Following last May's announcement of the "Delaware Blockchain Initiative" by former Delaware Governor Jack Markell,1 on March 13, 2017, the Corporate Council of the Corporation Law Section of the Delaware State Bar Association released groundbreaking draft legislation proposing to amend several sections of the Delaware General Corporation Law (DGCL) in an attempt to clarify the application of existing laws to, and facilitate the use of, blockchain technology for various corporate purposes.
Reading a 43-page draft bill may not be an immediate priority for most of us; we wrote this article to distill the most significant aspects of the proposed legislation which, if approved, would be introduced to the Delaware General Assembly and enacted by August 2017.
This article covers the proposed legislation as it relates to the use of blockchain technology for (i) the creation and administration of corporate records and (ii) the electronic transmission of stockholders' communications2.
1. The Use of Blockchain Technology for the Creation and Administration of Corporate Records
Section 219(a) of the DGCL currently requires the officers of a Delaware corporation to create and maintain a list of its stockholders.
Section 219(c) of the DGCL currently provides that a stock ledger of a Delaware corporation is the only evidence of the identity of stockholders of the corporation who are entitled to inspect the list of stockholders and to vote at meetings.
Under current recordkeeping practice, the stock ledger of a corporation is maintained by a corporate secretary or a corporation's transfer agent and often consists of a capitalization table, i.e., electronically encoded data on a computer program like Microsoft Excel, which is producible in printed form.
Whenever a corporation issues new shares or whenever shares are transferred among stockholders, the individuals in charge of a corporation's records must update the stock ledger.
However, manually recording an issuance or a transfer of shares is a time-consuming task which is also, by definition, susceptible to human error.
Section 224 of the DGCL currently authorizes a corporation to maintain its stock ledger on, by means of, or in the form of any information storage device or method subject to specified requirements. However, Section 224 of the DGCL does not currently provide that such information storage device or method may include the use of blockchain technology.
The proposed legislation would clarify the statutory requirements for the form of corporate records under Delaware law.
As amended, Section 219(c) would define "stock ledger" as "one or more records administered by or on behalf of the corporation in which the names of all of the corporation's stockholders of record, the address and number of shares registered in the name of each such stockholder, and all issuances and transfers of stock of the corporation are recorded in accordance with Section 224 of the DGCL."
By expressly allowing a corporation to have its records "administered by or on [its] behalf" (rather than "maintained by the corporation", as currently required by the statute), the proposed legislation recognizes that a stock ledger does not need to be administered directly by an individual, i.e., a corporate officer or a transfer agent, and therefore enables the use of blockchain technology for the creation and administration of corporate records.
In addition, Section 224 of the DGCL, as amended, would include specific language recognizing the use of blockchain technology as a permissible method for creating and administering corporate records. Section 224 of the DGCL, as amended, would provide that any records "administered by or on behalf of the corporation" may be kept on, by means of, or in the form of, any information storage device or method, "or one or more electronic networks or databases (including one or more distributed electronic networks or databases)."
Finally, Section 224 of the DGCL, as amended, would still preserve the requirement that records so kept must be convertible into clearly legible paper form within a reasonable time and would also require that the records must: (i) enable the corporation to prepare the list of stockholders specified in Sections 219 (stockholder meetings) and 220 (inspection of books and records) of the DGCL; (ii) be capable of recording the information specified in Sections 156 (partly paid shares), 159 (collateral transfer), 217(a) (voting rights of fiduciaries, pledgors and joint owners of stock), and 218 (voting trusts and other voting agreements) of the DGCL; and (iii) record transfers of stock as governed by Article 8 of the Delaware Uniform Commercial Code.
2. The Use of Blockchain Technology for the Electronic Transmission of Stockholders' Communications.
In conjunction with the proposed fundamental changes in the way that Delaware corporations may create and administer their corporate records, amendments to Sections 151, 202, and 364 of the DGCL are being proposed to clarify that the written notices required by those sections may be given by "electronic transmission" through the use of blockchain technology.
In particular, Section 232 of the DGCL would be amended to clarify that the definition of "electronic transmission" for purposes of the DGCL includes the use of, or participation in, one or more electronic networks or databases (including one or more distributed electronic networks or databases).
In addition, Sections 151(f), 202(a), and 364 of the DGCL would be amended to explicitly permit delivery of certain notices by electronic transmission (including via a distributed ledger) to a holder of uncertificated shares. As a result, notices by electronic transmission under Delaware law could be given by means of a distributed ledger.
The long-awaited amendments to the DGCL should pave the way for the use of blockchain technology and, if enacted, would put the State of Delaware, once again, at the forefront of corporate law by welcoming and accommodating groundbreaking and innovative technologies like blockchain.
Spencer D. Klein is a partner in the Corporate Department and serves as co-chair of the firm's global Mergers & Acquisitions Group and as head of the Corporate Department in New York and F. Dario de Martino is a Corporate and M&A associate in New York and a founding member of Morrison & Foerster's Blockchain/Smart Contracts Practice.
Morrison & Foerster's Blockchain/Smart Contracts Practice provides a holistic, comprehensive approach to the emerging blockchain and smart contracts space. Our cross-practice, cross-industry global team unites leaders in our M&A, investment, finance, technology transactions, real estate, financial services, FinTech, intellectual property, data security and privacy, capital markets, tax, bankruptcy and restructuring, and other legal content areas, and provides our clients with cutting-edge knowledge and strategic guidance.
2. This article is part of a series of publications of our Blockchain/Smart Contracts Practice. If you are interested in an introduction to blockchain technology, please see our articles: "Demystifying Blockchain and Distributed Ledger Technology – Hype or Hero?," "The (Heart)Beat Has Sounded: The World Economic Forum Places Blockchain Front and Center," and "Building Block(chain)s: 6 Key Findings and Featured Predictions – from the World Economic Forum's Blockchain Report."
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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