Delaware is on the forefront of Corporate law. The most recent example happened on July 21 of this year, when Delaware Governor John Carney signed Senate Bill 69 into law which amended sections of the Delaware General Corporate Law (DGCL) to include blockchain (also known as “shared ledger”) amendments, giving legal efficacy to digital distributed ledgers. This new record-keeping technology is used for tracking owners of a business. Likewise, it could be adopted to benefit people who manage multiple businesses or assets through a Series LLC.
Blockchain, within the definition of the law, is a technology that encrypts and replicates data across an array of servers to make the records more reliable than traditional cloud or single location based servers. The data can only be modified when there is a consensus among all servers in the blockchain that a transaction occurred. A blockchain is a “self-auditing” network with no central authority approving the transactions. Therefore, blockchain networks are more redundant than traditional servers, leading to safer and more reliable record-keeping.
The new legislation, which applies to the stock ledgers of Delaware corporations, raises the question of how blockchain could be applied to other non-corporate organizations to document their ownership, management, and even internal record keeping and bookkeeping. In particular, blockchain technology would allow the Series LLCs to maintain better asset records.
A Series LLC is a revolutionary type of LLC that allows assets to be segregated and compartmentalized. Traditionally, separation required forming multiple brother-sister entities. For some applications where multiple LLCs are not an economically affordable solution, the Series LLC may provide similar protection within a singular LLC structure. The Series LLC allows for internal firewalls to segregate protected series under the LLC. A Series LLC is permitted to create and maintain an unlimited number of protected series with rules governing the establishment of each protected series written in its Series LLC Operating Agreement. The Delaware LLC Act (Title 6 Del. C. Section 18-215) recognizes each protected series as a separate person in the eyes of the law. That means each protected series can have its own unique set of members, managers, assets, liabilities, and purpose. Some consider it superior to forming just one traditional LLC. In some situations, a Series LLC may be considered as an
alternative to forming multiple LLCs if the assets held are passive, low risk, and insured, such as real estate holdings.
The Delaware Series LLC internal asset protection is more vulnerable to attack by a creditor without archival records of current affairs and historical asset information. To minimize the allegations of either comingling or allegations of conspiring in mischief to move assets like a shell game from creditors, having a record of assets on the blockchain would be enormously helpful.
The current popular method of maintaining records in Microsoft Excel or an application, such as QuickBooks, is vulnerable to creditor accusations of manipulation.
The immutable record provided by blockchain-verified transactions allows the Series LLC to be more defensible if the blockchain retains data on:
1. How assets were acquired;
2. From whom assets were acquired;
3. How much was paid for assets;
4. How assets were disposed of or transferred.
Blockchain ledgers could also be applied to the record-keeping of Series LLC ownership.
This technology would enable managers to keep an iron-clad record of all issuances and transfers of member interests in the Series LLC. Because the records are encrypted, the member names, addresses and contact information would not be accessible outside of the company, nor would the intended asset ledgers be accessible outside the company without a private cryptographic key.
Courts and judges are tasked with weighing evidence presented by lawyers to determine which facts are more likely true than not. Blockchain records could help defendants prevail in cases by presenting to judges evidence that is more reliable than any other record-keeping evidence ever previously available. These records would be extremely probative when determining whether a manager had shifted assets from one protected series to another to hide assets from a creditor or when and how many interests are owned by a member at any given time for various purposes such as ownership disputes. This type of blockchain record may prevent a dispute in the first place or help resolve a dispute before trial because so little evidence issues would remain in dispute for a trier of fact to decide.
Although the new Delaware blockchain legislation seems to focus on express rules for digital stock ledgers and who has access to the data, it opens the door for “the creation and maintenance of corporate records…” in the blockchain. Extending this idea to Series LLCs means an LLC Operating Agreement and the agreements of the individual protected series could be authenticated by and recorded with a blockchain system. In the future, it may be best practice for all members and managers of Series LLCs to use Blockchain, the most reliable technology available to maintain important entity records free from the accusation of retroactive manipulation.
About the author
John Legaré Williams, Esquire practices business law through The Williams Law Firm, P.A. (www.TrustWilliams.com). He is also President of Agents and Corporations, Inc. (www.IncNow.com), a family owned and operated incorporation service that provides filing and registered agent services in Delaware to business owners from around the world. Nationally, Mr. Williams is a frequent speaker nationally on the topic of Delaware LLCs and in particular the Delaware Series LLC, the most cutting-edge entity on the market.