On March 13, 2017, the Council of the Corporation Law Section of the Delaware State Bar Association released proposed legislation that would amend Title 8 of Delaware’s General Corporation Law (DGCL) to permit Delaware corporations to use blockchain technology to create and manage corporate records.
Currently, stock ledgers in Delaware corporations are typically maintained by a corporate secretary or transfer agent, who manually updates the ledger upon receipt of notification of a transfer of share ownership. The proposed amendments would permit Delaware corporations to use electronic networks or databases, such as distributed ledgers, to administer corporate records and track share ownership and transfers.
Background: The Delaware Blockchain Initiative
The proposed amendments to the DGCL are part of an ongoing initiative by the State of Delaware to embrace blockchain and smart-contract technology in an effort to reduce transactional costs, streamline manual processes, and reduce fraud.
In May 2016, then–Delaware Governor Jack Markell announced formation of the Delaware Blockchain Initiative (the Initiative), a program under which the state aims to provide an “enabling regulatory and legal environment for the development of blockchain technology and to welcome blockchain companies to locate in the state.” Markell indicated that Delaware intended to pursue the creation of “distributed ledger shares” as a new form of corporate share based on blockchain technology—that is, shares that can be recorded and transferred on a ledger distributed across a peer-to-peer network, without the need for verification by a third-party intermediary.
Key Proposed Amendments
As part of the Initiative, the state government asked the corporate legal community to examine Delaware corporate legislation for any clarifications required to enable authorization of the proposed distributed ledger shares. The proposed amendments released by the Delaware State Bar Association are responsive to this request.
The proposed amendments explicitly recognize the use of distributed ledgers for maintaining corporate records required under the DGCL, provided the specified conditions are met. Specifically, section 224 of the DGCL, which stipulates the form of records that must be kept by Delaware corporations, would be amended to enable such records to be stored on, among other things, “one or more electronic networks or databases (including one or more distributed electronic networks or databases)” provided such records:
- can be converted into clearly legible paper form within a reasonable time; and
- with respect to the stock ledger:
- can be used to prepare the lists of stockholders required under Sections 219 and 220 of Title 8 of the DGCL (i.e., for inspection and identifying shareholders entitled to vote at a shareholder meeting);
- record the information specified in Sections 156 (regarding partly paid shares), 159 (regarding entries with respect to the transfer of shares made for collateral security), 217(a) (regarding voting rights in pledged shares), and 218 (regarding voting trusts and other voting agreements) of Title 8 of the DGCL; and
- record transfers of stock, as governed by Article 8 of subtitle I of Title 6 of the DGCL (the investment securities article of the Delaware Uniform Commercial Code).
The proposed amendments to the DGCL also remove certain stipulations in DGCL provisions as to who may prepare or administer the records of a corporation or derivations therefrom. For example, the proposed amendments provide that records may be administered “by or on behalf of” a corporation (emphasis added) and that the corporation (rather than the “officer who has charge of the stock ledger”, as currently provided) must prepare the list of the shareholders entitled to vote at a meeting of shareholders required to be prepared pursuant to Section 219(a) of the DGCL. These and similar changes in the proposed amendments lay the groundwork for the administration and preparation of such materials by means of a distributed ledger, rather than directly by a corporate officer.
Further, the proposed amendments provide for changes to the definition of “electronic transmission” in the DGCL to encompass “the use of, or participation in, one or more electronic networks or databases (including one or more distributed electronic networks or databases)”, a change that would enable delivery by distributed ledger of all notices permitted to be delivered by electronic transmission under the DGCL.
Delaware companies may be able to file documents on the state’s distributed ledger before the end of 2017. Indeed, if enacted, the proposed amendments to the DGCL would be effective on August 1, 2017 (with the exception of amendments regarding shareholder action by written consent, which would be effective only for such actions that have a record date on or after August 1, 2017).
The Canadian Landscape
The main obstacle to the use of distributed ledgers for corporate records maintained by corporations incorporated under Canadian provincial or federal law is the fact that the securities register required to be maintained is treated as a single register and is required to be kept in a single location.
For instance, the Canada Business Corporations Act (CBCA) provides that all registers and other records required by the CBCA, including the securities register, may be entered or recorded by any system of mechanical or electronic data processing or any other information storage device that is capable of reproducing any required information in intelligible written form within a reasonable time. In addition, it is clearly stated that a corporation may appoint an agent or mandatary to maintain a central securities register and branch securities registers. However, a single central securities register is required to be maintained at a single location.
Provincial corporate statutes impose similar requirements. For example, the Business Corporations Act (Québec) (QBCA) provides that a corporation may keep all or any of its records (including its securities register) at a place outside its head office under the conditions, among others, that the information contained in the record is readily available for inspection, in an appropriate medium; that the corporation provides technical assistance to facilitate the inspection of the information in the records; and that the corporation be able to reproduce, in intelligible form and within a reasonable time, the information contained in its record. However, corporations incorporated pursuant to the QBCA are required to maintain a single securities register.
Both the CBCA and the QBCA require reasonable precautions to be taken to prevent loss or destruction of, prevent falsification of entries in, and facilitate detection and correction of inaccuracies in the securities register. While the CBCA requires that these precautions be taken by either the corporation or its agents or mandataries, in Québec, the corporation alone remains responsible for the durability and the integrity of the register.
As Delaware is the legal home to almost one million business entities, including more than half of all U.S. publicly traded companies and 60% of Fortune 500 firms, the state’s adoption of blockchain technology is a significant development with the potential to impact corporate registrations, records management, and filings for a large number of businesses.
The amendments to the DGCL proposed by the Delaware State Bar Association appear to provide legal clarifications and changes necessary to permit the use of distributed ledgers and similar blockchain technology in corporate records creation and management for Delaware corporations.
In Canada, as in Delaware, amendments and clarifications to federal and provincial corporate legislation would be required to spur the use of distributed ledgers to record securities registers.
The proposed amendments to the DGCL also allow for a shift in the role of the corporation in its own corporate record-keeping. The proposed amendments remove the emphasis on the corporation as active intermediary in each administrative task involving the securities registry. Instead, in practice, corporations could opt to participate primarily by dictating the terms under which share ownership and transfers are recognized and recorded on a distributed ledger, perhaps by smart contracts. Such a change could allow for faster, lower-cost, more automated corporate record-keeping that is less prone to human error or administrative delay.