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Stock represents ownership in a corporate entity and is given in exchange for a paid-in capital contribution to a business. Ownership of stock does not entitle the holder to specific property or assets of the company but rather provides the holder with a portion of the entity’s profits and gains, normally through the receipt of dividends paid to the shareholder.
The specific benefits or advantages of the stock can vary depending upon a company’s Articles of Incorporation and the terms governing specific classes or stock.
Corporations in Delaware are required to keep a stock ledger. This ledger is not filed with the state of Delaware and is not part of the public record. Delaware corporations are required to record the stockholder’s name; the stockholder’s address; the number of shares registered to the stockholder; and all issuances and transfers of stock.
Recent changes to the Delaware General Corporate Law expressly permit the keeping of corporate records in the form of electronic networks and databases. These changes permit a corporation to maintain the required stock ledger using distributed-ledger technology, more popularly referred to as blockchain technology.
As recently discussed in the news, the various potential applications of blockchain technology are said to potentially disrupt a wide array of established markets and business methods. Blockchain is most commonly examined in the context of the creation, documentation and trading of cryptocurrencies such as Bitcoin, Litecoin and Ethereum.
While all cryptocurrencies involve the use of blockchain, blockchain applications are not limited to cryptocurrencies. Blockchain is a decentralized, widely-distributed digital ledger technology in which transactions are recorded across many computers worldwide.
As a result, recorded transactions cannot be changed after the fact without the alteration of the record stored on the various systems which received the distributed ledger.
Using blockchain technology to maintain a stock ledger could help to ensure the accuracy of the ledger and the appropriate documentation of transactions. Often, ledgers in smaller corporations, particularly closely-held corporations, are loosely maintained in an Excel spreadsheet, and a failure to maintain the ledger in a timely way or catch inaccuracies in data entry can often lead to errors or omissions.
An automated ledger recorded and verified in a distributed ledger creates the promise of an easier way to maintain a reliable and up-to-date ledger.
Errors in a stock ledger can create significant issues under the securities laws and the Delaware General Corporate Law. These errors or omissions can create significant legal ramifications for a company. For instance, errors in ownership amounts or outdated rosters of stock ownership can lead to failures to comply with voting rights and the required delivery of corporate materials to shareholders.
The Delaware Division of Corporations has embraced the many benefits of the Blockchain technology by exploring the use of the technology relating to the ownership. Blockchain technology may bring enormous benefits to the industry, but only time will tell.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.