of the secondary market for VOC shares and argues that by 1650, this market could be called the world’s first modern securities market.

The main incentive for investors to start trading shares was the permanent character of the VOC. The States General of the Dutch Republic had initially granted a 21-year charter, which, at the end of this period, was prolonged for another 21 years without intermediate liquidation. Hence the capital stock became de facto fixed. In the end, the company would stay in business for almost two centuries. Investors generally do not want their money to be locked up for that a long period of time, so they used the secondary market to sell their shareholdings to a third party.

Standardization of the VOC shares by market makers further enhanced the development of the market. Moreover, the establishment of a clear legal framework for the share trade attracted new participants to the market and made the trading community more diverse. The various types of share traders had different risk profiles, which made it possible to start trading financial risks, using various types of derivatives: forwards, options and repos became very popular financial instruments. The seventeenth-century Dutch share traders were thus already familiar with the financial technique that played a key role in Lehman Brother’s demise.
Around 1650, the level of development of the market was such that it started to provide the functions of present-day securities market: liquidity and price discovery. As a result, investors could now, for the first time in history, invest their money at low cost and for short periods of time, without the need for endless negotiations about terms and conditions of a contract. They did not have to fear, moreover, that it would be difficult to sell off their investment if need arose and the price impact of average trades was negligible.

Petram used original and partly hitherto unused sources such as lawsuits, merchants’ accounts, share traders’ correspondences and notarial deeds.