Rights to ownership are important documents for nearly every asset. When you purchase a house, the deeds are in your name. When you buy a car you get the licence and ownership record is set in your name. With shares, the process should not be any different. You will hold share certificates in your name and they will prove the ownership.
However, given the vast number of outstanding shares as well as the volume which is traded on the exchanges, the record keeping process is rather complicated. Share ownership in the USA is determined by a system called the Depository Trust Company (DTC). This was created in the 1960s as a means of keeping records.
The DTC Process
It can be quite an arduous procedure when you buy a share from your broker. The broker will inform the DTC that they are your broker and that they are the ones to be contacted with regards to queries. Hence, if someone wants to find out who owns a share, they have to ask the DTC who then reaches out to the brokers which then provide the ownership information of the share.
This creates a complicated chain of entries across three different entities. If you are the holder of a share, then your broker will keep you in their database. The DTC will have a record in their database that your broker is the one who oversees these shares. Lastly, the company that issued these shares would have a record in the DTC. This does not really give the holder of the share the exact ownership credentials that he would like (at least in the public eye).
This is indeed quite a complicated connection and as such, the DTC can’t handle periods where there will be lots of change. For example, when there is a merger, the DTC will ask for a “chill” period to process the changes. Moreover, this tangled web of entries and databases is no doubt a problem especially when it comes to finding share owners.
Consequences of Complication
This was all highlighted with the scandal of Dole foods. David Murdock, the majority owner of the company took it private in 2013 at $13.50 a share. Many of the other shareholders viewed this as a low ball offer that was agreed so that Dole could get the shares on the cheap. They sued and won the case which awarded them $2.74 a share. When they asked those who owned the shares to submit a claim, they received claims on over 49m shares when there were only 36m according the company’s books.
Although many people thought this could just be a result of some people lying, this was also an incorrect assertion. All of the records matched up. The discrepancy, however, was as a result of short sellers who had borrowed the shares from the actual owners. Given the complicated structure of the DTC and the brokers, it took quite some time to work through the mess. According to Delaware’s vice chancellor:
This problem is an unintended consequence of the top-down federal solution to the paperwork crisis that threatened Wall Street in the 1970s. Through the policy of share immobilization, Congress and the Securities and Exchange Commission addressed the crisis using the 1970s-era technologies of depository institutions, jumbo paper certificates, and a centralized ledger. Distributed ledger technology offers a potential technological solution by maintaining multiple, current copies of a single and comprehensive stock ownership ledger
A Decentralized Solution
Having seen the mess for the first time in the Dole case, the authorities in Delaware took note and made it legal for companies to maintain their own decentralised blockchain of shareholders. This would eliminate the inefficient centralised system. This has been taken up in earnest with some companies such as Overstock who have already said that they are using it.
This will greatly simplify the process of recording stock ownership of publically traded companies. Not only could it avoid any issues like the Dole debacle but it would also allow the company to easily determine who is owed dividends for example.
It is no surprise that the state of Delaware is encouraging the use of Blockchain technology in companies under their jurisdiction. Firstly, Delaware is the corporate capital of the United States with more than two thirds of all companies on the Fortune 500 list incorporated in the state. Secondly, the state itself is looking to blockchain solutions. According to Andrea Tinianow, Delware is working with a company called Symbiont to decentralise its records in a ledger.
Hopefully the move by Delaware will give all of the companies that are incorporated in the state the impetus to embrace blockchain technology and track their share ownership effortlessly.
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