Spencer D. Klein and F. Dario de Martino
Corporate Governance, Emerging Companies + Venture Capital, Financial Institutions + Financial Services, Financial Technology, Financial Transactions, Investment Management, Mergers + Acquisitions, and Public Companies Counseling + Compliance
On July 21, 2017, following last June’s announcement that the Delaware House of Representatives had passed (with near unanimity) blockchain-related provisions proposing to amend several sections of the Delaware General Corporation Law (DGCL), the Delaware Governor officially signed the legislation into law.
The newly enacted legislation provides, among other things, specific statutory authority for Delaware corporations to use “distributed electronic networks or databases,” aka distributed ledgers or blockchain technology, for the creation and maintenance of corporate records, including the corporations’ stock ledger.
1. The Use of Blockchain Technology for the Creation and Administration of Corporate Records
Section 219(c) of the DGCL provides that a stock ledger of a Delaware corporation is the only evidence of the identity of stockholders of the corporation who are entitled to inspect the list of stockholders and to vote at meetings.
Until now, under current recordkeeping practice, the stock ledger of a corporation could only be created and maintained by a corporate secretary or a corporation’s transfer agent. Often, a stock ledger consists of a capitalization table, i.e., electronically encoded data on a computer program like Microsoft Excel, which is producible in printed form.
Whenever a corporation issues new shares or whenever shares are transferred among stockholders, the individuals in charge of a corporation’s records must update the stock ledger. However, manually recording an issuance or a transfer of shares is a time-consuming task which is also, by definition, susceptible to human error and uncertainty.
Section 224 of the DGCL used to authorize a corporation to “maintain” its stock ledger on, by means of, or in the form of any “information storage device” or “method” subject to specified requirements. However, Section 224 of the DGCL did not specifically allow that such information storage device or method might include the use of distributed ledgers or blockchain technology. The newly enacted legislation clarifies the statutory requirements for the form of corporate records under Delaware law.
As amended, Section 219(c) defines “stock ledger” as “one or more records administered by or on behalf of the corporation in which the names of all of the corporation’s stockholders of record, the address and number of shares registered in the name of each such stockholder, and all issuances and transfers of stock of the corporation are recorded in accordance with Section 224 of the DGCL”.
By expressly allowing a corporation to have its records “administered by or on [its] behalf” (rather than “maintained by the corporation,” as previously required by the statute), the newly enacted legislation recognizes that a stock ledger does not need to be administered directly by an individual, i.e., a corporate officer or a transfer agent, and therefore enables the use of blockchain technology for the creation and administration of corporate records.
In addition, Section 224 of the DGCL, as amended, includes specific language recognizing the use of blockchain technology as a permissible method for creating and administering corporate records.
Section 224 of the DGCL, as amended, provides that any records “administered by or on behalf of the corporation [...]” may be kept on, by means of, or in the form of, any information storage device or method, “or one or more electronic networks or databases (including one or more distributed electronic networks or databases), provided that the records so kept can be converted into clearly legible paper form within a reasonable time and, with respect to the stock ledger, that the records so kept”: (i) can be used to prepare the list of stockholders specified in Sections 219 (stockholder meetings) and 220 (inspection of books and records) of the DGCL; (ii) record the information specified in Sections 156 (partly paid shares), 159 (collateral transfer), 217(a) (voting rights of fiduciaries, pledgors and joint owners of stock), and 218 (voting trusts and other voting agreements) of the DGCL; and (iii) record transfers of stock as governed by Article 8 of the Delaware Uniform Commercial Code.
According to Section 224 of the DGCL, as amended, when records are kept in such manner, a clearly legible paper form “prepared” from or by means of the “information storage device”, “method, or one or more electronic networks or databases (including one or more distributed electronic networks or databases)” shall be valid and admissible in evidence, and accepted for all other purposes, to the same extent as an original paper record of the same information would have been, provided that the paper form accurately portrays the record.
2. The Use of Blockchain Technology for the Electronic Transmission of Stockholders’ Communications
In conjunction with the newly enacted fundamental changes in the way that Delaware corporations can create and administer their corporate records, amendments to Sections 151, 202, and 364 of the DGCL were enacted to clarify that the written notices required by those sections may be given by “electronic transmission” through the use of blockchain technology.
In particular, Section 232 of the DGCL was amended to clarify that the definition of “electronic transmission” for purposes of the DGCL includes “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.”
In addition, Sections 151(f), 202(a), and 364 of the DGCL were amended to explicitly permit delivery of certain notices by electronic transmission (including via a distributed ledger) to a holder of uncertificated shares. As a result, notices by electronic transmission under Delaware law could be given by means of a distributed ledger.
The newly enacted legislation puts the State of Delaware, once again, at the forefront of corporate law by welcoming and accommodating groundbreaking and innovative technologies like blockchain, and by doing so, it may facilitate the modernization of our equity infrastructure, which is still centered on the 1970s policy of share immobilization through a depository system and centralized ledgers.
Spencer D. Klein is a partner in the Corporate Department and serves as co-chair of the firm’s global Mergers & Acquisitions Group and as head of the Corporate Department in New York; F. Dario de Martino is a Corporate and M&A associate in New York and serves as co-chair of Morrison & Foerster’s Blockchain/Smart Contracts Practice.
Morrison & Foerster’s Blockchain/Smart Contracts Practice provides a holistic, comprehensive approach to the emerging blockchain and smart contracts space. Our cross-practice, cross-industry global team unites leaders in our M&A, investment, finance, technology transactions, real estate, financial services, FinTech, intellectual property, data security and privacy, capital markets, tax, bankruptcy and restructuring, and other legal content areas, and provides our clients with cutting-edge knowledge and strategic guidance.
 This article is a follow-up to our March 20, 2017 article entitled “Delaware Paves the Way for the Use of Blockchain Technology”.
 If you would like to read the full text of the newly enacted legislation, please click here.
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