Distributed Ledger Shares: Proposed Amendments to the DGCL. M&A Committee Business Law Section of the ABA April 8, 2017

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1 Distributed Ledger Shares: Proposed Amendments to the DGCL M&A Committee Business Law Section of the ABA April 8, 2017

2 Blockchain Technology The hows are complicated; the what is simple Transfer assets directly without intermediaries Peer-to-peer Real time Secured through encryption Validated through proof via mathematical computation Identical version on each database in the network The result: an immutable distributed ledger containing a validated record of asset transfers without the need for an intermediary 2

3 Delaware Blockchain Initiative Encourage the adoption of blockchain technology Capable of recording transfers of assets Potential applicability to transfers of uncertificated shares Changes or clarifications to the DGCL? 3

4 Current State of Delaware Law Maintenance of a stock ledger Definitive source of names and addresses of record owners Maintained by corporate secretary/transfer agent Hard copy form or in centralized database (e.g., spreadsheet) Updated by individuals/intermediary Takes time Subject to human error 4

5 Proposed Amendments to the DGCL Section 224 of the DGCL Form of corporate records Current statute: maintained by a corporation New statute: administered by or on behalf of the corporation Specific contemplation of blockchain technology Current statute: may be kept on, or by means of, or be in the form of, any information storage device, or method Added language: or one or more electronic networks or databases (including one or more distributed electronic networks or databases) 5

6 Proposed Amendments to the DGCL (cont.) Section 224 imposes certain minimum requirements Convertible into clearly legible paper form (in current statute) Enable preparation of stockholder list (Sections 219 and 220) Capable of recording certain information: Section 156 (partly paid shares) Section 159 (collateral transfer) Section 217(a) (voting rights of pledgees) Section 218 (voting trusts and other voting agreements) Transfers of stock in accordance with Article 8 of the Delaware U.C.C. 6

7 Proposed Amendments to the DGCL (cont.) Section 219 revised to include definition of stock ledger Stock ledger means: 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 Removes concept that officer has charge of the stock ledger Section 232 revised to clarify definition of electronic transmission Notices to holders of uncertificated shares may be given through the distributed ledger (Sections 151, 202 and 364) 7

8 Implications of Blockchain Technology Administration of the stock ledger by or on behalf of the corporation Continuing role for corporation through contractual arrangements Permissioned vs. non-permissioned Legacy stock certificate issue Global certificate in the depository/other certificates issued Section 158 of the DGCL any shares represented by certificates are not uncertificated until certificates surrendered Article 8 of the U.C.C. 8

9 Implications of Blockchain Technology (cont.) Secondary Securities Market DGCL only applies to record ownership Secondary securities market governs beneficial ownership transfers Potential far reaching benefits for secondary securities market Real time vs. T3 settlement Ability to know holder at any given moment in time Unification of systems -- conceivable to have record ownership trade Secondary securities market players likely to adopt technology 9

10 Implications of Blockchain Technology (cont.) M&A Implications Due diligence on capitalization Voting Delivery of proxy statements/notices/etc. Appraisal Were the shares voted in favor of the merger? Were the shares continuously owned until the effective time? Who owned the shares at the effective time? Payment of merger consideration Escrow mechanics Merger agreements? 10

11 Implications of Blockchain Technology (cont.) Other applications Real-time ownership transparency (e.g., 13D/13G) Imposition of transfer restrictions/ownership limitations Vesting of options, warrants and restricted stock Payment of dividends Regulator real-time monitoring Etc. 11

12 Contact Information: Mark A. Morton Direct Dial: (302) Michael K. Reilly Direct Dial: (302) Potter Anderson & Corroon LLP Hercules Plaza, 6th Floor 1313 North Market Street Wilmington, DE