THE POTENTIAL IMPACT OF BLOCKCHAINS ON CORPORATE

GOVERNANCE: A SURVEY ON SHAREHOLDERS’ RIGHTS IN THE DIGITAL

ERA

Véronique Magnier

Université Paris-Sud Paris-Saclay

Patrick Barban

Université Le Havre - Normandie

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Characters of BlockchainsRegister

• Open to all users

• Unchanged without consensus procedure

• Data bank ranging from simple to complex

Exchange

• Virtual money and tokens

• Smart Contracts (if… then…)

• No intermediaries = no transaction fees

• Efficient Market (FAMA) = Prefect information and no transaction costs

Organize

• Automatization

• Ranking of users feasible

• Voting procedure

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Permissioned Blockchains and Public Blockchains

CommonProcess security

Pseudonymous

PublicTransparency

No Intermediaries

Inertia

PermissionedOpacity

Presence of an intermediary

Dynamism3rd International Conference- Zagreb december 2018 3

Functional identity in Corporate LawRegister

• Information to shareholders

• Financial Information to the public

Exchange

• Securities issuance

• Securities selling / buying

• Shareholders’ agreement (Financial aspects)

Organize

• General Meeting organization

• Corporate organs power

• Shareholders’ agreement (Political aspects)3rd International Conference- Zagreb december 2018 4

Shareholders’ rights

Financial rights

• Approve the financial statement

• Affect profits

• Dividends

• Exit rights:

• freely transferable shares

• agreeements

Power to vote

• Right to attend Annual meeting

• Right to vote on AGM resolutions

• Right to add resolutions to the agenda

• Right to amend corporation bylaws

• Right to reincorporate in another State

Information

• Regular Information (annual, quaterly…)

• Information on specific agreements

• Financial & extra-financial information (public & large companies)

• Auditor reports

Faci

litat

es

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PRINCIPAL - AGENCY ISSUES

Principals

engage the agent, to perform some service on their behalf

Agent

Should act in the

principal’s interest

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Full disclosureInformation

Control on Agents

Agent may Actopportunistical

ly

Monitoring

Coordinatio

ng

Costs

Impact of corporate governanceon shareholders’ rights

Correct assymetry of information

• On Executive compensation

• On Conflicts of interests

• More Transparency

Control on Executives

• Incentives: Ex compensation aligned on shareholders’interest (Stock Options)

• ‘say on pay’

• Vote on major strategic decisions

• Vote on third party agreements

GOAL

=

Maximisation of shareholdervalue

shareholder primacy model

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Question 1 :

How BC may improve‘direct democracy’?

Question 2 :

What are the potential risks?

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Duty of information

General Information

• Name / legal Address

• Charts and Articles of association / Name of the representative

PeriodicalInformation

• Management Report

• Auditors Report

• Corporate Accounts

Public companiesinformation

• Enhanced Management Report

• Corporate Social Responsabilities Report / Internal Control

• Financial Information

• Financial Documentation to the Regulator

• Prospectus

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Disintermediation / Dematerialization

One Blockchain

CorporateCommunication

(Permanent Information)

Financial Document

CorporateRegister

French Regulator

Infogreffe in France

Issuer

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Register of Shareholders

Emetteur

Intermédiaire

Issuance Account(hold the numbers of shares or bonds on

the market)

S S S

S S S

Blockchain

3rd International Conference- Zagreb december 2018S = Shareholder Account

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ERC-884 Case

Information on Shareholders

Identity

Information on Titles

Token’sExchange

Encryption and production of tokens

Decryption for ShareholderIdentification

Classic Data Bank Blockchain Ethereum

Intermediary

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Reinforced voting power on BC

Blockchain registersshareholders’ names

A

TOKEN

• AGM organized via BC: More participants

• Voting coins are directly transfered to theshareholder at the AGM

No more empty voting issues?

• No need for proxy in listed companies?

• Immediat & direct exercice of the voting right No more Blank Check Practice?

• Reduction of voting costs

• Disclosure : impact on shareholder activism?

A PA

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Overcome shareholders Identification obstacles

Company

AII

Central depositary

€€ €

€

• Article L. 22

company BlockchainNo cost

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Solve Beneficial owner issue

I BEII

BE

Company

First Layer

Last Layer

Frontier

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Decentralized Autonomous Organization

3rd International Conference- Zagreb december 2018

Accounting Register Shareholder’s Register

Shareholder100000 euro of

earnings

Smart Contract :

GM

C. Accounts

Bank Account

Token

NO

YES

Decision: DividendDistribution ?

16

Organization of Shareholders’ Agreement through Smart Contracts

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Advantages

Automatization = 0 cost

No need to go to court

If the clauses are clear and arithmetic = efficiency

Disadvantages

If the clauses are not lear neither arithmetic= need to ask a third party for enforcement

Limited to simple « If… then… »

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Risks (1): Loss of confidentiality?

No more anonymous shareholding

exercice des droits associés à sa participation dans le capital d’une société

Sens de la Directive Actionnaires

A new intermediary should help find anonymosity

Trusted third party

Starw man (risk of appearance/reality)

But what if these intermediarie do not declare their third party position?

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Risk (2): Potential conflicts of interests?

Actual

• Executive compensation: • « pay for performance »

• Say on pay

• Third party Contracts:• quantitative criteria

• Special report (auditors)

• AGM control

New

New opportunistic behavior on BC?

- No more trusted third-parties?

- Decentralized BC

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Need: BC Legal expert?

Need

• Contractual clauses should be translated into Smart contracts or on the DAO

• Regulation should be translated into Smart contracts or on the DAO

Expertise

• Expertise in Digital and data processing techniques

• IP/IT law expert

• Business & Tax law expert

Statute

• Independance

• Auditor (internal/external)

• New ‘compliance officer’

• employee of the firm

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Q&A

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