Blockchain for Corporate Governance

Existing Issues in the Sector

The current system presents at least two critical issues:

• For the exercise of shareholders’ rights in listed companies, there is a complex chain of intermediation that often leads to inefficiencies, misunderstandings, complexities in shareholder identification, and costly legal disputes. These consequences could be avoided through the use of Distributed Ledger Technology (DLT).
• The unexpected effects of remote voting procedures. Often, shareholder voting at the assembly is done via telecommunications before the actual meeting takes place. This results in early availability of voting outcomes to certain intermediaries or the issuer itself, leading to inevitable information asymmetries and undermining the significance of the physical assembly.

Blockchain for Corporate Governance

Direct Management on the Blockchain

A significant aspect concerning this matter is the possibility of managing corporate governance directly on the decentralized blockchain of the company, through a set of defined and self-executing rules for:

1. Role of the share register and dematerialized meeting book on the platform.
2. Conducting the shareholders’ meeting.
3. Exercising voting rights on the blockchain.

Unlike a traditional company, where rules are subject to interpretations and distortions, in a decentralized organization that applies blockchain technology, the rules and relationships between individuals are predetermined in the code of smart contracts.

In fact, while it is common for large companies to face increasing inefficiencies as they grow, the use of blockchain technology aims to coordinate a potentially unlimited number of individuals collaborating outside the structure of traditional companies.

Dematerialization Process

The dematerialization process of corporate records, which refers to the computerized process of creating, keeping, and storing corporate books, is a procedure in compliance with current regulations. Article 2215-bis, paragraph 1, of the Italian Civil Code, titled “Electronic Documentation,” states that “books, registers, records, and documentation that must be kept by law or regulation or that are required due to the nature or size of the company can be created and kept using electronic tools.”

The dematerialization process of corporate records can be divided into the following phases:

1. Once the minutes or a transcription is entered into the digital shareholder book, it must be digitally signed by the signatories and forwarded to the other two phases of the process: the holding phase and the storage phase.
2. Regarding the signing process, a feasible solution could be to use SMS OTP (One-Time Password) signatures or SMS signatures. This type of electronic signature allows signing a digital document using one’s mobile phone number.
3. The holding phase involves adding an electronic timestamp to the document and “the digital signature of the entrepreneur or another person delegated by them.”
4. The storage process includes the final addition of a digital signature by the Responsible for Conservation and a timestamp to the file.

Conducting the Shareholders’ Meeting

Now, regarding the conduct of the shareholders’ meeting, it is necessary to verify the compatibility of the blockchain with the need to identify the authorized participants in the meeting. One issue is ensuring both identification and participation of only authorized individuals.

Two solutions could be hypothesized:

• A system where participation in the meeting is allowed only after a Know Your Customer (KYC) process verifies the user’s identity and information. This would enable them to connect, participate, and vote on the agenda items using their token.
• A system focused on using the Digital Identity (Spid) or Self-Sovereign Identity (SSI), which would allow connection only for those who are genuinely authorized.

A potential solution to the problem could be adopting a mixed system.

One possible approach, therefore, could involve a mechanism in which the physicality of the assembly continues to be ensured through the traditional conduct of remote meetings, i.e., via telecommunications means, following the application of common law rules. This way, shareholders could still actively participate in the debate and make proposals on the agenda items, following ordinary rules, and only later—during the voting process—utilize blockchain, which, with its intrinsic characteristics, would allow for the recording of cast votes (before or during the assembly) and the resulting outcome in a certain and immutable manner.

A second solution to the problem could be the implementation of blockchain for participation itself in the assembly. In a “fully remote” assembly conducted on the blockchain, following the KYC process or through Spid or SSI, each authorized participant would be recognized and enabled to participate in the meeting, being able to express objections regarding the agenda items through statements (for example, using a “speech to text” function) that, consistent with the peculiarities of DLT (Distributed Ledger Technology), would be instantly recorded in the system. This way, besides facilitating a moment of debate, the entire intervention would be fully documented, without the possibility of alteration.

Administrative rights.

Now, turning to the exercise of administrative rights, particularly the right to vote, some reflections need to be made.

Voting on the blockchain could occur through the use of smart contracts that, interacting with the voting tokens distributed to shareholders, would allow them to express their will from anywhere, ensuring the authenticity of the choice made by the token holder.

The proposed resolutions, after being discussed in the “remote” assembly (or directly at the meeting, using a DLT that allows intervention and participation with immediate registration of statements in the system), and divided into a set of points on which shareholders must express themselves, would be approved or rejected based on the expression of each individual’s will.

The shareholder would access the platform and proceed to vote using their voting token, transmitting the results directly to the blockchain. This way, transactions executed by authorized parties would become certain, immutable, and verifiable on the blockchain, following an operational method that does not present significant issues concerning the current Italian corporate law.

Electronic voting on the blockchain would offer opportunities from multiple perspectives:

• Implementing blockchain for the voting procedure, given its aforementioned characteristics, would enable obtaining all this information without the need for guarantees such as a notary or a recording secretary.
• Voting operations, ensuring voter privacy and remaining anonymous on the network, would be validated on the blockchain, and once a favorable majority approval is reached, the same resolutions contained in the electronic document would be publicized in the dematerialized assembly book managed by the blockchain itself.
• The application of blockchain to corporate assemblies appears to support the revival of the assembly’s significance and functions, also encouraging the participation of smaller shareholders.

The increased transparency and simplification brought about by the decentralization facilitated by blockchain would allow the stakeholders involved in the company’s affairs to make informed and conscious decisions, limiting agency costs.

Given its characteristics, this technology represents a useful tool for outlining a new, more secure, and company-compliant mode of shareholder participation and involvement, which inevitably should be encouraged.