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Delaware Paves the Way for Corporate Use of Blockchain

  • By John Hintze
  • Published: 5/18/2016
Delaware Paves the Way for Corporate Use of Blockchain John Hintze 2016-05-18

The State of Delaware, the legal home for 66 percent of Fortune 500 companies and 85 percent of U.S. initial public offerings (IPOs), aims to have legal and operational frameworks in place by next spring to permit companies to issue private shares entirely over distributed ledgers, which are proprietary messaging platforms that use technology similar to blockchain. The distributed ledgers would automate operationally intensive functions such as proxies and corporate actions.

Delaware is working with Pillsbury Winthrop Shaw Pittman’s distributed ledger team to amend state corporate law so corporate shares can be created on a distributed ledger, electronically and without the need for physical certificates. By also amending the uniform commercial code (UCC) to enable listing the shares on a distributed ledger, shares can be issued to a purchaser and then resold to another party, thus creating a legal framework.

“Now we’re in the process of determining which amendments are required and which ones are advisable,” said Marco Santori, a partner at Pillsbury who heads up its distributed ledger team.

Santori said that the Delaware legislature will be packing up in June and in January 2017 will be starting a new session, when the amendments will be introduced and likely adopted. He noted that companies typically plan share offerings a year in advance, so those domiciled in Delaware and considering issuing shares next year may be able to choose between representing shares in the traditional fashion, with a physical certificate held by the Depository Trust & Clearing Corp., or electronically on a distributed ledger.

The advantages of smart contracts

Delaware is initially working with Symbiont, a distributed ledger design firm that focuses on creating so-called smart contracts. Initially, Symbiont is working with the Delaware Public Archives to store the state’s archival records on a distributed ledger, making them easily accessible and providing an immutable record.  

Delaware also will use Symbiont’s smart contracts to represent shares on a distributed ledger, offering many advantages. First and foremost, said Mark Smith, CEO of Symbiont, the record of the shares and share transactions is immutable, transparent, and easy to access.

“One of the big advantages is with the chain of title, since the distributed ledger enables knowing at any given moment what the current state of ownership is of any instrument on the ledger,” Smith said.

Issuers can also immediately see their companies’ capitalization tables and communicate with investors—sending financial statements or other key documents--through the ledger rather than relying on an email or physical address. The cumbersome proxy voting structure, involving mailings and physical forms to fill out, could be automated, as could corporate actions such as dividend payments or K1 distributions.

“The value there is very clear: lower costs in terms of the payment structure, and an immutable record of who got paid, which becomes a basis for tax filings,” Smith. He added shares represented by smart contracts are programmable, eliminating many compliance and liability issues; for example, restrictions on selling shares could be programmed into the contacts, making it impossible to sell the shares until specified conditions are met.
    
“Smart contracts offer a powerful and innovative way to streamline cumbersome back-office procedures, lower transactional costs for consumers and businesses, and manage and reduce risk,” said Delaware Governor Jack Markell in a statement March 2 when he announced support for the initiative at the Consensus conference in New York. “We're delighted that Delaware has this opportunity to help lead the way in promoting blockchain technology and its growing role in digital commerce.”
    
A longer version of this article appears in an upcoming edition of AFP Exchange.
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