On July 21, 2017, the Delaware Governor enacted new legislation permitting corporations to use “distributed electronic networks or databases” – aka blockchain technology – for the maintenance of corporate records, including stock ledgers.
Corporate governance issues are not readily apparent to the public, likely because such issues can be rectified internally before they become a major problem. Only when an issue becomes magnified as a result of litigation have we seen the pitfalls of administrative errors by corporate entities and their agents, including the inaccurate voting instructions and stock ownership records evident in In re Appraisal of Dell Inc., 143 A.3d 20 (Del. Ch. 2016) and In re Dole Food Co., Inc., No. CV 8703-VCL, 2017 WL 624843 (Del. Ch. Feb. 15, 2017). The paper recording practices devised to comply with the notice and recording requirements of the old DGCL subject all corporations to such missteps, not to mention inefficiencies in a world where we rarely communicate by non-electronic means. By permitting corporations to use blockchain technology for recording, and transmitting corporate information, Delaware law provides an opportunity for corporations to avoid problems and inefficiencies borne out of traditional recordkeeping practices.
Blockchain Technology for Corporate Recordkeeping
The amendments to Section 224 of the Delaware General Corporation Law, which addresses the form of records to be kept by corporations, permits the use of blockchain technology for recording any corporate records, including stock ledgers, so long as such information can be converted to paper form within a reasonable time. Specifically, the amendments permit records to be administered by or on behalf of the corporation” rather than “maintained” by the corporation, implying the blockchain can supplant the functions of the corporate officer or agent that traditionally keeps such records.
With respect to stock ledgers, the information recorded on the blockchain must (i) allow the company to prepare a list of stockholders as required by §219 (stockholder meetings) and §220 (inspection of books and records) of the DGCL; (ii) record information specified in §156 (partially paid shares), §159 (collateral transfers),§217 (voting rights of fiduciaries, pledgors and joint owners of stock), and §218 (voting trust and other voting agreements) of the DGCL; and (iii) record transfers as governed by Article 8 of Subtitle I of Title 6.
The amendments further state that record prepared from the blockchain shall be valid and admissible in evidence and acceptable for all other purposes. In essence, the blockchain records are to be treated equally as the paper records of the corporation.
Blockchain Technology for Corporate Notices and Stockholders Communications
A core feature of blockchain technology is ability to securely transmit information among multiple parties. Recognizing this, Delaware amended several sections of the DGCL to explicitly authorize “electronic transmission” of notices by way of blockchain technology.
Section 232 of the DGCL amends the definition of “electronic transmission” to include:
the use of, or participation in, one or more electronic networks or databases (including one or more distributed electronic networks or databases) that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.
Additionally, the amendments permit corporations to provide notices stockholders holding uncertificated shares through electronic transmission for information required to be disseminated under §151(f) (certificated and uncertificated stock; rights and their explanation) and §202(a) (restrictions on transfer and ownership of securities).
Delaware’s amendments permit companies to take advantage of technological innovations that will expedite and optimize their internal recordkeeping and notice procedures. Companies that adopt such solutions by issuing digital securities can more easily manage and track voting of its shareholders, provide notices, and manage transfers of stock.