Traceable Shares and Corporate Law

A healthy system of shareholder voting is crucial for any regime of corporate law. The proper allocation of governance power is subject to debate, of course, but the fitness of the underlying mechanism used to stuff the ballot boxes should concern everyone. Proponents of shareholder power, for instance, cannot argue for greater control if the legitimacy of the resulting tallies is suspect. And those who advocate for board deference do so on the bedrock of authority that reliable shareholder elections supposedly confer.

Unfortunately, our trust in the corporate franchise was forged during an era that predates modern complexities in the way that stock ownership is now tracked and traded. We do not trace shares, and any clear-eyed look at the conferral of voting rights via back-end stock clearing practices is unsettling. Evidence of the various entanglements crops up from time to time—in the form of questionable voting outcomes or disputes about standing for shareholder lawsuits—but the underlying problems are systemic, not episodic. Our stock clearing system is a kludge.

This is an important moment for corporate law, however, because new technology is approaching a state where clearing and settlement systems may soon support traceable shares. The rise of distributed ledgers and blockchain technology is poised to allow for specific share identification and precise records of share provenance. This may sound like an uninteresting technical sideshow, but as this Article will argue, the impact of traceable shares on corporate law will be profound. It will change the structure of shareholder lawsuits, alter the allocation of corporate governance rights, and require lawmakers to rethink fundamental principles of shareholder responsibility for corporate misdeeds.