Scalable Shareholder Relations

27 April 2021

Abstract

Aktionariat has been consciously designed to make shareholder relations scalable. Board members of issuers that choose Aktionariat are not bothered with updating shareholder addresses, answering inquiries regarding lost keys, or similar. There is no dependence on (usually costly) intermediaries to handle such tasks either. All is automated and decentralized, with the holders themselves being directly responsible. A company tokenized with Aktionariat can have thousands of direct shareholders without resorting to pooling, phantom stock options or other work-arounds. These are the foundations to reap the main benefit of open blockchains: free and open transferrability and the emergence of light-weight, efficient markets for the issuer tokens. This post outlines how exactly we achieve a high level of scalability in shareholder relations. In essence, it is all about letting the shareholders do the work they generate and not the issuer or another centralized entity.

Address Changes

It starts with things as simple as keeping the addresses of your shareholders up to date. By law, companies are required to keep a shareholder registry with the names and addresses of their shareholders. If an average person moves once every five years and you have 5’000 shareholders, you can expect to receive about three address update requests per day. For large firms, this task is outsourced to specialized firms that charge the issuer either by the hour of with a costly flat fee. With Aktionariat, the token holders can update their addresses themselves and the changes are automatically reflected in the shareholder registry. Of course, the company can override the shareholder’s address if necessary, but the default assumption is that the shareholders themselves know best where they live. This reflects also the fact that by law, the issuer is allowed to trust the shareholder to provide the correct address unless there are reasonable doubts. By turning around the default from distrusting the shareholder to trusting the shareholder, the address management becomes scalable and can be maintained with much less manual effort.

By default, the shareholders can manage their address

Selective Transfer Restrictions

A second obstacle on the path towards scalable shareholder relations are transfer restrictions. While Aktionariat AG itself has no transfer restrictions at all, we recognize that many companies do wish to have such restrictions in place. The usual way to implement them with share tokens is to have a so-called white-listing, an example being CMTA’s tokenization blueprint. With a white-listing, every new address must be explicitly approved by the issuer before it can receive tokens. This creates a big obstacle for scalability and prevents the token from being traded on decentralized exchanges or otherwise benefit from the magic of decentralized finance. The more scalable alternative is to allow transactions by default but grant the board the statutory power to retro-actively deny the shareholder rights to token holders that turn out to not be compliant with the articles of association. Again, turning around the default assumption from distrusting one’s shareholders to trusting them saves the issuer a lot of unnecessary work.

Decentralized Token Recovery

A third potential pain point is the loss of private keys by shareholders. The traditional crypto approach to the loss of private keys is to simply let the inapt user suffer the loss and tell him or her to be more careful the next time. In contrast, issuers of security tokens sometimes add an administrative backdoor into their systems such that lost tokens can be reassigned to a new address. For large issuers, this leads to an incoming stream of token recovery requests that require a lot of attention as each request must be verified very carefully. That is why tokens issued with Aktionariat have no such backdoor. Instead, we are using a decentralized recovery mechanism that is much more scalable as it does not require the attention of the issuer. Furthermore, we allow to freely combine traditionally held and tokenized shares in the shareholder registry, allowing significant shareholders that do not feel comfortable handling crypto assets to stay in the traditional system.

Blockchain-Enforceable Drag-Along

A fourth important point is the ability to organize significant corporate actions, most notably an acquisition of the issuer. Here, we can offer a unique mechanism to enforce the drag-along terms of a shareholder agreement directly on-chain. After having proven through the smart contract that a majority of token holders approves an acquisition, the remaining minority can be automatically squeezed out. After the execution of the acquisition, the acquirer will control all the share tokens and the former shareholders will hold a token that does not represent a share anymore, but their share in the acquisition proceeds. Having this mechanism in place, companies can afford having thousands of shareholders without worrying about not being able to execute an acquisition anymore.

Continuous Buyback instead of Dividends

Fifth, we offer a unique way to implicitly distribute dividends. When a company runs our Brokerbot to create a market for its shares, the Brokerbot can be instructed to follow a continuous price drift, letting the price slowly climb over time. As the price increases, shareholders will be tempted to sell some of their shares back to the company. In the economic equilibrium and with the right configuration, this is equivalent to a share buyback program of a given size, which again is economically equivalent to a dividend payment. But unlike a dividend payment, the transaction costs are paid for by those shareholders who sell their shares and not by the company. In short, a share buyback program is much simpler than a dividend distribution and we offer the tools to implement one easily.

Outlook

There are many additional aspects in which we can still improve the scalability of shareholder relations. These include ideas for electronic, digitally signed voting procedures, tools for getting in touch with the shareholders, and a better scalable shareholder table in our Corporate Dashboard. But all in all, we believe that our offer is extremely compelling when it comes to having scalable shareholder relations.