Blockchain applications begin to transform both companies and company law. The respective implications at the intersection of blockchain and company law as well as the potential need for legal reform are currently considered on the European scale as well as at member state level. Digitalization is likely to trigger further reform steps under company law, and blockchain and distributed ledger technologies represent fundamental challenges for this field of law. At the same time, as identified and critically analyzed in my recent paper, blockchain applications are increasingly used in company law practice.
The blockchain can be imagined as a decentralized database in which entries are unchangeably grouped in chronologically sorted, linked blocks. This creates an electronic register for digital data records, events and transactions which is not administered by a central office but by all participants in the distributed computer network. This decentralized and self-managing system is enabled by distributed ledger technologies which form a reliably functioning common trust architecture that is independent of intermediaries and central supervising authorities.
Importantly, the blockchain technology makes it possible to formulate conditions for the execution of transactions, monitor their execution and enforce agreed conditions in a decentralized, location-independent form. Such self-enforcing agreements, which are depicted in the source code of the blockchain, are called smart contracts. As they trigger technical but not necessarily legally effective changes, they need not be contracts in the legal sense. However, they can control, monitor and document legally relevant actions by both mapping agreed rules technically and implementing them automatically. Therefore, the blockchain can serve as a functional equivalent to legal contracts that promises reliable enforcement. As a regulatory technology, the blockchain can be used to define and incorporate legal provisions into code as well as to enforce them.
While the discussion of blockchain applications in company law is still in the starting blocks, the blockchain is increasingly used to identify shareholders. Even though shareholder identification is required for the exercise of shareholders' rights and the enforcement of claims, the prevailing custody practice makes the identification difficult because shares are typically not held directly but through a chain of intermediaries. Also, the cascade-like information obligations provided by the second EU Shareholder Rights Directive make the shareholder identification within the ramified framework of shareholders and intermediaries more complex, costly and error-prone.
By listing shareholders and shareholder changes in a transparent, traceable and chronologically sorted register, the blockchain could facilitate the simple and unambiguous identification of shareholders. However, under German company law, a decentralized register maintenance would only be permissible if selected participants authorized by the board of directors were exclusively in charge of validating transactions within the blockchain. Moreover, the requirement of confidentiality has to be met. Yet, secrecy does not reduce the efficiency advantages of the blockchain and is technically realizable because the transparency of the blockchain can be limited and users generally appear under a pseudonym.
The features of the blockchain as a regulatory technology can further facilitate the enforcement of corporate governance norms. In particular, internal company decision-making processes can be automated. With the recent introduction of virtual general meetings, the application possibilities also extend to their resolutions. Applications such as Otonomos offer the possibility of using entirely blockchain-based and -administered governance structures within the framework of applicable corporate laws.
Blockchain technology can also replace organizational structures with technical code and thus enable company-like organizations detached from the structures of company law. These smart contract-based forms of organizations, usually called ‘Decentralized Autonomous Organizations’ (DAOs), allow the incorporation even of complex rules and include their own dispute resolution mechanisms. Moreover, DAOs promise other advantages over law-based companies such as cheap and simple establishment, freedom of organizational design, global reach of their regulatory offerings as well as their simple and effective enforcement mechanisms. However, disadvantages like the lack of (positive) practical experience and the scope for interpretation and discretion as well as legal uncertainty concerning liability questions should not be underestimated.
Accordingly, there is a tendency to combine the respective advantages of blockchain and company law. On the one hand, some platforms offer legally compliant DAOs, for which the liability of shareholders is limited in a legally secure manner. On the other hand, some jurisdictions are starting to design legal forms that are specifically tailored to DAOs or are at least suitable for their establishment. In the long run, these developments are likely to amount to cooperation between national company law and the blockchain. It is just not yet clear how this cooperation will be structured in detail.