On April 30, 2019, Maryland’s governor signed into law a bill that allows for Maryland incorporated companies to maintain their stock ledgers on the blockchain. Maryland is now part of an elite club of states that allow this, Delaware being the most notable given that it is home to two-thirds of listed Fortune 500 companies and 85% of the IPOs in the United States.
According to Morrison and Foerster, a law firm deeply involved in the Maryland amendments, “these amendments also permit a company to transmit communications (such as annual statements and stockholder notices) by means of a distributed electronic network or database, which includes by means of blockchain technology. The amendments further permit a company to have its records “maintained by or on [the company’s] behalf” (rather than requiring the company itself to maintain its records, as was previously required by the statute), recognizing that a stock ledger does not need to be administered directly by an individual (i.e., a corporate officer or a transfer agent), thus enabling the use of blockchain technology for the creation and administration of corporate records. Other amendments were enacted to clarify that written consents and requests required or permitted by the Maryland General Corporation Law may be given by “electronic transmission,” which includes through the use of blockchain technology.”[1]
These developments open the door for companies to issue, execute, settle, redeem and trade stock using the benefits of the blockchain. As if on cue, on May2, 2019, the London Stock Exchange chief executive Nikhil Rathi said he was inspired by early blockchain initiatives at other stock exchanges, and sees the benefit of distributed ledger technology: “You can certainly see distributed ledger technology having an application in the issuance process… I can see that technology being used in settlement too.”[2]
The use of blockchain technology and ledgers for the entire lifecycle of a security is welcome relief from the current completely centralized system of stock ownership in the U.S. where DTCC technically owns every publicly traded share, and those who own shares are now “beneficial shareholders” who must engage with intermediaries to enforce their rights. “These inter-mediaries today must approve a transaction or sale, leading to longer settlement times for transactions. Additionally, each intermediary charges a fee, leading to higher costs for transactions. ”[3]As if these weren’t reason enough to change the way ledgers are kept today, recent Delaware case law highlights that the current system “derails” shareholder voting rights by being slow and not recording the votes of those entitled to vote. As the Court pointed out in the Dole case, “the problems raised by short sales and trades during the three days before closing appear endemic to the depository system and hence likely infect every claims process. Nothing about either factor was unique to Dole. The only difference was the magnitude of the discrepancy, which made the issues visible.” [4]
The time for blockchain based ledgers has come and it’s great to see states recognizing that fact.
[1] Blockchain Technology Embraced by Maryland Legislature (May 2, 2019)
https://www.mofo.com/resources/publications/190501-blockchain-technology-maryland-legislature.html
[2]Blockchain Will Revolutionize 300 Years of Stock Trading: London Stock Exchangehttps://finance.yahoo.com/news/blockchain-wil-revolutionize-300-years-105350065.html
[3] Taking Stock of the Block: Blockchain, Corporate Stock Ledgers, and Delaware General Corporation Law—Part II John C. Kelly and Maximilian J. Mescall THE JOURNAL OF ROBOTICS, ARTIFICIAL INTELLIGENCE & LAW Volume 1, No. 4 (July–August 2018) discussing In re Dole Food Co., 2017 Del. Ch. LEXIS 25 (Ch. Feb. 15, 2017) (where due to its inability to track the short sale of shares during the three-day settlement period, Dole failed to record 12,370,657 of 49,164,415 shares) and In re Appraisal of Dell Inc., 143 A.3d 20 (Del. Ch. 2016) (where Institutional Shareholder Services, Inc. an intermediary, voted in the opposite manner than what certain shareholders had requested)
https://www.mccarter.com/files/Uploads/Documents/Website/RAIL_Taking%20Stock%20of%20the%20Block_J_Kelly0502318.pdf
[4] Dole Food Co, supra at 20-21.
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