United States: Taking Stock In Blockchains

Corporate lawyers and software developers have been watching eagerly as the State of Delaware takes steps to enable Delaware corporations to issue shares of their stock as digital tokens. Instead of recording shares on paper ledgers, corporations will record ownership using "Blockchains": ledgers that are secured by cryptographic keys that can be distributed around the world without fear of tampering.

Why all the excitement? What's so wrong about how corporations have been issuing shares and keeping track of shareholders? What's aspects of Delaware corporate law, used reliably since Delaware first enacted its corporate laws in 1899, now need a fix?

On March 27, 2017, the Corporation Law Section of the Delaware State Bar Association approved proposed amendments to the Delaware General Corporation Law (DGCL) that had been proposed by the DSBA Corporation Law Council. These amendments address changes that are needed for Delaware corporations to issue and manage their shares using Blockchains. The proposed amendments were drafted to welcome in a certain future, not a hypothetical possibility. NASDAQ and other prominent companies are building Blockchain-based platforms for issuing, transferring, managing and trading corporate stock. Why?

Blockchains, often referred to as distributed ledgers, valuable provided qualities compared to legacy information systems:

These qualities can solve many issues that corporations and their attorneys (and their paralegals) grapple with frequently.

1. Whose shares are these?

A deep concern of corporate officers and their lawyers is that two people will claim the same shares. This can happen, to give only a few examples, when the corporate secretary accidently issues the same certificate numbers to different people, when a nefarious shareholder purports to transfer the same shares to two (or more) buyers, or where the chain of ownership over the shares gets muddied by corporate transactions or intestate succession.

Blockchains record the issuance of each new digital asset, and each transfer of that digital asset. Unlike a traditional databases or excel spreadsheets, the digital ledger is stored on a multitude of computers anywhere in the world (referred to as nodes). The owner of the asset can only transfer it once, and must use digital cryptographic keys to sign the transaction. If the owner attempts to transfer the same digital asset again, the nodes will check their records, see that the owner has already transferred the digital asset, and refuse to confirm the transfer. Therefore, once a share of stock is encoded into a digital asset on a Blockchain, no one should be able to successfully claim that they have ownership and control over the share unless they actually do as evidenced by the Blockchain.

But what if the Blockchain record is tampered with, deleted, forged or somehow altered? What if the Company or nefarious paralegal tampers with the ledger? Properly configured, Blockchain records are immutable. They cannot be deleted or altered. The way to correct an error is to record a new transaction. For example, if Ms. Smith accidently transferred her stock to Mr. Jones, Mr. Jones would need to transfer it back. If he refused, Ms. Jones would need to rely on claims she may have in law or equity to get the shares back.

2. Where did that certificate go?

As long as corporations have issued stock certificates, people have found new and interesting ways to lose them. Nonetheless, investors and others enjoy the security of receiving and holding their stock certificates, and a considerable amount of law has been developed to govern the claims and rights of shareholders holding certificates versus those who do not.

With Blockchains, the digital asset simply cannot be lost, it can only be transferred. If anyone needs to find it, it will be right where they left it – on the Blockchain. The digital asset cannot be transferred off the Blockchain unless it is connected to another Blockchain. However, we note that anyone can lose their access to the digital asset simply by losing their cryptographic keys. Today, there are solutions that utilize back-up keys to avoid this loss.

3. Thou Shall Nots: Protective Provisions and Restrictive Covenants

Every day, often including weekends, corporate law associates relish the opportunity to draft rights of first refusal, rights to "tag-along" offerings, vesting provisions, obligations to be dragged-along in acquisitions, and other restriction and obligations governing the transfer of shares. The only thing more enjoyable, of course, is reviewing bylaws, certificates of incorporation, stock purchase agreements, and checking the backs of stock certificates to discover if there is some language to be found restricting or obligating the transfer of shares that might apply to the transaction the associate is tasked to close tomorrow.

These associates may need to find something else to do on weekends once shares are encoded on Blockchain as digital assets, with the Blockchain protocol governing how and when the assets can be transferred. Restrictions will be encoded into the Blockchain protocol and into the assets themselves. No one will need to check the back of a printed certificate for restrictive legends, and no transfer agent of the company need guard against unpermitted transfers. Does the underwriter need a need "lock-up" shareholders before an IPO? That should be achievable electronically as easily as we now distribute Docusign contracts for signature, and thereafter enforced by the code in the digital share certificate themselves.

Some restrictions, such as a right of first offer, may get waived for a particular transfer but should still apply to the transferee. If the restrictions are encoded into the digital share of stock itself, it will put any buyer on notice and continue to apply the restriction.

4. Due Diligence? Done.

Using a Blockchain to manage stock, any investor or acquirer will be able to see not just the capitalization of the corporation, but the full history of each share with accurate time stamps and the cryptographic signatures for each transfer of shares.

5. Voting

Not many relish the difficulty of obtaining shareholder votes at an annual meeting, on the eve of a corporate acquisition, or in a heated proxy fight. With Blockchains for corporate securities, voting functionality will be integrated into the protocol just as scheduling a meeting is part of what your Google calendar or Microsoft Outlook can do. NASDAQ has demonstrated this functionality in at least one "proof of concept" in Estonia.


If all this sounds too good to be true, it is. It will take a while before platforms for Blockchain-based stock issuances and management become commonplace, full-functional, and affordable. NASDAQ announced its platform Linq in December, 2015, but it is not yet in general release. The full promise of the technology depends on corporate adoption, and the depends in turn on Delaware and other states amending corporate laws for uncertificated. The end result, however, is enticing: more accurate and auditable ledgers, easily implemented restrictions on transfer, and swift voting, and a new generation of paralegals as amused by paper certificates as they were by carbon paper.

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.

Events from this Firm
24 Oct 2017, Seminar, Los Angeles, United States

Presented by The American Bar Association White Collar Crime Committee.

24 Oct 2017, Conference, Los Angeles, United States

Corporate transactions are not just in the domain of M&A corporate attorneys. This program will cover the important role of employment and benefits counsel in shaping mergers and acquisitions. The presenters will provide practical guidance on conducting due diligence of labor, employment, employee benefits and executive compensation arrangements of target companies.

25 Oct 2017, Business Breakfast, New York, United States

Please join us for a complimentary breakfast program and networking with private equity investment banking professionals to discuss private equity activity and prospective deal flow opportunities in the technology industry.

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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.


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.


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.


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.


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.


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.


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.