24th July 2017, the State of Delaware government promulgated the law giving legal force to the use of a blockchain - and more generally of Distributed Ledger Technologies (DLT).
A company can now manage its registers, and in particular its shareholders registers with the help of this technology (I). Meanwhile, along with the article 120 of the so called Sapin II Law as of December 9 2016 enabling the French government to regulate this sphere, France is thinking on securities reform.
The latter shall address the question of representation and transfer of the titles under such electronic recording facility (See the public consultation initiated by the Ministry of Economics). The Delaware example can eventually inspire the French lawmaker (II).
Legal environment in the State of Delaware favors experiments
It is by its legislature that this Sate, hosting almost two-third of the north-American enterprises, attracts innovating companies benefiting from favorable legal environment to try new approaches in corporate governance.
As of now, the paragraph 224 of the Title 8 of the Delaware Code – amended by section 7 of the new law – specifies that all registers administrated by or on behalf of the company – including the shareholders registers, accounts books, protocol registers – can be hold on “one or several networks or digital data bases” (including distributed networks or digital databases). The reference on these distributed technologies is thus explicit.
The new paragraph elaborates the following functions of the respective registers:
The list of shareholders settlement;
Shares and voting related information registration;
Securities transfer registration.
The advantages of registration of information in a blockchain
First of all, this legislation responds to the companies’ demand. The use of the DLT for securities management can offer efficiency gains in terms of costs and promptness.
Indeed, shareholders can interact directly with one another through this system, which can reduce transaction costs for traditional intermediaries as well as execution delays. A blockchain also offers more transparent way to manage the information and the possibility to automatize certain procedures like, for example, distribution of dividends.
One should, however, consider the problems caused by the personal data protection and respect of confidentiality regime.
These challenges seem to be well known in France as well, in particular, in the context of the Fintech emergence. The lawmaker’s debut in this sphere took place the 28th of October 2016 with addressing the question of minibons and the Sapin II law referred above.
2. Potential source of inspiration for the French lawmaker
Current regulation in France
Article L 228-1 of the French Commercial Code concerning securities issued by joint-stock companies, provides in its para 5 that “these securities notwithstanding their form, shall be registered in an account in the titleholder’s name (…).”
Generally, registration and transfer of titles are governed by articles L-211-3 and L211-15 of the French Monetary and Financial Code. Based on its provisions, the securities are registered in a securities account and are moved by a transfer from account to account. In particular, “the securities property transfer results from registration of the securities in the buyer’s securities account” (L 211-17 of the French Monetary and Financial Code).
To conclude, the key element of legal environment of securities is based on the notion of a securities account. In the absence of respective reference in the French Monetary and Financial Code, it would be difficult to consider a system using a blockchain as a securities account without amending the law.
The points 3.2. and 3.3. of public consultation on the reform project related to a blockchain initiated by the General direction of the Public Treasury – and closed the 19th of May – concern respectively the “Representation of securities by means of shared electronic recording” and the “Transfer of titles by means of shared electronic recording”.
There are three suggestions concerning the functions of the DLT, starting with the lowest significance and finishing with the highest important of the technology:
Alternative technology for securities accounts holding/alternative technology for transfer of titles: in both cases, a blockchain is no more than an operational substitute but legal execution of the transaction depends on registration in a securities account.
Evidence of the property/evidence of the title transfer: the DLT plays a decisive role here but legal execution remains traditional.
Legal representation of securities/transfer of titles. In this last case, legal force results directly from the DLT treatment, either because this latter is considered as a securities account or because the law created a special regime with regard to the technology in question.
We can analyze the situation by referring to the State of Delaware law. In this State the law-maker’s choice is close to the third suggestion. The use of a blockchain is equivalent to paper medium for stocking the registers and to record legal representation or transfer of securities.
This approach does not owe to a new specific regime; the law simply added this technology to the list of mediums and confirmed its acceptability. Following the same logic, France could add, as suggested in the abovementioned consultation document and by numerous market players which responded thereto, a provision directly establishing that the DLT is considered as a securities account when used respectively.
Hence, the registrations and transfers of titles by means of this new decentralized register would have a complete legal force.
The development of the blockchain technology and its growing impact on financial sector shows great importance of this issue and necessity to clarify the regulation. Delaware legal developments should be welcomed and can inspire the governments of other countries willing to attract innovative companies.
By the way, this modification of the Delaware Code is especially interesting in the light of the last rapport of « Securities and Exchange Commission » (SEC). The rapport as of 25 July 2017 concluded that Tokens or « Initial Coin Offerings » (ICO) can under certain circumstances present securities or a public offer thereof.