Delaware Approves Tracking of Stock Ownership on Blockchain, Major Effects

When the Delaware Chancery Court ordered David Murdoch to pay the shareholders of Dole Food Co. an extra $2.74 per share after taking the company private, it seemed easy enough. The lawyers for the shareholders posted a claim form, and shareholders submitted claims for over 49 million shares. The only problem? The company only ever issued 36.7 million shares.

The insanity of DTC

The root of this problem is a 1960s system for determining who owns a share of stock. According to Investopedia, the Depository Trust Company (DTC) was created because the New York Stock Exchange couldn’t keep track of who owned what anymore. Trading volume was simply too high. Indeed, in 2012, the DTC settled over 299 million shares with a value of $110 tln.

When you buy a share of stock from your broker, your broker informs the DTC that it represents somebody who owns a share of that stock. When a company wants to find out who owns their stock, they have to ask the DTC to consult its list of brokers, and then the brokers have to be asked who they actual owner is of the shares in the broker’s account.

As Bloomberg puts it:

“So if you own stock, what you really have is an entry in your broker’s database, and your broker in turn has an entry in DTC’s database, and DTC has an entry in the company’s database of shareholders of record.”

Shares, shares, everywhere

If this all sounds unnecessarily complicated, that’s because it is. In Dole’s case, they had to ask the DTC to figure out who owned shares of the company at the time the company was purchased. DTC then consulted the brokers, and they eventually got it sorted. The reason for the extra shares of stock? Short sellers had borrowed shares from their actual owners, causing those shares to be counted twice.

You can imagine that it took some time for the DTC and countless brokers to sort through the mess and figure out who really owned what.

Delaware’s Vice Chancellor Laster commented on the dilemma:

“This problem is an unintended consequence of the top-down federal solution to the paperwork crisis that threatened Wall Street in the 1970s. Through the policy of share immobilization, Congress and the Securities and Exchange Commission addressed the crisis using the 1970s-era technologies of depository institutions, jumbo paper certificates, and a centralized ledger. Distributed ledger technology offers a potential technological solution by maintaining multiple, current copies of a single and comprehensive stock ownership ledger.”

Delaware approves Blockchain

Delaware took note of this problem, and in early August, the state made it legal for corporations to maintain shareholder lists using Blockchain technology rather than the old centralized and inefficient system.

Using a Blockchain to record stock ownership would allow the corporation to quickly and easily figure out all its current shareholders, as well as who owned shares at any point in the company’s history. This can be quite useful when it comes to determining who is owed dividend payments, for instance.

This is particularly noteworthy, because even though Delaware is a small state, the majority of all corporations in the US are based in Delaware. This is because, by strange historical fluke, the state developed a robust and expert court system called the “Court of Chancery” to handle business disputes. Delaware’s judges are some of the nation’s foremost experts in business law, and such cases are tried before them rather than juries. Delaware also has favorable tax laws, easy and quick incorporation paperwork, and other advantages.

Because of this, when Delaware legalized use of the Blockchain to record stock ownership, over a million businesses, including 50% of all publicly traded companies, were immediately allowed to begin tracking stock ownership through a Blockchain.