The current infrastructure for voting and owning shares in the U.S. securities markets is ripe for reform, and blockchain technology holds the key to providing “better accuracy, greater transparency, and superior efficiency for settling securities trades and voting in corporate elections,” according to Vice Chancellor J. Travis Laster of the Delaware Court of Chancery.
In a keynote address to the Council of Institutional Investors last month, Vice Chancellor Laster gave examples of how the current system is failing stockholders, and called distributed ledger technology the “plunger solution” needed to clean up the “proxy plumbing.” He also highlighted efforts by Delaware Governor Jack Markell to embrace the technology in state government and to promote its use for the benefit of Delaware corporations.
Vice Chancellor Laster explained that the current infrastructure for proxy voting is complicated, expensive, and generates errors, particularly in close elections. He also noted that the incumbent players did not have an incentive to change it: “The folks who run the system are not affected by the election results and are generating profits in a non-competitive environment. Change will have to come from the outside.”
“The folks who run the system are not affected by the election results and are generating profits in a non-competitive environment. Change will have to come from the outside.”
Vice Chancellor Laster suggested that distributed ledger technology could eliminate many of the problems with proxy voting. Distributed ledger technology, the technology behind Bitcoin, consists of a database of recorded transactions maintained collaboratively by a decentralized network, Vice Chancellor Laster said. “The ledger tracks transfers in ownership of a particular asset. It is distributed because no single institution maintains the ledger. Instead, members of the network update it through collective action.”
“The ledger tracks transfers in ownership of a particular asset. It is distributed because no single institution maintains the ledger. Instead, members of the network update it through collective action.”
Using this technology would “reunite legal and beneficial ownership of stock” by providing a platform where owners could transfer securities without a central intermediary. A single distributed ledger would allow “straight-through” accounting, enabling stockholders to track of the execution, lending, and settlement of securities, Vice Chancellor Laster explained.
The technology is flexible enough to allow for “permissioned” ledgers that can be used to define who has control or access to the information. It can also facilitate “smart contracts” can be used to make fulfillment of contractual obligations, such as the payment of a dividend, automatic.
Vice Chancellor Laster noted that the features of distributed ledger technology are secure, efficient and monetizable. He observed that banks and brokers are already “embracing this movement,” that international companies are developing distributed-ledger-based securities trading, and that Nasdaq has started a blockchain technology initiative.
He then reported on how the State of Delaware has taken the lead on distributed ledger technology. Delaware’s efforts include the Delaware Blockchain Initiative, launched by Governor Jack Markell in May 2016. The mission of the initiative is to create a welcoming regulatory environment and support a clarification of the State’s corporate laws to enable the authorization of distributed ledger shares.
“Distributed ledger shares hold the promise of immediate clearance, immediate settlement.”
Vice Chancellor Laster shared the Governor’s vision for the initiative with conference attendees: “We see companies allocate significant financial resources to correct and validate stock authorization and issuance errors that could have been correctly and seamlessly handled from the outset . . . Distributed ledger shares hold the promise of immediate clearance, immediate settlement and bring with them dramatic increases in efficiency and speed in the sophisticated commercial transactions for which Delaware is known.”
Vice Chancellor J. Travis Laster
The Honorable J. Travis Laster was sworn in as Vice Chancellor of the Court of Chancery on October 9, 2009. Prior to his appointment, he was one of the founding partners of Abrams & Laster LLP, a corporate law boutique specializing in high stakes litigation involving Delaware corporations and other business entities, and advising on transactional matters carrying a significant risk of litigation. Before forming Abrams & Laster, he was a director in the Corporate Department of Richards, Layton & Finger P.A. Before joining Richards Layton & Finger, he clerked for the Honorable Jane R. Roth of the United States Court of Appeals for the Third Circuit.
Vice Chancellor Laster received his A.B summa cum laude from Princeton University and his J.D. and M.A. from the University of Virginia, where he served on the Virginia Law Review, was a member of the Order of the Coif, and received the Law School Alumni Association Award for Academic Excellence for having the best academic record in his graduating class. He is a member of the American Bar Association, Delaware State Bar Association, and the Rodney Inn of Court.
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