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The Delaware Legislature is poised to consider proposed amendments that would facilitate the use of blockchain technology under the state’s corporate law, a move that may help companies keep better track of who owns their stock.
If adopted, the amendments would clarify that companies incorporated in the state can use blockchain, or “distributed ledger” technology, for legally required corporate record keeping.
Blockchain is a shared online ledger system with multiple potential uses in the securities industry. The use of the technology for issuing and tracking shares of stock and other securities could lead to its application to trades and money transfers, potentially executing them within minutes rather than days. Blockchain could help companies lower transactional costs, in part by reducing bookkeeping errors.
More than half of Fortune 500 companies, about 85 percent of U.S. initial public offerings and over a million other entities call Delaware their home and are subject to its corporate requirements. Delaware officials and other stakeholders hope their legislative proposal will create the right environment for developing the technology in the state and for encouraging blockchain developers to locate there.
The proposed amendments are a step toward making distributed ledger shares a viable option for companies, Marco Santori, a New York-based partner at Cooley LLP who is advising Delaware on its blockchain initiative, told Bloomberg BNA.
Many corporate counsels have looked at implementing blockchain technology, but have decided to wait for more guidance on how to do so, Santori said. That guidance could be provided if the proposal becomes law, he said.However, many public companies may be wary of moving to distributed ledger shares until the Securities and Exchange Commission clarifies its rules as well, Santori said. Under the current federal securities laws, it is not clear what is required, he said.
The proposed amendments would outline what is required for a Delaware corporation to implement a distributed stock ledger, Matthew J. O’Toole, a Wilmington, Del.-based partner at Potter Anderson & Corroon LLP, told Bloomberg BNA. O’Toole is chair of the state bar’s Corporation Law Council, which drafted the amendments.
The proposed changes must still be introduced and voted on by Delaware’s General Assembly to become law. The endorsement of the changes by the state bar makes that likely.
“We’re excited about the proposed legislation put forth by the Delaware Bar; they’ve been great partners in our efforts to explore the possibilities blockchain technology could hold for the state of Delaware and our corporate franchise,” Delaware Deputy Secretary of State Kris Knight, who oversees the state’s Division of Corporations, told Bloomberg BNA in an email.
“We’re hopeful that these statutory changes broaden our ability to seamlessly manage entity formations and filings, as well as the issuance and transfer of shares,” he said.
Former Delaware governor Jack Markell announced in 2016 that the state is working with blockchain services provider Symbiont on a distributed ledger system for the state’s archives.
Corporate bookkeeping errors surfaced in high-profile litigation that might have been avoided through the use of blockchain technology.
Investors in public companies generally own their shares indirectly. The Depository Trust Company’s nominee Cede & Co. is the record holder who owns shares on behalf of broker/dealers, which in turn hold shares on behalf of investors.
In a May 2016 ruling, the Delaware Chancery Court concluded that several Dell Inc. investors couldn’t pursue their appraisal rights in the company’s management buyout because a mix-up caused their shares to be inadvertently voted in favor of the transaction.
More recently, the chancery court in February had to modify a merger-related class settlement after Dole Food Co. investors submitted “facially valid” claims for 49,164,415 shares, despite the class consisting of 36,793,758 shares.
A situation like Dole wouldn’t occur under a blockchain system because companies would be able to more effectively manage their capitalization tables and keep track of who is a beneficial owner of their stock, Santori said.
If blockchain technology is widely adopted by corporations, investors more often may directly own their shares—which means that they could transfer or sell their holdings to others without the use of multiple layers of ownership, O’Toole said.
The proposed amendments, if adopted, will take effect in August.
With blockchain, there is a “network effect” where the benefits show only when there are many companies and shareholders using the technology, Santori said.
“It may be that companies at first slowly start to adopt this type of record keeping, but then it quickly progresses,” he said.
The proposed amendments are available at http://src.bna.com/nqJ
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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