Delaware corporations are now able to store corporate records on a blockchain, thanks to legislation passed this week by the Delaware General Assembly and signed by Governor John Carney.
This innovative legislation allows Delaware companies to finally toss the stacks of paper stock ledgers collecting dust on shelves, and provides a secure and immutable electronic record of share activity that eliminates opportunity for bookkeeping errors and costly ownership disputes.
With the current paper-based system, tracking stock ownership in a corporation as it grows and changes produces a nightmare for many companies. It is a challenge to reconstruct the stockholders at any given point in time, including the exact number of shares held and any restrictions or agreements that apply to those shares, which impacts shareholder voting.
The new Delaware legislation—the first of its kind anywhere—allows existing corporations to convert their paper-based shares to distributed ledger shares, while new corporations will use electronic records from the outset and never hold paper records. Corporate records will be easy to track and verify, allowing corporations to save significant time and money and to avoid costly litigation.
Blockchain: A better way
Blockchain allows companies to conduct transactions quickly, securely and dependably. It will change transaction activity the way the Internet changed commerce, revolutionizing the way business is conducted.
How? Currently, most digital assets are kept on servers or “in the cloud” on a server network. This solution poses two problems: It is vulnerable to hacking by outsiders and to manipulation/data entry error by insiders. Because this system results in a record that is less than fully dependable, companies are required to keep hard copies of documents to mitigate the risks.
In contrast, blockchain technology offers companies the ability to store, manage and share encrypted data on a distributed database. The system uses a vast network of encrypted servers, called nodes, to hold documents or digital signatures of encrypted documents. There is no central repository; instead, the digital assets are widely dispersed on a spider web of servers, and available only to those holding encryption keys.
The distributed ledger cannot be edited, even if an individual holds all of the access keys. The stockholder record can be appended, but retroactive adjustments to the record cannot be made. This process generates a highly dependable audit trail that clearly—and indisputably—indicates how each stockholder acquired stock and from whom. That potentially has an enormous impact in court if a plaintiff were to dispute who the stockholders were at a given moment, such as when large merger is announced.
The technology thus provides the redundancy and security needed to allow companies to do away with paper back-up documents that are no longer needed.
Changes to the DGCL designed to benefit Delaware’s corporate community
The Delaware General Corporation Law (“DGCL”) enjoys a well-deserved reputation around the world as the gold standard for corporate governance, especially for large businesses. Delaware works to retain this prominent position through cutting-edge legislation, such as this blockchain innovation.
The initiative began under the leadership of Governor Markell, and continues to take shape under Governor Carney. The Delaware Division of Corporations and Global Delaware embarked on education and legislative efforts on this charge under the leadership of Andrea Tinianow, Esq., Delaware’s Blockchain Ombudsperson.
With passage of the new legislation, Delaware law firms and registered agents are exploring how to efficiently implement blockchain technology. Two of the leaders in this discussion are Matt O’Toole, Esq. of Potter Anderson and John Mark Zeberkiewicz, Esq. of Richards Layton & Finger. Many other major players in the state are working closely with Symbiont, a secure service private blockchain provider, to implement the technology. Here at IncNow, we are exploring how to bring blockchain stock ledgers to smaller corporations.
The investment community recognizes the significance of the new legislation and the promise of blockchain technology. As corporations begin to join the blockchain, swift adoption by others is expected as word spreads about the resulting increased efficiency in corporate transactions.