Wednesday, July 26, 2017

Delaware entices corporations with blockchain law

By Anne Sherry, J.D.

In an effort to continue to attract corporations to the state and curb costly recordkeeping errors, Delaware governor John Carney signed a law to allow corporations in the state to keep records, including the stock ledger, in distributed ledgers, or blockchain. Supporters of the amendments to the Delaware General Corporation Law believe the technology could avert issues like those faced in the Dell appraisal and Dole Food class action.

The law, drafted by the Corporation Law Council of the state bar and passed overwhelmingly in the legislature, expressly permits corporations to use networks of electronic databases in the creation and maintenance of records, including the stock ledger. It is the culmination of the Delaware Blockchain Initiative launched last year by then-governor Jack Markell. The plan sought to ensure a welcoming and enabling regulatory environment and appropriate legal infrastructure for distributed ledger shares; Governor Markell also committed state government to the use of the technology by partnering with Symbiont to store public archives on a distributed ledger.

Andrea Tinianow, director of the initiative, and Caitlin Long, chairman and president of Symbiont, have said that distributed ledger shares would avoid scrambles to perfect inconsistent capitalization tables right before a corporate transaction. The method would also solve ownership inconsistencies between corporate and securities laws: Delaware confers rights on the direct, record owners of shares, while some federal securities laws require that listed securities be depository eligible and thus indirectly owned.

Addressing the Council of Institutional Investors at a conference last fall, Vice Chancellor J. Travis Laster lauded distributed ledger technologies as the “plunger” that would “fix the proxy plumbing.” The vice chancellor focused on two of his own chancery court decisions that disenfranchised Dell shareholders from participating in the appraisal of the company—or receiving the added merger consideration resulting from that appraisal—due to record holder transfers and a mix-up with T. Rowe Price’s proxy voting instructions. The law required the “absurd” result, Laster said.

Tinianow and Long also pointed to a discrepancy uncovered in the Dole Food class-action litigation, where class members filed facially eligible claims to over 49 million Dole shares while the company had only 37 million shares outstanding. “Distributed ledger technology offers a potential technological solution by maintaining multiple, current copies of a single and comprehensive stock ownership ledger,” Vice Chancellor Laster wrote in that opinion.

In addition to the blockchain provisions, the law also amends the DGCL to facilitate mergers with foreign corporations; conform the requirements for annual reports filed by foreign corporations; and clarify the provisions for opting out of restrictions on business combinations and shareholder consents. The amendments take effect on August 1.