Blockchain Legal Resource

For many public companies, the annual meeting voting process is littered with intermediaries and inefficiencies that can result in a lack of shareholder engagement. Proposals are often voted on by proxies instead of by shareholders, oftentimes weeks in advance of the meeting. Few shareholders attend annual meetings in person. Large institutional shareholders may be granted engagement opportunities with management of the company that are not afforded to individual shareholders. These factors can result in a lack of transparency in the voting process and asymmetrical voting power amongst shareholders. Blockchain technology has several potential applications that can remedy these inefficiencies and restore shareholder trust and engagement.

The immutable nature of a blockchain and the ability to create a specified set of rules for its use make blockchain technology an appealing option as an automated, secure method of counting shareholder votes at an annual meeting. Broadridge Financial Solutions Inc., a corporate services company that provides a variety services for annual meetings, was recently granted a patent for proxy voting using blockchain technology. In March of 2018, Broadridge tested a pilot blockchain-based voting system at the annual meeting of Banco Santander, S.A. The technology was successfully used to create a digital register of the proxy voting at the meeting and was used by more than 20 percent of shareholders who voted.

Stock exchanges around the world have been exploring the use of blockchain-based voting systems for years. Some foreign stock exchanges, such as the Abu Dhabi Securities Exchange, use blockchain-based voting systems for shareholders of listed companies. In 2016, Nasdaq and the Nasdaq-operated Estonia central securities depository developed a web-based user interface for stockholders of companies listed on Nasdaq Tallin. The interface allowed shareholders to vote before or during annual meetings, transfer their rights to a voting proxy, monitor how the proxy voted, and review previous meetings and transactions. The system relied on blockchain technology to record ownership, issue voting rights and allow shareholders to vote. This application is particularly interesting as the blockchain was not only used to register votes, but also to provide an indelible record of previous meetings and transactions for shareholders to view. Similar applications of blockchain technology could help resolve information asymmetries in shareholder votes.

State legislation in the United States has begun to address similar uses of blockchain in corporate governance. In 2017, Delaware passed legislation allowing Delaware corporations to use blockchain technology to keep any corporate records, including stock ledgers, books of account and minute books. This year, Vermont passed legislation allowing the creation of blockchain-based limited liability companies that can legally use blockchain and smart contracts to provide their governance, including voting procedures. For its part, the Securities and Exchange Commission continues to study the “proxy plumbing” problem and has scheduled a public roundtable on the issue on November 15, 2018. As blockchain technology continues to develop, so will its practical uses for publicly listed companies in both annual meetings and corporate governance.