How Blockchain Could Increase the Need for and Availability of Contractual Ordering in Corporations
My recent paper, How Blockchain Could Increase the Need for and Availability of Contractual Ordering for Companies and Their Investors, which is forthcoming in the North Dakota Law Review, examines how blockchain use will create both opportunity and need for private contractual ordering.
In the past few years, increasing attention has been paid to the possibility that companies may move from issuing stock to offering tokenized interests to investors. Sometimes called securities tokens, and sometimes referred to as tokenized offerings, this kind of investment opportunity opens a wide range of issues on which there has been little comment. One such issue involves the lack of either mandatory or default rules that would govern relationships between investors and the companies in which they are investing.
For example, corporate statutes tend to offer very specific default and mandatory rules governing the rights of shareholders to have notice of and vote at shareholder meetings, to elect directors, to vote on amendments to the company’s articles and bylaws, to vote on structural changes, to vote on whether to dissolve the business, to share in dividend and similar payouts, and to access certain books and records. Some of those rules apply in the absence of contrary agreement, and some are mandatory. There are, however, no default or mandatory rules governing any of these issues in the context of tokenholders. Even tokens that are labeled “equity tokens,” or that purport to offer a right to share in “dividends,” are not covered by corporate statutes. This leaves a wide range of topics that will realistically need to be addressed in any contract between a company issuing tokens and investors.
One concrete example might help illustrate how complicated drafting can be. Suppose that a company decides to sell “tokens” that will function like non-voting preferred stock. The agreement is that tokenholders will receive a certain payment each year, before shareholders are allowed to receive any dividends. That may seem to be a relatively complete statement of the obligations of the company and rights of investors, but there are a number of issues that it does not address. What happens if a required payment would render the company unable to pay its debts? Do payments that are not made cumulate or add up? How does the company know where to send distributions, especially if payments in fiat are contemplated? If payments are made in crypto (in addition to a whole host of potential tax issues), what happens if an investor loses access to his or her wallet and cannot “claim” a distribution? If the company buys back some tokens does the right to receive the payment go to the company in some manner? In the course of deciding what payments to make, do the corporate directors owe any duties to the tokenholders? Do tokenholders have a right of action against directors to enforce the terms under which the tokens were issued? This list of questions should illustrate how difficult it can be to fill in all the contractual gaps.
Legal theorists have long argued about the desirability of allowing for this sort of contractual ordering, with the suggestion being that we do not need mandatory rules covering issues such as the extent of a corporate director’s fiduciary duties to shareholders and others. Instead (at least according to proponents who favor contractual ordering), the laws should allow the parties to decide on the obligations and responsibilities of the various parties. While legislators have not generally been willing to remove either default or mandatory rules that have long governed corporate-shareholder relationships in the U.S., blockchain creates a clear opportunity (and in fact need) for such agreements. As a result of the blockchain revolution and the advent of tokenized offerings, both proponents and opponents of voluntary, contractual ordering will be able to learn how the process of voluntarily setting rules and guidelines works in the context of company-investor relations.
Carol Goforth, University of Arkansas, School of Law