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Appraisal Rights Litigation Blog

Delaware Gov. Signs Blockchain Bill – Possible Impact on Appraisal

Posted in Blockchain

As we have previously covered, Delaware has been considering whether to allow Delaware corporations (with Delaware being the site of the vast majority of appraisal litigation) to use blockchain platforms to issue and trade shares.  As of July 21, that has become the law with Delaware’s governor signing a bill allowing blockchain to be used for the maintenance of corporate records, including stock ledgers.  Blockchain is a concept of distributed ledger, as opposed to the centralized ledger system of DTCC.  From JD Supra: “One practical reason for using blockchain technology to track the transfer of corporate securities stems from a long-standing uncertainty surrounding the property rights of investors who ‘ultimately have no identifiable relationship with the corporate issuers of investment securities’ that they purportedly hold.”

Multiple decisions in the Dell case put the potential relevance of blockchain to appraisal in focus.  In July 2015, Vice Chancellor Laster reluctantly dismissed a subset of Dell shares seeking appraisal because, prior to the effective date, those stockholders’ stock certificates had been retitled.  As a brief recap, in that instance, DTCC (the holder of effectively all stock in the US) certificated shares into the name of its nominee, Cede & Co.  The petitioners’ custodians told DTCC to retitle the dissenting shares to the name of their own nominees – this retitling broke the record of ownership and thus denied these petitioners the right to appraisal.  Blockchain, which generally does involve “titling” in this sense, could avoid such a result.  The same is likely with regard to a second opinion, from May of 2016, involving the lead petitioner in Dell.  There, the lead petitioner instructed Cede (via its custodian) to vote in favor of the merger – but this was an error and the lead petitioner intended to vote against the merger.  While blockchain cannot protect against mistaken instructions, blockchain could reduce the number of steps between beneficial holder and the exercise of its vote.

While this market plumbing/market structure can seem esoteric, it can have real-world consequences.  In the recent Dole case, which concerned appraisal but was focused on breach of fiduciary duty claims, it ultimately turned out that millions of unexpected shares claimed on the settlement.  From JD Supra, regarding Dole: “The Chancery Court ruled that the additional merger considerations should be distributed to DTC, who would issue it to its over 800 participants, who would then issue it to the individual beneficial owners.  The Court warned that this process would likely result in incremental costs for beneficial owners, but noted that ‘these are [the] risks inherent in choosing to hold [equities] in street name.’”  At minimum, a blockchain ledger could have made administration easier than the Court’s selected remedy – kicking the issue back to DTCC

Blockchain may also present something of a victory for companies seeking to resist appraisal actions.  While appraisal arbitrage involves the idea of a “fungible bulk,” that may not rule the day with blockchain implementations.  With a distributed ledger, potentially, the shares of a beneficial holder could be traced to that holder in particular, instead of to a generalized mass of shares.

None of this is certain.  While the law allows for corporations to utilize blockchain, there is no guarantee they will necessarily do so [Law360 $$].  Developments in blockchain implementation in Delaware (and other places, such as Nevada and Arizona) may well turn out to be developments in appraisal rights as well.

Update:  the HLS Forum has covered blockchain and appraisal here.