Disclaimer: The following analysis is for informational purposes only and does not constitute legal advice. You should contact an attorney for advice with respect to any particular issue or problem. Use of and access to this post does not create any attorney-client relationship between the author and the user or reader.
The past two months have possibly seen more action in the blockchain legal space than the previous two years combined. Since December, Overstock raised $10.9M via blockchain stock issuance, Coinbase released their proposed securities framework for blockchain tokens, and the SEC denied the Winklevoss Twins’ Bitcoin ETF. These actions are some of the first major foundational contributions to blockchain’s regulatory framework that will shape the industry and transactions for years or decades to come.
Keeping with its commitment as a leader of business-related law, the State of Delaware has joined this recent stream of blockchain-related legal innovation by announcing proposed amendments to its Delaware General Corporate Law (the “DGCL”) that would recognize “Distributed Ledger Shares” as a legitimate method to track and account for corporate stock. If passed by the Delaware’s General Assembly, corporations in the famously business-friendly state can look forward to legally issuing shares via distributed ledgers as of August 1st, 2017.
Such changes would allow for corporations to utilize blockchain to severely reduce or eliminate the time and monetary costs with stock transactions and management. Expensive middlemen who traditionally facilitate asset transactions and records — such as central securities depositories, auditors, exchanges, or transfer agents — can be rendered obsolete by distributed ledgers capable of performing the same services for a fraction of the price (or even for free). Further, shares that are native to blockchain’s cryptographic tracking systems can potentially be incorporated into Smart Contracts, allowing for automated asset management and transfers with less dependence on escrow services, brokers and lawyers. With these changes recommended by the Delaware Blockchain Initiative, Delaware will once again demonstrate why it is known as the “most innovation-friendly state,” taking a key regulatory step towards manifesting Harvard Business Review’s prediction that “blockchain will have the same effect on the financial industry that the internet had to media.”
The proposal itself mostly focuses on record-keeping and issuance of shares. The proposed changes to §§151(f), 202(a), 219(a), 224 and 232 modify DGCL’s language to better reflect the evolution from hardcopy to electronic record-keeping and notice-issuance, paving the way for blockchain to perform such processes. The proposed changes to §§219(c) and 224 specifically re-define the term “stock ledger” to include those administered via electronic networks such as blockchain. Moreover, corporations will no longer need to personally maintain these records, and can now legally rely on “distributed electronic networks and databases” to do so instead. Any distributed ledger can be used for these functions so long as it complies with §224 by performing three functions: facilitate corporations’ easy preparation of a current list of stockholders; meet the record-keeping requirements of other sections of DGCL (specifically §§156, 159, 217(a), and 218); and record blockchain-enabled stock-transfers in accordance with other DGCL mandates (such as §159). The net result of these changes is that Delaware corporations can rely on blockchain systems can act as digital “trust entities” for stock management, transfers and tracking, thereby optimizing efficiency, minimizing transaction costs, and boosting stockholder value.
While these changes focus on record-keeping, one area that remains to be seen is if and how the state will modify its laws to authorize shareholder voting and participation via blockchain or app-tokens. As we have seen through Proof of Work consensus methods and DAO-enabled shareholder decision-making, blockchain enables new organizational voting schemes never thought possible through legacy technologies. Examples of Delaware law that still need to address these potentials include how portions of DGCL §§112 and 113 do not clearly allow for proxy materials and voting via distributed ledgers. Further, those sections could also be modified to include express authorization for private-key signatures to operate in lieu of written signatures on such materials. And (perhaps most importantly) the DGCL is silent to nontraditional corporate structures like those of DAOs, where the legacy concept of distinct classes of human shareholders, boards of directors, and officers is modified by smart contracts capable of making decisions autonomously or through a direct vote of shareholders. The law hasn’t had a chance to consider the possibility of a hard-coded DAO smart contract operating in direct conflict with the wishes of shareholders or a board of directors, especially when a plain-language Certificate of Incorporation is silent or even contradictory on the issue. We probably won’t see legal frameworks reflecting these possibilities until more maturity is demonstrated by blockchain governance technologies, but blockchain developers, entrepreneurs and regulators must keep an eye towards these legal issues as they innovate new corporate functionalities via distributed ledgers.
All in all, the proposed rule changes are an excellent first step for regulatory oversight that many in the blockchain ecosystem argue is drastically needed. Special recognition goes to Director Andrea Tinianow, Governor Jack Markell, Cooley LLP Partner Marco Santori, and the rest of the Delaware Blockchain Initiative for their excellent work on this proposal. Let’s hope the Delaware General Assembly passes these amendments so we can move one step closer to building the corporate landscape of the future.
About the Author: Jason Civalleri is a law student and MBA-graduate passionate for blockchain and distributed ledger innovation. His first exposure to blockchain was his investment in Bitcoin in 2011, the proceeds from which he used to finance his first year of law school. He built his first “miner” for the Ethereum network in January, 2016, and has since guided start-ups, medium-sized companies, and Fortune 500 firms on how to better understand decentralized systems when contemplating process optimization and surviving disruption. In his free-time, Jason enjoys brewing beer, sailing, and playing with his dog, “Cairo.”