Newly proposed amendments to the Delaware General Corporation Law (DGCL) seek to modernize corporate governance for the digital age. Some of the proposed changes would (i) authorize the use of “blockchain” or “distributed ledger” technology for corporate books and records administration; (ii) remove the requirement that stockholder consents be individually dated; and (iii) update certain provisions of the DGCL relating to mergers and consolidations that involve different types of entities.
If approved and enacted, the amendments will take effect August 1, 2017.
“Blockchain” or “distributed ledger” technology allows for transaction ledgers to be maintained among a network of participants, opposed to a central source. This type of record maintenance has seen significant growth and application recently, especially with the advent and proliferation of bitcoin and other digital and crypto currencies, and is believed to be potentially valuable and advantageous to stock ledger maintenance.
Section 219 of the DGCL requires a corporation to prepare and keep a list of its stockholders and defines the evidentiary value of the ledger. This section is proposed to be revised to add a definition of “stock ledger,” which would allow the ledger to be “administered by or on behalf of the corporation” so that all issuances and transfers of the corporation’s stock are recorded in accordance with Section 224 of the DGCL.
Section 224 sets forth the record retention requirements of a corporation, and would also be amended to allow records to be kept on “one or more electronic networks or databases (including one or more distributed electronic networks or databases).” Records would still be required to be convertible into legible paper form. The amendments also spell out compliance measurements with other DGCL provisions, including Section 156 (consideration for partly paid shares), Section 159 (transfer of shares for collateral security) Section 217 (voting of pledge-subject shares), Section 218 (voting trusts), and Section 220 (stockholder demands to inspect the books and records).
There are also amendments to Sections 151 (certificate information must be sent to uncertificated shareholders), 202 (notice of restrictions on transfer and ownership), and 364 (notice by public benefit corporation) to specify that the written notices governed by those statutes may be sent by “electronic transmission.” These amendments are tied to the blockchain amendments.
Corporations that have certificated stock would be, at least, restricted from implementing distributed ledger programs because the transfer of stock certificates as directed by Art. 8 of the Delaware Uniform Commercial Code does not allow the use of the technology. In order to transition to a completely distributed stock ledger system, a corporation must convert any certificated shares, which requires that the certificate be “surrendered to the corporation” pursuant to Section 158 of the DGCL.
Section 228 of the DGCL is currently interpreted to require that shareholder consents be signed and dated by the shareholder on the date that the shareholder signs the consent (versus a pre-printed date on which the shareholder may or may not sign the consent).
The proposed amendments would dispose of the requirement that each consent has a date of signature of the stockholder, eliminating challenges to the validity of actions due to signature date challenges and other common timing and “foot fault” errors that occur as a result of the rule. Section 228 will maintain the 60-day window for the delivery of consents, but the commencement date would be amended to the date the first consent is received by the corporation.
The proposed amendments affecting the DGCL with respect to the authorization and accomplishment of mergers and consolidations will be the subject of another article on this website. They are mostly technical and serve to harmonize and improve consistency among the various statutes that govern mergers and consolidations.
There are other proposed amendments, such as a change to Section 203 that clarifies when a corporation’s “opt out” of the restrictions of that section becomes effective, and changes to Sections 374 and 502 relating to annual reporting requirements. These and other more technical changes are thoroughly discussed in the proposal, which can be found here.
If you have questions about the proposed DGCL amendments and how they might affect your corporate governance please contact Ben Thompson or any member of the Thompson Bukher Business & Corporate practice at (212) 920-6050.
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