The Harvard Business Law Review (whose articles we’ve covered before) has published a piece concerning Delaware allowing blockchain to be used for company stock ledgers. While we have written about blockchain repeatedly, the new HBLR article examines how blockchain-based securities could fundamentally change corporate governance. Using Dell and Dole as examples, the author discusses how blockchain can solve delayed settlement and unrecorded transfers issues – issues that can be critical when it comes to determining the entitlement to appraise.

The author notes that blockchain implementation may create value for the economy as a whole but would not necessarily distribute the gains evenly. This issue–effectively a tragedy of the commons–could be resolved through government action. But markets may also play a role. As readers of this blog know, the majority of large U.S. companies are incorporated in Delaware, a state with less than 1 percent of the U.S. population. Part of the reason for that is a market for legal rules–Delaware law, and the Delaware courts, are a more hospitable environment for incorporation than other places. Likewise with blockchain. If early adopters find distributed ledgers result in lower transaction costs – and thus additional investors, more liquidity, easier (and cheaper governance) or similar – this may encourage regulatory reform in states looking to compete with Delaware.  Regulatory reform may, in turn, beget further adopters.

We expect continuing developments with blockchain, and its use with securities, in the future.

 

In light of blockchain stock ledgers coming to Delaware, commentators and news outlets are starting to take notice. Recently, Bloomberg has covered the idea of stock ledger blockchain, as has the Financial Times [$$]. The core difference between any possible blockchain stock ledger and the existing system would be the likely elimination of the concept of fungible bulk. A blockchain, or at least some iterations of a blockchain, would allow a diligent researcher to potentially trace a “share” (or whatever one unit may be called) through each transaction, each wallet, or each address, back to issuance/mining/founding. This may not necessarily be an easy process–but as it stands currently, such a process is truly impossible. The “shares” held by, for example, a prime broker, are non-differentiated (hence the idea of fungible); they are not individual “units.” Blockchain share ledgers would have implications for “naked” short selling, corporate governance, securities litigation, derivative actions, and, relevant here, appraisal. As reporters are observing, blockchain may also reduce transaction costs associated with M&A activity. This remains a development likely to generate continued interest going forward.

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.”

Continue Reading Delaware Gov. Signs Blockchain Bill – Possible Impact on Appraisal