On February 1, 2021, the first part of the new ""Federal Law on the Adaptation of Federal Law to Developments in Distributed Ledger Technology"" came into force. This introduced the so-called ledger-based security as a new form of security into the Swiss Code of Obligations (Art. 973d et seq. CO).
I. What is a ledger-based security?
A ledger-based security is the securities that are incorporated into the securities ledger on the basis of an agreement concluded between the parties. Such securities may only be pursued or transferred to other entities by means of this securities ledger (Art. 973d para. 1 CO). So it is a completely innovative and fully electronic method of securing, which is then transferred digitally via blockchain technology or distributed ledger technology. In the model described above, all claims as well as membership rights can be issued in a completely digital manner. In this way, financial instruments known from the classical economy can also be issued, such as securities, which in the world of blockchain technology are most often reflected by share tokens.
The process of issuing securities based on distributed ledger technology assumes, in the first place, the conclusion of the so-called registration agreement. Alternatively, it is permissible to issue registration conditions and amend the company's articles of association to include the possibility of issuing digital securities based on blockchain technology. Another element that needs to be taken care of in order to meet legal requirements is that the underlying securities ledger meets the legal standards for technical implementation. The process related to the transfer of securities based on the blockchain technology must be subject to the terms agreed in the relevant recording agreement. It is worth emphasizing that, unlike classic securities in an unverified form, a written form is not required here.
At this point, it is necessary to consider what specific positives result from the possibility of issuing securities based on blockchain technology for companies listed on the stock exchange.
II. Increased efficiency in shareholder management
Swiss law requires every company that issues registered shares to keep a share register (Art. 686 CO). The above-mentioned share register may be kept on a blockchain intended for securities, which are based on ledger-based securities. Whenever registered shares are issued as securities, which are essentially ledger-based securities and transferred using a securities ledger, each new entry is automatically registered in a decentralized share register which is based on blockchain technology. This ensures that the digital share ledger is up-to-date at all times and ensures cleanliness and transparency of the entire system from its launch. The model described above leads to an exceptionally simple management of the shareholder structure. This is primarily important at the level of communication with the shareholder base and, consequently, determines the existence of the once unbroken chain of ownership. This is especially important in the case of legal disputes in Switzerland regarding the actual shareholding structure in joint-stock companies.
In the event that the statute of a given joint-stock company imposes restrictions on the transferability of shares, then in each case the board of directors is obliged to check the correctness of the transfer of shares (primarily in relation to compliance with the restrictions on transferability) and then to confirm it. Pursuant to Swiss law, each time the transfer of ownership of shares is confirmed by the management board of a given company, a new entry is automatically made in the securities ledger and, consequently, also in the share register. A person who is a new recipient of a share token or a ledger-based security becomes a new shareholder in this mechanism, and thus gains shareholder rights.
The Daura company (www.daura.com) offers a platform for issuing securities based on a decentralized database. In turn, the base infrastructure "Swiss Trust Chain", which is operated by Swisscom and by Swiss Post, acts as a decentralized securities book within the meaning of Art. 973d paragraph. 2 CO. The chain code on this particular blockchain serves both as a share register and as a register of unauthorized securities for individual joint stock companies.
Each person who is a shareholder, whose entry is entered in the securities ledger (and thus in the share register) and confirms these facts, is considered to be entitled to vote at the general meeting of shareholders. All signs indicate that in the future the general meeting of shareholders will be convened using the smart contract function, which will be responsible for sending invitations along with the proposed agenda to each holder of securities based on ledger-based securities, i.e. the shareholders.
Each time a joint-stock company wishes to convene a virtual general meeting, all eligible shareholders should be informed about the possibility of participating in the virtual meeting and invited to register on the appropriate digital platform.
Illustrating this on the example of the Daura platform, each user receives login data in the process of a virtual general meeting. On the basis of the received data, logging in, the user can generate a token entitling him to submit his vote under individual resolutions being voted on at the general meeting. The above-mentioned token may also be used to issue instructions to an independent representative appointed by the corporation or to another independent representative (provided that the articles of association allow such action).
After a successful virtual general meeting, all resolutions and the resulting arrangements are automatically registered on the blockchain. In the near future, the fully automated system will also enable the payment of dividends.
As in the case of general meetings, it is also permissible to increase the company's share capital in a fully digital manner. This particular method of capital increase is particularly beneficial for small and medium-sized enterprises, as it opens the possibility of reaching a wide group of potential shareholders, and thus offers quick and effective access to the capital market.
Illustrating this again on the example of Daura, the whole process looks like this, that in order to be able to subscribe to shares via this platform, in the event of an increase in the company's capital, users must agree to the terms of subscription of a joint-stock company. After successfully going through the subscription process, all new shares minted in the process of raising the capital are saved on the blockchain and assigned to new shareholders (subscribers).
Digital share management is a real revolution bringing Swiss companies many benefits. In particular, this convenience may significantly facilitate the effective and more economical management of share ledgers, virtual enforcement of general meetings of shareholders and, soon, also the fully automated payment of dividends.
The Eberhard Advisory team is fully ready to serve you with our knowledge in the field of securities issues based on blockchain technology.
