Canada: A Canadian Perspective: Proposed Amendments To Delaware's General Corporation Law Would Enable Use Of Blockchain

On March 13, 2017, the Council of the Corporation Law Section of the Delaware State Bar Association released proposed legislation that would amend Title 8 of Delaware's General Corporation Law (DGCL) to permit Delaware corporations to use blockchain technology to create and manage corporate records.

Currently, stock ledgers in Delaware corporations are typically maintained by a corporate secretary or transfer agent, who manually updates the ledger upon receipt of notification of a transfer of share ownership. The proposed amendments would permit Delaware corporations to use electronic networks or databases, such as distributed ledgers, to administer corporate records and track share ownership and transfers.

Background: The Delaware Blockchain Initiative

The proposed amendments to the DGCL are part of an ongoing initiative by the State of Delaware to embrace blockchain and smart-contract technology in an effort to reduce transactional costs, streamline manual processes, and reduce fraud.

In May 2016, then–Delaware Governor Jack Markell announced formation of the Delaware Blockchain Initiative (the Initiative), a program under which the state aims to provide an "enabling regulatory and legal environment for the development of blockchain technology and to welcome blockchain companies to locate in the state." Markell indicated that Delaware intended to pursue the creation of "distributed ledger shares" as a new form of corporate share based on blockchain technology—that is, shares that can be recorded and transferred on a ledger distributed across a peer-to-peer network, without the need for verification by a third-party intermediary.

Key Proposed Amendments

As part of the Initiative, the state government asked the corporate legal community to examine Delaware corporate legislation for any clarifications required to enable authorization of the proposed distributed ledger shares. The proposed amendments released by the Delaware State Bar Association are responsive to this request.

The proposed amendments explicitly recognize the use of distributed ledgers for maintaining corporate records required under the DGCL, provided the specified conditions are met. Specifically, section 224 of the DGCL, which stipulates the form of records that must be kept by Delaware corporations, would be amended to enable such records to be stored on, among other things, "one or more electronic networks or databases (including one or more distributed electronic networks or databases)" provided such records:

  1. can be converted into clearly legible paper form within a reasonable time; and
  2. with respect to the stock ledger1:
    1. can be used to prepare the lists of stockholders required under Sections 219 and 220 of Title 8 of the DGCL (i.e., for inspection and identifying shareholders entitled to vote at a shareholder meeting);
    2. record the information specified in Sections 156 (regarding partly paid shares), 159 (regarding entries with respect to the transfer of shares made for collateral security), 217(a) (regarding voting rights in pledged shares), and 218 (regarding voting trusts and other voting agreements) of Title 8 of the DGCL; and
    3. record transfers of stock, as governed by Article 8 of subtitle I of Title 6 of the DGCL (the investment securities article of the Delaware Uniform Commercial Code).

The proposed amendments to the DGCL also remove certain stipulations in DGCL provisions as to who may prepare or administer the records of a corporation or derivations therefrom. For example, the proposed amendments provide that records may be administered "by or on behalf of" a corporation (emphasis added) and that the corporation (rather than the "officer who has charge of the stock ledger", as currently provided) must prepare the list of the shareholders entitled to vote at a meeting of shareholders required to be prepared pursuant to Section 219(a) of the DGCL. These and similar changes in the proposed amendments lay the groundwork for the administration and preparation of such materials by means of a distributed ledger, rather than directly by a corporate officer.

Further, the proposed amendments provide for changes to the definition of "electronic transmission" in the DGCL to encompass "the use of, or participation in, one or more electronic networks or databases (including one or more distributed electronic networks or databases)", a change that would enable delivery by distributed ledger of all notices permitted to be delivered by electronic transmission under the DGCL.

Delaware companies may be able to file documents on the state's distributed ledger before the end of 2017. Indeed, if enacted, the proposed amendments to the DGCL would be effective on August 1, 2017 (with the exception of amendments regarding shareholder action by written consent, which would be effective only for such actions that have a record date on or after August 1, 2017).

The Canadian Landscape

The main obstacle to the use of distributed ledgers for corporate records maintained by corporations incorporated under Canadian provincial or federal law is the fact that the securities register required to be maintained is treated as a single register and is required to be kept in a single location.

For instance, the Canada Business Corporations Act (CBCA) provides that all registers and other records required by the CBCA, including the securities register, may be entered or recorded by any system of mechanical or electronic data processing or any other information storage device that is capable of reproducing any required information in intelligible written form within a reasonable time. In addition, it is clearly stated that a corporation may appoint an agent or mandatary to maintain a central securities register and branch securities registers. However, a single central securities register is required to be maintained at a single location.

Provincial corporate statutes impose similar requirements. For example, the Business Corporations Act (Québec) (QBCA) provides that a corporation may keep all or any of its records (including its securities register) at a place outside its head office under the conditions, among others, that the information contained in the record is readily available for inspection, in an appropriate medium; that the corporation provides technical assistance to facilitate the inspection of the information in the records; and that the corporation be able to reproduce, in intelligible form and within a reasonable time, the information contained in its record. However, corporations incorporated pursuant to the QBCA are required to maintain a single securities register.

Both the CBCA and the QBCA require reasonable precautions to be taken to prevent loss or destruction of, prevent falsification of entries in, and facilitate detection and correction of inaccuracies in the securities register. While the CBCA requires that these precautions be taken by either the corporation or its agents or mandataries, in Québec, the corporation alone remains responsible for the durability and the integrity of the register.

Takeaways

As Delaware is the legal home to almost one million business entities, including more than half of all U.S. publicly traded companies and 60% of Fortune 500 firms, the state's adoption of blockchain technology is a significant development with the potential to impact corporate registrations, records management, and filings for a large number of businesses.

The amendments to the DGCL proposed by the Delaware State Bar Association appear to provide legal clarifications and changes necessary to permit the use of distributed ledgers and similar blockchain technology in corporate records creation and management for Delaware corporations.

In Canada, as in Delaware, amendments and clarifications to federal and provincial corporate legislation would be required to spur the use of distributed ledgers to record securities registers.

The proposed amendments to the DGCL also allow for a shift in the role of the corporation in its own corporate record-keeping. The proposed amendments remove the emphasis on the corporation as active intermediary in each administrative task involving the securities registry. Instead, in practice, corporations could opt to participate primarily by dictating the terms under which share ownership and transfers are recognized and recorded on a distributed ledger, perhaps by smart contracts. Such a change could allow for faster, lower-cost, more automated corporate record-keeping that is less prone to human error or administrative delay.

Footnotes

1 The proposed amendments add a definition of "stock ledger" to Section 219(c) of the DGCL, defining it 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]".

To view the original article please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.