As remote interactions become more prevalent and technological advancements increase, corporations must reform their policies to be more accessible and connect to their shareholders, specifically during shareholder voting. The ability to participate in corporate governance remotely should motivate shareholders to be more active in director elections and the promulgation of management proposals. Both the Securities and Exchange Commission and Delaware’s corporate law[1] have acknowledged this technological necessity by encouraging virtual board meetings[2] and e-voting, which some corporations have implemented with the help of blockchain technology, effectively increasing shareholder participation.[3] Using blockchain technology as a corporate governance mechanism will allow for access to real time transactions, potentially eliminate the need for proxy intermediaries, and increase transparency and efficiency, all while cutting agency costs during shareholder voting.[4]
Traditionally, companies host elaborate, costly annual meetings to obtain shareholder votes when electing directors or approving management proposals.[5] At these meetings, shareholders may propose and accept amendments to by-laws and other management proposals.[6] Yet, many shareholders are unable or uninterested in attending these meetings, thus they elect to use proxies, or third-parties selected by management, to cast their votes.[7] Although corporations must disclose all material information regarding proposals to the requisite voters[8], many shareholders do not receive or read the proxy materials and blindly trust the proxy which deprives them of their vote.[9] Proxies often have voting discretion and thereby use votes to fulfill their personal agendas, not always aligned with shareholder interests, which inherently prevents minority shareholders from making effective changes and executing their rightful role in the corporate governance structure.[10]
Perhaps, the most serious example of shareholder proxy abuses occurred at Procter and Gamble, Co. when a board of director election cost shareholders at least $60 million and a voting recount proved the existence of many illegitimate votes by proxies.[11] Both of these issues could have been prevented through the use of blockchain technologies.
Essentially, the “blockchain” is the central ledger that holds all the transaction in real time.[12] The live record for transfer of shares will ensure the rightful owner casts the vote.[13] For each vote, the shareholder will be given a code or token to vote to the companies account digitally, and a new block is created.[14] Once the vote occurs, the block is authorized and sent to the central ledger, or blockchain which holds all the present votes cast, increasing transparency.[15]
Since blockchain can be a decentralized operation, storing all information on various computer systems, it is nearly impossible to hack and limits the opportunity for manipulation.[16] There would be clear transfer of shareholder title on the blockchain central ledger, making it easy to determine who has voting rights.[17] During voting, those shareholders receive a token and have the right to cast the vote, therefore the number of votes will correspond with (or be less than) the number of shares outstanding.[18] Moreover, if the voter still wants to use a proxy they can transfer their token to the proxy’s public ledger, maintaining transparency and trust in each proxy’s number of votes.[19] It is nearly impossible for proxies to cast votes beyond their authority with this technology, since those without proper tokens cannot be added to the ledger and there is only one token per share.[20]
Shareholders are the corporation’s rightful owners and should be given control over the operations in order to protect the integrity of a company. Indeed, shareholder voting can have serious implications for future court actions, and in particular can limit minority shareholders’ remedies for improper violations of fiduciary duties for claims of director self-dealing.[21] Once shareholders ratify a proposal, courts hold the self-dealing directors to the business judgment standard of review, an extremely deferential standard only requiring minimal rationalization in decision-making.[22] On the other hand, if an action is not ratified by the shareholders, they may be held to the intrinsic fairness standard, leaving the shareholders with a greater likelihood of remedial action.[23]
Blockchain technologies have many benefits, from voting accuracy to cutting shareholder costs. Blockchain effectively removes the third-party entities when performing transactions and thereby limits mishaps and unauthorized voting.[24] In addition, blockchain is a central system, saving millions of shareholder funds traditionally expended at shareholder meetings, on compensation for proxy intermediaries and on distributing proxy material.[25] Companies are required to disclose materially relevant information for shareholder voting[26] and recompense the cost of any materials distributed by an individual who wins a board of directors position.[27] Blockchain would eliminate some shareholder fund expenditures as disclosures would be accessible electronically on the central ledger.[28]
In conclusion, Blockchain technology is extremely cost effective. It would avoid many of the common shortcomings of the current corporate governance proxy structure and place corporate decision making rights back with the shareholder.
[1] Delaware is a common place of incorporation due to its favorable corporation regulations. See Rick Bell, Why Do So Many Companies Incorporate in Delaware?, DelawareInc.com (Aug. 14, 2019), https://www.delawareinc.com/blog/why-do-businesses-incorporate-in-delaware/.
[2] Lisa R. Stark et al., Delaware and the SEC Facilitate Virtual Stockholder Meetings as the COVID-19 Outbreak Spreads, ABA (Mar. 26, 2020), https://www.americanbar.org/groups/business_law/publications/blt/2020/04/virtual-meetings/.
[3] See, e.g., Turner Wright, Cybersecurity Company Kaspersky Debuts Blockchain-Based Voting Machine, Cointelegraph (Feb. 28, 2020), https://cointelegraph.com/news/cybersecurity-company-kaspersky-debuts-blockchain-based-voting-machine.
[4] Anne Lafarre & Christoph Van der Elst, Blockchain Technology for Corporate Governance and Shareholder Activism 4, 14-16 (Eur. Corp. Governance Inst. Working Paper No. 390, 2018), https://www.researchgate.net/profile/Anne_Lafarre/publication/324670400_Blockchain_Technology_for_Corporate_Governance_and_Shareholder_Activism/links/5b349a0ca6fdcc8506d73db4/Blockchain-Technology-for-Corporate-Governance-and-Shareholder-Activism.pdf.
[5] Alexander Daniels, Blockchain & Shareholder Voting: A Hard Fork for 21st-Century Corporate Governance, 21 U. Pa. J. of Bus. L. 405, 410 (2018).
[6] See id.
[7] See id. at 411.
[8] Elad L. Roisman, Comm’r, SEC, Speech at Columbus School of Law at The Catholic University of America: Myths and Realities: Modernizing the Proxy Rules (Jan. 30, 2020), https://www.sec.gov/news/speech/roisman-myths-and-realities-2020-01-30.
[9] See Federico Panisi et al., Blockchain and Public Companies: A Revolution in Share Ownership Transparency, Proxy Voting and Corporate Governance?, 2 Stan. J. of Blockchain L. & Pol’y 189, 204 (2019), https://stanford-jblp.pubpub.org/pub/blockchain-and-public-companies/release/1.
[10] David A. Katz & Laura A. McIntosh, Proxy Voting and the Future of Corporations, Harv. L. Sch. F. on Corp. Governance (Nov. 30, 2108), https://corpgov.law.harvard.edu/2018/11/30/proxy-voting-and-the-future-of-corporations/.
[11] David Benoit, P&G vs. Nelson Peltz: The Most-Expensive Shareholder War Ever, The Wall Street Journal, (Oct. 6, 2017).
[12] Ruhi Taş & Ömer Özgür Tanriöver, A Systematic Review of Challenges and Opportunities of Blockchain for E-Voting, 12 Symmetry 1328, 1330 (2020), doi:10.3390/sym12081328.
[13] See id.
[14] See id.
[15] See id.
[16] See id. at 1331.
[17] See Roisman, supra note 8.
[18] Spencer J. Nord, Blockchain Plumbing: A Potential Solution for Shareholder Voting?, 21 U. of Pa. J. of Bus. L. 706, 732 (2019).
[19] See id.
[20] See id.
[21] See, e.g., In re The Goldman Sachs Grp., Inc. S’holder Litig., No. 5215-VCG, 2011 WL 4826104 (Del. Ch. Oct. 12, 2011).
[22] See, e.g., id.
[23] See, e.g., Calma v. Templeton, No. 9579-CB, 2015 WL 1951930 (Del. Ch. Apr. 30, 2015).
[24] See Nord, supra note 17, at 728.
[25] See id.
[26] See Panisi et al., supra note 9, at 204.
[27] See generally Rosenfeld v. Fairchild Engine & Airplane Corp., 309 N.Y. 168, 128 N.E.2d 291 (1955) (holding that management can use the corporate treasury for reasonably expenses in a policy contest).
[28] See Lafarre & Van der Elst, supra note 4, at 15.
