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21 January 2019

Digitisation, administration and transfer of registered shares of an unlisted AG on the blockchain

In the past few years, blockchain has become a "hype" topic for lawyers, as the technology seemingly promises entirely new ways to easily and securely track transactions via a decentralised peer-to-peer computer network.

Due to its secure and decentralised nature, blockchain technology could be the perfect solution to digitise shares in companies, most notably of Austrian Stock Corporations (AG), since their shares are generally meant to be fungible. Digitisation of shares means that shares are represented by "tokens", and not by paper share certificates. Tokens are digital units that can be created based on a "smart contract", for example, on the popular Ethereum blockchain using its "ERC-20 standard". ERC-20 defines a common list of rules for Ethereum tokens within the Ethereum blockchain.

These rules include how the tokens are transferred between addresses and how the data stored on each token is accessed. Tokens can thus have special programm functions, such as a "transfer" function.
Share tokens are linked with registered shares and issued to the shareholders of the AG by transferring the newly created token to the shareholders' cryptocurrency wallets. Each token represents one individual share.
The digitisation of the registered shares of an AG is intended to simplify their transfer. Due to the technical design, it is possible to eliminate any intermediary and for shareholders to transfer the shares directly against payment of the agreed consideration (delivery versus payment). Digitisation is also intended to make the transfer of registered shares of an AG more secure. The blockchain ensures tamper-proof transfer of tokens. The risk of fraud and errors in the transfer of shares can therefore be further reduced.

Legal requirements
The possibility to digitise shares should be provided for in the articles of association of the AG. For AGs that are not listed, there is greater autonomy regarding the statutes in comparison to a listed AG. Amendments to the statutes of an unlisted AG are generally permissible not only where the law expressly provides, but also where the mandatory law or the nature of the AG is not violated. Now that the digitisation of shares does not automatically qualify the AG as a listed company, respective provisions governing the digitisation of shares can, subject to the foregoing and the following, be included in any non-listed AG's articles of association.
With our recent project for Conda (see the press release), we have proven that such changes in the articles of association are admissible. There is no explicit provision in the Austrian Stock Corporation Act prohibiting provisions in the statutes concerning the digitisation, administration and transfer of registered shares of an unlisted AG on the blockchain. These procedures are also in accordance with the principles of stock corporation law. Therefore, provisions in the statutes of an unlisted AG regarding the digitisation, administration and transfer of registered shares are permitted in principle.

How to do it
If it is planned to digitise shares, the company's statutes must first exclude shareholders' rights to the certification of shares. Subsequently, the statutes must authorise the management board to segment the registered shares of the company in the form of tokens and to transfer them to the shareholders. Thereafter, the transfer of shares is only possible according to general civil law principles (by assignment).
Since each registered share is linked to a digital token and each token represents an individual share, the transfer of a token is equivalent to the transfer (assignment) of a share.
When a token is transferred, it is registered in the blockchain that the token was transferred from one shareholder to another person, and therefore the transfer can no longer be manipulated. Since the transfer of a token is equivalent to the transfer of a share, the transfer of the share is thus sufficiently proven for the management board. The management board is informed of this by a computer protocol ("smart contract"). Based on this, the management board can make the corresponding changes in the share register. The transfer of a token is therefore equivalent to the (conventional) transfer of a share.

Another digital corporate solution could involve how general meeting resolutions are passed. Electronic voting is already permissible. The advantage of voting via the blockchain is that voting behaviour could be securely stored on the blockchain, meaning voting errors would be further reduced.
In addition, dividends could be paid in the form of cryptocurrency or other tokens. Such distributions legally qualify as distribution in kind, which are only admissible if all shareholders consent. We will see if future legislation will acknowledge (by default) cryptocurrency or other tokens as means of payment of dividends.

Co-author: Zurab Simonishvili


This article was up to date as at the date of going to publishing on 10 December 2018.



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