{"id":4460,"date":"2018-01-03T10:37:21","date_gmt":"2018-01-03T15:37:21","guid":{"rendered":"http:\/\/journals.law.harvard.edu\/hblr\/?p=4460"},"modified":"2025-03-01T20:58:37","modified_gmt":"2025-03-02T01:58:37","slug":"bullish-on-blockchain-examining-delawares-approach-to-distributed-ledger-technology-in-corporate-governance-law-and-beyond","status":"publish","type":"post","link":"https:\/\/journals.law.harvard.edu\/hblr\/bullish-on-blockchain-examining-delawares-approach-to-distributed-ledger-technology-in-corporate-governance-law-and-beyond\/","title":{"rendered":"Bullish on Blockchain: Examining Delaware\u2019s Approach to Distributed Ledger Technology in Corporate Governance Law and Beyond"},"content":{"rendered":"

Download PDF<\/a><\/p>\n

I. Introduction<\/strong><\/h6>\n

The buzz around blockchain is getting ever louder. Mergers & Acquisitions (M&A) activity in the blockchain technology sector rose 33.3% between Q2 2016 and Q2 2017,1<\/a><\/sup>See Architect Partners, Blockchain M&A Snapshot 3 (2017).<\/span> and approximately 80% of respondents to Bain & Company\u2019s 2017 survey of financial institution executives expect their organizations to begin using the technology by the time current first-year law students graduate.2<\/a><\/sup>See Bain & Co., Blockchain in Financial Markets: How to Gain an Edge 1 (2017).<\/span> Nasdaq continues its investment in Nasdaq Linq, its blockchain-based platform for the private market, as stock exchanges around the world, such as the Australian Stock Exchange, Korea Exchange, and the London Stock Exchange, begin testing blockchain-based services in their respective markets.3<\/a><\/sup>See Prableen Bajpai, How Stock Exchanges Are Experimenting With Blockchain Technology, Nasdaq (June 12, 2017, 8:50 AM), http:\/\/www.nasdaq.com\/article\/how-stock-exchanges-are-experimenting-with-blockchain-technology-cm801802; Laura Shin, Why Nasdaq Is Even More Optimistic About Blockchain Than It Was 3 Years Ago, Forbes (Feb. 21, 2017, 8:00 AM), https:\/\/www.forbes.com\/sites\/laurashin\/2017\/02\/21\/why-nasdaq-is-even-more-optimistic-about-blockchain-than-it-was-3-years-ago\/#6036a7351a26.<\/span><\/p>\n

Increased legislative response is perhaps the clearest signal yet that blockchain technology may be more than a passing fad. As of September 2017, several jurisdictions in the United States have amended their state laws to explicitly legitimize the use of blockchain technology in both commerce and corporate governance.4<\/a><\/sup>See, e.g., Ariz. Rev. Stat. Ann. \u00a7 44-7061 (2017); Nev. Rev. Stat. Ann. SB 398, \u00a7 4 (2017); 12 V.S.A. \u00a7 1913 (2017).<\/span> Most notably, Delaware amended the Delaware General Corporation Law (DGCL) to expressly allow Delaware corporations to use \u201cdistributed electronic networks or databases\u201d\u2014blockchains\u2014to create and maintain corporate records.5<\/a><\/sup>Del. Code Ann. tit. 8, \u00a7 224 (2017); see also Pete Rizzo, Delaware Governor Signs Blockchain Bill Into Law, Coindesk (July 24, 2017, 1:30 PM), https:\/\/www.coindesk.com\/delaware-governor-signs-blockchain-legislation-law\/.<\/span> Just a few months after the new Delaware statutes were signed into law, the 2017 Business Law Section Meeting of the American Bar Association (ABA) featured a panel session entitled \u201cBlockchain: How the Technology Behind Distributed Ledgers will Impact Corporate Law and M&A Practice.\u201d6<\/a><\/sup>The author attended the ABA\u2019s Business Law Section Meeting in Chicago, Illinois from September 14 to September 16, 2017. See also A.B.A., Business Law Section Annual Meeting 2017, https:\/\/www.americanbar.org\/groups\/business_law\/events_cle\/annual_2017.html (last visited Nov. 13, 2017) (advertising the meeting as occurring from September 14 to September 16, 2017).<\/span> The panel featured high-profile speakers such as Vice Chancellor Travis Laster of the Delaware Court of Chancery and Andrea Tinianow, Director of Corporate and International Development at the Delaware Department of State. Ms. Tinianow also serves as Director of the Delaware Blockchain Initiative.<\/p>\n

With a focus on Delaware\u2019s embrace of blockchain technology, this Article examines the potential role of distributed ledgers in corporate governance and capital market transactions. The Article then considers the solutions such technology offers, as well as some barriers its advocates might face in pursuing its wide-scale adoption.<\/p>\n

II. What is a Blockchain?<\/strong><\/h6>\n

A blockchain is a digital ledger.7<\/a><\/sup>See Investopedia, Blockchain (Sept. 23, 2017, 3:18 PM), http:\/\/www.investopedia.com\/terms\/b\/blockchain.asp.<\/span> Blockchain technology is also known as \u201cdistributed ledger technology\u201d (DLT), because copies of a single, shared ledger are distributed across a decentralized network of multiple \u201cnodes,\u201d or users.8<\/a><\/sup>See id.<\/span><\/p>\n

In a blockchain, all transactions that occur within a network are validated and recorded in the ledger by consensus.9<\/a><\/sup>See generally Blockchain 101, IBM, https:\/\/www-01.ibm.com\/common\/ssi\/cgi-bin\/ssialias?htmlfid=XI912346USEN& (last visited Oct. 24, 2017).<\/span> When a transaction is proposed, all nodes verify that the sell-side account has the promised inventory and that the buy-side account has the promised currency to purchase it.10<\/a><\/sup>See Oliver Wyman & Euroclear, Blockchain in Capital Markets: The Prize and the Journey 10 (2016).<\/span> If all nodes validate the transaction, the transaction is executed and cryptographically recorded in the shared ledger.11<\/a><\/sup>See id. at 6 (describing encryption and mutual consensus verification technologies).<\/span> Thus, rather than having an intermediary institution reconcile the sell-side and buy-side\u2019s respective ledgers in order to settle the transaction, the transaction is authenticated and executed in real time by automated network consensus.12<\/a><\/sup>See id. at 11.<\/span><\/p>\n

In addition to circumventing the inefficiencies of relying on an intermediary, blockchain\u2019s automated consensus technology promises accuracy and security.13<\/a><\/sup>See Blockchain 101, supra note 9.<\/span> First, by consolidating data into a shared database, the technology minimizes the chance of accounting discrepancies\u2014and any subsequent disputes\u2014among the parties involved.14<\/a><\/sup>See id.<\/span> The technology has been likened to the functionality of Google Docs, in which all permissioned parties have access to a single document at the same time and only a single version of the document exists at any one time.15<\/a><\/sup>See What is Blockchain Technology?, BlockGeeks, https:\/\/blockgeeks.com\/guides\/what-is-blockchain-technology\/ (last visited Oct. 24, 2017).<\/span> Further, all transactions are recorded sequentially and irreversibly, thus creating an immutable and indisputable audit trail.16<\/a><\/sup>See Andrea Tinianow & Caitlin Long, Delaware Blockchain Initiative: Transforming the Foundational Infrastructure of Corporate Finance, Harvard Law School Forum on Corporate Governance and Financial Regulation: The Delaware Law Series (Mar. 16, 2017), https:\/\/corpgov.law.harvard.edu\/2017\/03\/16\/delaware-blockchain-initiative-transforming-the-foundational-infrastructure-of-corporate-finance\/.<\/span> Finally, since copies of the ledger are cross-authenticated and updated in real time, enormous computing power would be required to corrupt any portion of the data encrypted in the network.17<\/a><\/sup>See Blockgeeks, supra note 15.<\/span><\/p>\n

III. Delaware\u2019s Approach<\/strong><\/h6>\n
A. Examples of Corporate Governance Disputes in Recent Delaware Jurisprudence<\/em><\/h6>\n

With roughly two-thirds of Fortune 500 companies incorporated in Delaware, a vast portion of U.S. corporate litigation occurs in the state, and the Delaware Court of Chancery\u2019s docket provides a reliable snapshot of current trends in corporate governance disputes.18<\/a><\/sup>See DLA Piper, Delaware Corporate Law and Litigation: What Happened in 2016 and What it Means for You in 2017 (Feb. 6, 2017), https:\/\/www.dlapiper.com\/en\/us\/insights\/publications\/2017\/02\/delaware-corporate-litigation-2016-2017\/.<\/span> A March 2017 article co-authored by Andrea Tinianow, the state\u2019s Director of Corporate and International Development, pointed to two disputes in particular that were characteristic examples of transactional litigation that arises out of administrative error\u2014In re Appraisal of Dell, Inc.<\/em> and In re Dole Food Co., Inc.19<\/a><\/sup>Tinianow & Long, supra note 16 (citing In re Appraisal of Dell Inc., 143 A.3d 20 (Del. Ch. 2016) and In re Dole Food Co., Inc., No. CV 8703-VCL, 2017 WL 624843 (Del. Ch. Feb. 15, 2017)).<\/span><\/em> Dell<\/em> gives a dramatic example of how beneficial shareholders lost appraisal rights in a merger proposal due to a botched proxy vote. Dole<\/em>, on the other hand, showcases the accounting discrepancies than can arise as a consequence of using a corporate record-keeping system that is unable to keep up with the volume and nature of today\u2019s capital market transactions. Though it should be noted that Tinianow\u2019s article explicitly advocates for the adoption of blockchain technology and that her co-author is Caitlin Long, Chairman and President of a start-up that offers a proprietary, blockchain-based issuance and securities trading platform, the cases the article cites do shed light on the systemic shortcomings of today\u2019s corporate infrastructure<\/p>\n

1. Proxy Voting Errors in Dell<\/em><\/h6>\n

Dell Inc. completed a go-private merger in February 2013, and in July 2013, certain of Dell\u2019s beneficial shareholders petitioned for appraisal.20<\/a><\/sup>See In re Appraisal of Dell, Inc., No. 9322-VCL, 2015 WL 4313206, at *1, *7 (Del. Ch. July 30, 2015).<\/span> In May 2016, Vice Chancellor Laster of the Delaware Court of Chancery denied the shareholders\u2019 petition and entered judgment against them by holding that they had lost standing to claim shareholder appraisal rights.21<\/a><\/sup>See Dell, 143 A.3d at 59.<\/span><\/p>\n

Vice Chancellor Laster has publicly stated that the outcome of this case, while consistent with Delaware case law, is \u201cabsurd\u201d: the shareholders lost standing because of nothing more than a proxy voting error. 22<\/a><\/sup>Vice Chancellor J. Travis Laster, Keynote Speech at the Fall 2016 Meeting of the Council of Institutional Investors: The Block Chain Plunger: Using Technology to Clean Up Proxy Plumbing and Take Back the Vote (Sept. 29, 2016).<\/span><\/sup><\/p>\n

Under \u00a7 262(a) of the DGCL, shareholders can request appraisal of the fair value of their shares only if they meet certain conditions. One such condition is the \u201cDissenter Requirement\u201d\u2014the shareholder must have neither voted in favor of the merger, nor consented thereto in writing.23<\/a><\/sup>See Del. Code Ann. tit. 8, \u00a7 262(a) (2017).<\/span> Ultimately, the petitioning shareholders in Dell<\/em> were deemed to have waived their appraisal rights because they voted in favor of the merger and thus did not meet the Dissenter Requirement.24<\/a><\/sup>See Dell, 143 A.3d at 59.<\/span> However, the shareholders were so deemed only due to an almost laughable clerical error.<\/p>\n

The shareholders\u2014mutual funds sponsored by T. Rowe Price & Associates, Inc. (T. Rowe)\u2014intended to vote against the merger. However, because they were beneficial shareholders and not holders of record, the shareholders voted by proxy.25<\/a><\/sup>See id. at 22.<\/span> As a result of an error in the voting instructions sent to their proxy voter, the shareholders\u2019 votes were inadvertently recorded for<\/em> the merger.26<\/a><\/sup>See id.<\/span><\/p>\n

i. Stock Ownership and Voting Right Structure<\/h6>\n

The petitioning shareholders\u2019 votes were recorded through something akin to a protracted game of \u201ctelephone.\u201d Under Delaware law, voting authority for the shares beneficially owned by the petitioners lay with a company named Cede & Co. (Cede)\u2014the holder of record whose name was represented on Dell\u2019s corporate stock ledger.27<\/a><\/sup>See id.<\/span> However, Cede did not have a direct relationship with the petitioners. Cede merely held Dell shares in \u201cfungible bulk\u201d for a number of custodial banks, including a certain State Street Bank & Trust Co. (State Street), which, in turn, held the Dell<\/em> petitioners\u2019 shares in smaller fungible bulk.28<\/a><\/sup>See id. See Figures 1 and 2 below for a visual representation of the chain of ownership and voting rights.<\/span> Accordingly, when the Dell merger was announced, Cede had to seek shareholder approval through a long chain of intermediaries.<\/p>\n

First, Cede transferred its voting authority to the relevant custodial banks, including, in the Dell<\/em> petitioners\u2019 case, State Street.29<\/a><\/sup>See Dell, 143 A.3d at 22.<\/span> State Street then outsourced the task of collecting and implementing voting instructions from the petitioners, as well its other account holders with claim to the fungible pool of Dell shares, by giving power of attorney to a third-party company named Broadridge Financial Solutions, Inc. (Broadridge).30<\/a><\/sup>See id.<\/span> On the other side of the chain, T. Rowe involved another<\/em> third-party, called Institutional Shareholder Services, Inc. (ISS).31<\/a><\/sup>See id.<\/span> ISS was to collect T. Rowe\u2019s voting instructions and convey them to Broadridge.32<\/a><\/sup>See id.<\/span><\/p>\n

Thus, in order for the Dell<\/em> petitioners to oppose the Dell merger, their voting instructions needed to flow through ISS, then Broadridge, whose authority was delegated from State Street, which, in turn, had received proxy authority through Cede.<\/p>\n

ii. Mistaken Voting Instructions<\/h6>\n

The critical error occurred in the process of ISS collecting T. Rowe\u2019s voting instructions. T. Rowe informed ISS that it wanted to vote against<\/em> the merger in the vote to be held at Dell\u2019s July 2013 shareholder meeting.33<\/a><\/sup>See id. at 27.<\/span> T. Rowe\u2019s Corporate Governance Specialist explicitly asked ISS to override T. Rowe\u2019s default for<\/em> vote, which would otherwise automatically populate the ISS voting system.34<\/a><\/sup>See id. T. Rowe assumed a default position that it would typically vote for the transaction when voting on transactions supported by the management of the entity.<\/span> ISS confirmed accordingly; the entry in ISS\u2019s system for the July 2013 Dell shareholder meeting showed T. Rowe\u2019s voting instruction against<\/em> the merger.35<\/a><\/sup>See id. at 27.<\/span><\/p>\n

However, the July meeting was postponed three times.36<\/a><\/sup>See id.<\/span> Each time a new date was announced, ISS confirmed that T. Rowe\u2019s vote against<\/em> the merger was recorded in ISS\u2019s system.37<\/a><\/sup>See id.<\/span> But when the vote was eventually pushed back to September 2013, the ISS system generated a new entry.38<\/a><\/sup>See id. at 27\u201328.<\/span> Unbeknownst to either ISS or T. Rowe, the new entry fatally replaced the July meeting entry. The new entry was automatically populated with T. Rowe\u2019s default for<\/em> vote and thus, ISS submitted voting instructions to Broadridge indicating that the T. Rowe shareholders were in favor of<\/em> the merger.39<\/a><\/sup>See id.<\/span> At just the second link of the proxy voting \u201ctelephone\u201d chain, the petitioners\u2019 instructions were garbled; the petitioners had ostensibly approved the merger and effectively waived their appraisal rights.<\/p>\n

\"\"<\/p>\n

Figure 1: Chain of ownership between issuer, record holders, and beneficial owners. <\/em><\/p>\n

Dell, 143 A.3d at 25.<\/em><\/p>\n

 <\/p>\n

 <\/p>\n

\"\"<\/p>\n

Figure 2: Chain of voting authority between issuer, record holders, and beneficial owners. <\/em><\/p>\n

Dell, 143 A.3d at 31.<\/em><\/p>\n

 <\/p>\n

2. Ledger Discrepancies in Dole<\/h6>\n
i. Inconsistent Ledgers<\/h6>\n

The cause of conflict in Dole<\/em> could similarly be likened to a \u201ctelephone\u201d game. As in Dell<\/em>, the record owner of the relevant shares was Cede.40<\/a><\/sup>See In re Dole Food Co., Inc., No. CV 8703-VCL, 2017 WL 624843, at *1 (Del. Ch. Feb. 15, 2017).<\/span> Cede again held shares in fungible bulk, and its stock ledger recorded the accounts of custodial institutions, which, in turn, held shares in fungible bulk for their<\/em> clients\u2014the actual beneficial owners.41<\/a><\/sup>See id. at *3.<\/span> But this time, Cede, the beneficial shareholders, and the layers of intermediaries between them muddled a much more routine communication\u2014the routine trading of shares.42<\/a><\/sup>See id. (\u201cDTC\u2019s centralized ledger did not reflect all of these trades.\u201d)<\/span> This muddled communication led to an inaccurate stock ledger, which came to the Dole<\/em> court\u2019s attention in a case regarding a class action settlement.43<\/a><\/sup>See id.<\/span><\/p>\n

In the wake of the go-private merger of Dole Food Company, Inc. (Dole), which closed on November 1, 2013, shareholders brought a class action against Dole\u2019s fiduciaries.44<\/a><\/sup>See id. at *1.<\/span> The parties settled the case for $2.74 per share plus interest.45<\/a><\/sup>See id.<\/span> When the settlement administrator instructed class members to submit claims for the settlement consideration, it received facially valid claims for 49,164,415 shares.46<\/a><\/sup>See id.<\/span> Unfortunately, this far outnumbered the number of shares actually outstanding according to Cede\u2019s centralized stock ledger, which showed only 36,793,758 shares outstanding.47<\/a><\/sup>See id. at *5.<\/span> Asserting that it would require \u201ca forensic audit of herculean proportions\u201d to retrace every trade and to rectify the ledger, the Dole<\/em> court held that the settlement consideration should be distributed by the same mechanism as the merger consideration\u2014Cede\u2019s stock ledger would govern, even though this would mean that some beneficial owners, who admittedly fell within the class definition, would not be able to collect on their settlement claims.48<\/a><\/sup>See id. at *4\u20136.<\/span><\/p>\n

ii. Delayed Settlement and Unrecorded Transfers<\/h6>\n

Upon investigation, there were two main causes of the stock ledger discrepancy. First, in anticipation of needing to distribute merger consideration pro rata <\/em>among the custodial institutions\u2019 claims, Cede had frozen its centralized ledger on the effective date of Dole\u2019s merger.49<\/a><\/sup>See id. at *3.<\/span> Freezing a ledger restricts securities from being deposited or withdrawn,50<\/a><\/sup>See U.S. Sec. and Exchange Commission, DTC Chills and Freezes, Investor.gov: Investor Alerts & Bulletins (Feb. 23, 2017), https:\/\/www.investor.gov\/additional-resources\/news-alerts\/alerts-bulletins\/dtc-chills-freezes.<\/span> which would theoretically have given Cede an accurate snapshot of account balances on the merger\u2019s effective date. Unfortunately, however, this does not mesh with the current process for clearing trades; the clearing process has a lag time of three days, meaning that any trades placed in the two days prior to, or on the day of, the Dole merger\u2019s closing were not captured in Cede\u2019s ledger.51<\/a><\/sup>See In re Dole Food Co., Inc., 2017 WL 624843, at *3.<\/span> And in the three-day period prior to the merger becoming effective, more than thirty-two million shares of Dole common stock were traded.52<\/a><\/sup>See id.<\/span><\/p>\n

Second, this discrepancy was further exacerbated because, as of October 31, 2013, 2.9 million shares of Dole common stock had been shorted.53<\/a><\/sup>See id.<\/span> Current share-lending laws allow brokers and the custodial institutions that hold beneficial owners\u2019 shares in fungible bulk to lend shares for short sale without the beneficial owners\u2019 knowledge.54<\/a><\/sup>See id.<\/span> In Dole<\/em>, this facilitated double counting. It created more beneficial owners who could facially claim settlement consideration, while the unknowing lenders of a shorted stock could simultaneously submit claims based on the same underlying shares.55<\/a><\/sup>See id. at *3.<\/span><\/p>\n

Declaring that it was \u201cfunctionally impossible to resolve the share discrepancy in a practical or cost-effective manner,\u201d the Dole<\/em> court held that the settlement consideration should be distributed according to Cede\u2019s ledger and shifted the burden to the custodial institutions to allocate the consideration among its clients.56<\/a><\/sup>See id. at *4, *7.<\/span><\/p>\n

B. Delaware\u2019s Response<\/em><\/h6>\n
1. Vice Chancellor Laster\u2019s Criticism of the Current System<\/h6>\n

Vice Chancellor Laster summarized the history of the current stock ownership system and its incompatibility with the realities of modern-day securities trading in a different decision from the Dole <\/em>case. In In re Appraisal of Dell, Inc.<\/em>, he explained why most U.S. equity securities are currently registered in the name of Cede, rather than in the names of their beneficial owners.57<\/a><\/sup>See In re Appraisal of Dell, Inc., No. 9322-VCL, 2015 WL 4313206, at *4 (Del. Ch. July 30, 2015).<\/span> In the 1970s, as trading volumes rose to an unprecedented level, the U.S. Securities and Exchange Commission (SEC) implemented a national \u201cshare immobilization\u201d initiative.58<\/a><\/sup>See id. at *1.<\/span> The initiative halted the physical exchange of share certificates with every trade.59<\/a><\/sup>Laster, supra note 22, at 4.<\/span> Instead, custodians such as banks and brokers\u2014State Street in the case of Dell<\/em>\u2014placed \u201cjumbo certificates\u201d representing masses of shares into one of three depositories.60<\/a><\/sup>See In re Appraisal of Dell, Inc., 2015 WL 4313206, at *5.<\/span> The jumbo certificates were issued in the name of each depository\u2019s nominee.61<\/a><\/sup>See Laster, supra note 22, at 4\u20135.<\/span> The depositories then served as central accountants\u2014the depositories tracked any trades among the various custodians\u2019 accounts\u2014but as discussed earlier, held the custodians\u2019 shares in fungible bulk.62<\/a><\/sup>See id. at 5.<\/span> The structure was then repeated at a smaller level within each custodian\u2019s account.63<\/a><\/sup>See id.<\/span> The custodians tracked any trades among their clients, who were the true beneficial shareholders, but actually held all their clients\u2019 shares in fungible bulk. 64<\/a><\/sup>See id.<\/span><\/p>\n

This system is still in place, but today, the only surviving depository is the Depository Trust Company (DTC).65<\/a><\/sup>See In re Appraisal of Dell, Inc., 2015 WL 4313206, at *1.<\/span> Now, almost all U.S. stock is issued in the name of DTC\u2019s nominee\u2014Cede.66<\/a><\/sup>See id. at *4.<\/span><\/p>\n

Given that much of Delaware\u2019s corporate governance law exclusively grants shareholders\u2019 executory power to owners of record, rather than beneficial owners, this multilayered system requires all the parties involved to participate in a new game of \u201ctelephone\u201d each time shareholder action is required.67<\/a><\/sup>See Laster, supra note 22, at 10 (\u201cT. Rowe is not the only stockholder to have suffered from this daisy-chained system of share ownership.\u201d).<\/span>\u00a0Although the share immobilization system was designed to accommodate the increased trading volumes of the 1960s and 1970s, it has ironically become an enormous encumbrance on the exponentially higher trading volumes of the twenty-first century. Vice Chancellor Laster asserts that the current system\u2019s inability to accurately and timely track trading activity and shareholder voting is a \u201csystemic failure[] [that] undermine[s] the legitimacy of our corporate governance system.\u201d68<\/a><\/sup>Laster, supra note 22, at 14.<\/span> In Dole<\/em>, he warned that the circumstances that led to the dispute were not uncommon and that \u201c[t]he only difference [that made Dole<\/em> unique] was the magnitude of the [stock ledger] discrepancy, which made the issues visible.\u201d69<\/a><\/sup>In re Dole Food Co., Inc., No. CV 8703-VCL, 2017 WL 624843, at *7 (Del. Ch. Feb. 15, 2017).<\/span> He noted that such discrepancies appeared \u201cendemic to the depository system.\u201d70<\/a><\/sup>Id.; see also Concept Release on the U.S. Proxy System, Release Nos. 34-62495, Investment Advisor Act Release No. 3052, Investment Company Act Release No. 29,340, 75 Fed. Reg. 42,982, 42,990 (proposed July 22, 2010) (\u201cBecause the ownership of individual shares held beneficially is not tracked in the U.S. clearance and settlement system . . . imbalances occur.\u201d).<\/span><\/p>\n

2. The Beginnings of Blockchain-Based Governance Mechanisms in Delaware<\/h6>\n

Vice Chancellor Laster\u2019s warnings did not fall on deaf ears. Both the Delaware legislature and executive branch seemed to agree with his assessment of the state\u2019s corporate governance requirements. To much fanfare, Delaware Governor John Carney signed the \u201cBlockchain Bill\u201d into law in July 2017. The bill amends the DGCL to expressly allow the inclusion of blockchain technology in the infrastructure of corporate governance.71<\/a><\/sup>See generally Handout from Matthew J. O\u2019Toole, Michael K. Reilly & David B. DiDonato, at the ABA\u2019s 2017 Business Law Section Meeting (Sept. 15, 2017); Matthew J. O\u2019Toole & Michael K. Reilly, The First Block in the Chain: Proposed Amendments to the DGCL Pave the Way for Distributed Ledgers and Beyond, Harvard Law School Forum on Corporate Governance and Financial Regulation: The Delaware Law Series (Mar. 16, 2017), https:\/\/corpgov.law.harvard.edu\/2017\/03\/16\/the-first-block-in-the-chain-proposed-amendments-to-the-dgcl-pave-the-way-for-distributed-ledgers-and-beyond\/.<\/span> For example, \u00a7 151(f) of the DGCL now explicitly allows the delivery of certain shareholder communications by distributed ledger platforms, and, crucially, \u00a7 224 now grants statutory authority to use distributed ledgers in the creation and maintenance of corporate records.72<\/a><\/sup>See Del. Code Ann. tit. 8, \u00a7\u00a7 151(f), 224 (2017). See generally O\u2019Toole, Reilly & DiDonato, supra note 71, at 3.<\/span> The latter provision even enumerates minimum requirements of such records.73<\/a><\/sup>See Del. Code Ann. tit. 8, \u00a7 224 (2017).<\/span><\/p>\n

These legislative changes come in the midst of a broader push from the Delaware executive branch to embrace blockchain technology. In 2016, then-Governor Jack Markell announced the launch of the Delaware Blockchain Initiative.74<\/a><\/sup>See Press Release, Del. Off. of the Governor, Governor Markell Launches Delaware Blockchain Initiative (May 2, 2016).<\/span> A press release from the Governor\u2019s Office stated that the initiative is a \u201ccomprehensive program to provide an enabling regulatory and legal environment for the development of blockchain technology and to welcome blockchain companies to locate in the state.\u201d75<\/a><\/sup>See id.<\/span> Governor Markell announced that Delaware, in demonstration of its commitment to the technology, would also invest in its own use cases for blockchain and smart contract technology.76<\/a><\/sup>See id.<\/span> For example, Delaware partnered with Symbiont, a DLT start-up, to store state archival records on a distributed ledger.77<\/a><\/sup>See id.<\/span><\/p>\n

Further, Tinianow, who also serves as the Director of the Delaware Blockchain Initiative, used her March 2017 article to publicly contemplate the benefits of distributed stock ledgers and advocate unequivocally for Delaware\u2019s bullish position on the technology:<\/p>\n

If shares are registered on a distributed ledger, investors and issuers would be able to interact directly<\/em>. Property rights<\/em> would be crystal clear. Capitalization table management<\/em> would become easy. Proxy voting<\/em> would be transparent and always accurate. Dividends<\/em> and other corporate actions (such as stock splits) would be automated and always accurate. Certificates of good standing<\/em> would never again require a prerequisite forensic audit. Securities lending records<\/em> would always be accurate, so accidental over-issue of securities would never happen.78<\/a><\/sup>Tinianow & Long, supra note 16 (emphasis added).<\/span><\/p>\n

IV. Challenges to Wide-Scale Adoption<\/strong><\/h6>\n

Tinianow and Long\u2019s piece certainly raises valid points about the advantages of adopting blockchain-based platforms. Features such as \u00a0(1) direct issuer-investor relations; (2) transparent, unified, and real-time transaction data; and (3) automated processes for dividend distribution and investor communications all would seem likely to bring us closer to Vice Chancellor Laster\u2019s \u201cutopian vision of share ownership system where there is only one type of owner: record owners.\u201d79<\/a><\/sup>Laster, supra note 22, at 20.<\/span> Further, there seems to be consensus among capital markets experts that, by replacing the manual, redundant, and error-prone processes of secondary markets with an automated system for execution, clearing, and settlement, blockchain technology could not only minimize liquidity and credit risks, but allow companies to harness richer\u2014but cheaper\u2014market reference data.80<\/a><\/sup>See Bain & Co., supra note 2, at 4; Oliver Wyman, supra note 10, at 9.<\/span><\/p>\n

But both corporations and the capital markets still seem tepid towards wide-scale blockchain adoption.81<\/a><\/sup>See Bain & Co., supra note 2, at 1.<\/span> Certainly, there are still technological limitations. Although the technology has been tested in smaller use cases, such as Nasdaq\u2019s previously mentioned private market platform,82<\/a><\/sup>See Bajpai, supra note 3.<\/span> and could have substantial near-term impacts on smaller domestically focused markets such as the Australian Stock Exchange,83<\/a><\/sup>See Bain & Co., supra note 2, at 2.<\/span> there are still questions regarding DLT\u2019s scalability and capacity to handle high-volume, high-frequency trading.84<\/a><\/sup>See Caitlin Long, Remarks at the ABA\u2019s 2017 Business Law Section Meeting (Sept. 15, 2017); Oliver Wyman, supra note 10, at 14.<\/span><\/p>\n

Further, implementation requires some degree of consensus from all market participants, in terms of both policy and actual system design. Technology that distributes ledgers inherently requires group participation because there must be a network of nodes to which ledgers can be distributed, and all nodes in the network must agree to the protocols the network will use.85<\/a><\/sup>See Oliver Wyman, supra note 10, at 7.<\/span> Naturally, such coordination will be harder to achieve in larger markets. Moreover, there needs to be a critical mass in the number of participants willing to invest in blockchain technology for it to become useful and an attractive investment.86<\/a><\/sup>See Bain & Co., supra note 2, at 5.<\/span> As such, Bain & Co. predicts that many market actors will face \u201cgame-theory-type decisions.\u201d87<\/a><\/sup>Id.<\/span> Being the first to adopt a technology that may never achieve critical mass and widespread usage may result in a losing investment, but being too slow may result in being left behind as the market evolves.88<\/a><\/sup>See id.<\/span><\/p>\n

Relatedly, although Delaware has adapted the DGCL to welcome the advent of blockchain technology, for most market participants, changes to Delaware law alone may not be sufficient to justify migrating to blockchain-based platforms. Although the Blockchain Bill\u2019s changes to the DGCL seem to promise a path to Vice Chancellor Laster\u2019s utopia, they are hardly a panacea to the convoluted system currently in place. First, Delaware\u2019s new rules address only record ownership, and while this could be revolutionary for companies incorporating in Delaware moving forward, existing corporations will be largely unaffected. Existing entities, who see very little day-to-day change in their stock ledgers and whose shares are currently traded almost exclusively in the secondary market, will only feel the simplifying benefits of a blockchain-based platform when secondary market actors buy into the technology too.89<\/a><\/sup>See O\u2019Toole, Reilly & DiDonato, supra note 71, at 4.<\/span><\/p>\n

Second, as the DGCL stands now, a Delaware corporation may only use uncertificated shares\u2014and shares issued or recorded exclusively by DLT would necessarily be uncertificated\u2014if certificates that previously represented those shares are surrendered to the corporation.90<\/a><\/sup>See Del. Code Ann. tit. 8, \u00a7 158 (2017).<\/span> This requirement renews precisely the logistical challenge that the SEC\u2019s 1970s share immobilization initiative sought to defeat\u2014the physical movement of stock certificates. For Delaware corporations with stock certificates outstanding, which encompasses the vast majority of publicly traded corporations, this is an additional labor and cost intensive obstacle to transitioning to blockchain-based stock ledgers.91<\/a><\/sup>See O\u2019Toole, Reilly & DiDonato, supra note 71, at 4.<\/span><\/p>\n

Perhaps most crucially, widespread adoption may be slowed because the benefits of migrating to blockchain-based trading will not be distributed evenly.92<\/a><\/sup>See Bain & Co., supra note 2, at 4.<\/span> Recent estimates from an Oliver Wyman study put global annual expenditure on post-trade and securities servicing in the region of $100 billion, with an additional $100 to $150 billion in general information technology and operations expenses in capital markets.93<\/a><\/sup>Oliver Wyman, supra note 10, at 20.<\/span> Although Bain & Co.\u2019s research suggests that issuers and end-investors may see between fifteen and thirty-five billion dollars in savings by transitioning secondary markets to blockchain technology, those savings will likely come at the expense of clearinghouses and custodians, whose utility would be replaced by DLT.94<\/a><\/sup>Bain & Co., supra note 2, at 4\u20135.<\/span> As such, those intermediary actors, who currently hold vast power in the ecosystem,95<\/a><\/sup>See, e.g., Laster, supra note 22, at 15 (citing Broadridge\u2019s monopoly power in controlling over ninety-eight percent of the U.S. market for proxy voting processing services); In re Dole Food Co., Inc., No. CV 8703-VCL, 2017 WL 624843 (Del. Ch. Feb. 15, 2017), at *5 (noting that the only feasible solution to stock ledger discrepancies caused by the current system\u2019s inadequacies disproportionately benefits large holders).<\/span> have little incentive to make or facilitate the transition. Though many intermediaries are actively exploring the potential of blockchain technology lest the market leave them behind,96<\/a><\/sup>For instance, the Bain & Co. study cited throughout this Article was written in collaboration with Broadridge and the Oliver Wyman study was co-authored by Euroclear, another provider of post-trade services.<\/span> the risk of disrupting their own business models and competitive offerings looms large.97<\/a><\/sup>Bain & Co., supra note 2, at 5.<\/span><\/p>\n

V. Conclusion<\/strong><\/h6>\n

In light of the issues \u201cendemic to the depository system,\u201d98<\/a><\/sup>In re Dole Food Co., Inc., No. CV 8703-VCL, 2017 WL 624843, at *7 (Del. Ch. Feb. 15, 2017).<\/span> DLT undeniably has potential to improve the current infrastructures of corporate governance and capital market transactions. The Delaware Blockchain Initiative and subsequent Blockchain Bill certainly mark significant steps toward wider implementation of the technology. However, blockchain proponents face a conundrum: to unlock its full potential, the technology must become scalable, and a critical mass of market participants must take the leap. To be successful, advocates must stimulate enough market interest in the technology to keep driving product innovation and to persuade all actors that the upside is worth the investment.<\/p>\n

Save<\/span>Save<\/span><\/p>\n

Save<\/span>Save<\/span><\/p>\n

Save<\/span>Save<\/span>Save<\/span>Save<\/span><\/p>\n

Save<\/span>
\n<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Download PDF I. Introduction The buzz around blockchain is getting ever louder. Mergers & Acquisitions (M&A) activity in the blockchain […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[22],"tags":[],"ppma_author":[374],"class_list":["post-4460","post","type-post","status-publish","format-standard","hentry","category-home"],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/pgKEUK-19W","jetpack-related-posts":[{"id":4477,"url":"https:\/\/journals.law.harvard.edu\/hblr\/how-do-i-sell-my-crowdfunded-shares-developing-exchanges-and-markets-to-trade-securities-issued-by-start-ups-and-small-companies\/","url_meta":{"origin":4460,"position":0},"title":"How Do I Sell My Crowdfunded Shares? Developing Exchanges and Markets to Trade Securities Issued by Start-ups and Small Companies","author":"ehansen","date":"January 28, 2018","format":false,"excerpt":"Download PDF Governments worldwide are increasingly recognizing that assisting the development of start-ups and small to medium enterprises may be critical to fostering job creation and economic growth. As such, there is a concerted effort to rework securities regulation to encourage the funding of these businesses through innovative approaches such\u2026","rel":"","context":"In "Home"","block_context":{"text":"Home","link":"https:\/\/journals.law.harvard.edu\/hblr\/category\/home\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":4364,"url":"https:\/\/journals.law.harvard.edu\/hblr\/trading-in-substitute-securities-liability-under-rule-10b-5\/","url_meta":{"origin":4460,"position":1},"title":"Trading in Substitute Securities: Liability Under Rule 10b-5","author":"ehansen","date":"May 16, 2017","format":false,"excerpt":"Download PDF Cody Donald I. Introduction A trade in a substitute security occurs when a trader with inside information, typically an employee, trades\u2014not in the securities of the company that is the subject and source of the information\u2014but in the securities of another company whose stock would be affected if\u2026","rel":"","context":"In "Home"","block_context":{"text":"Home","link":"https:\/\/journals.law.harvard.edu\/hblr\/category\/home\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":5041,"url":"https:\/\/journals.law.harvard.edu\/hblr\/strong-creditors-weak-owners-a-taxonomy-of-leveraged-finance-and-its-impact-on-corporate-governance\/","url_meta":{"origin":4460,"position":2},"title":"Strong Creditors, Weak Owners: A Taxonomy of Leveraged Finance and Its Impact on Corporate Governance","author":"cmajocha","date":"April 28, 2023","format":false,"excerpt":"I. Introduction This Article builds upon existing literature on controlling shareholders, financial intermediation and creditor governance (Part II) to analyze the mirroring setup between controlling and noncontrolling shareholders on the equity side, and private and public lenders on the debt side (Part III). It studies the dynamic interaction of these\u2026","rel":"","context":"In "Home"","block_context":{"text":"Home","link":"https:\/\/journals.law.harvard.edu\/hblr\/category\/home\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":4349,"url":"https:\/\/journals.law.harvard.edu\/hblr\/age-before-equity-federal-regulatory-agency-disgorgement-actions-and-the-statute-of-limitations\/","url_meta":{"origin":4460,"position":3},"title":"Age Before Equity? Federal Regulatory Agency Disgorgement Actions and the Statute of Limitations","author":"ehansen","date":"April 4, 2017","format":false,"excerpt":"Download PDF Michael Columbo and Allison Davis I. Introduction At what point may a person rest assured that the government will not confiscate her money due to a past alleged regulatory infraction? In Kokesh v. SEC, the Supreme Court is poised to resolve a three-way split among the federal circuit\u2026","rel":"","context":"In "Home"","block_context":{"text":"Home","link":"https:\/\/journals.law.harvard.edu\/hblr\/category\/home\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":4657,"url":"https:\/\/journals.law.harvard.edu\/hblr\/an-introduction-to-californias-consumer-privacy-act\/","url_meta":{"origin":4460,"position":4},"title":"An Introduction to California\u2019s Consumer Privacy Act","author":"Harvard Law Development","date":"March 12, 2019","format":false,"excerpt":"In June of 2018, the California legislature passed the California Consumer Privacy Act of 2018, establishing a new system of privacy regulation that has never before been seen in the United States.\u00a0 Specifically, the provisions of the CCPA allow consumers five rights: (1) the right to know what personal information\u2026","rel":"","context":"In "Home"","block_context":{"text":"Home","link":"https:\/\/journals.law.harvard.edu\/hblr\/category\/home\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":4493,"url":"https:\/\/journals.law.harvard.edu\/hblr\/sidestepping-the-rat-holes-investment-risk-and-securities-law\/","url_meta":{"origin":4460,"position":5},"title":"Sidestepping the Rat Holes: Investment Risk and Securities Law","author":"ehansen","date":"April 21, 2018","format":false,"excerpt":"Download PDF This Article presents a novel understanding of the purpose of federal securities laws as the management of investment risk. Those laws should be treated as a whole. When two rules, even under different statutes, address the same risk, they should be applied concomitantly. For example, broker-dealer regulation under\u2026","rel":"","context":"In "Home"","block_context":{"text":"Home","link":"https:\/\/journals.law.harvard.edu\/hblr\/category\/home\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"jetpack_sharing_enabled":true,"authors":[{"term_id":374,"user_id":6,"is_guest":0,"slug":"hlsjrnldev","display_name":"ehansen","avatar_url":"https:\/\/secure.gravatar.com\/avatar\/e63e48e4d49784084ed809c915627ab9f38ce23b8f0aa540749aa9e907f6a18c?s=96&d=blank&r=g","0":null,"1":"","2":"","3":"","4":"","5":"","6":"","7":"","8":""}],"_links":{"self":[{"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/posts\/4460","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/comments?post=4460"}],"version-history":[{"count":0,"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/posts\/4460\/revisions"}],"wp:attachment":[{"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/media?parent=4460"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/categories?post=4460"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/tags?post=4460"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/ppma_author?post=4460"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}