The Malta Independent 8 December 2019, Sunday

The case for tokenisation of shares in limited liability companies

Tuesday, 16 July 2019, 09:33 Last update: about 6 months ago

Anton John Mifsud

Practitioners advising clients in the crypto-sphere have often come across cases where their clients are interested in setting up a structure whose ownership is denominated in tokens. Clients would typically ask for the setting up of a company whose shares are tokenised i.e. company shares would be in the form of tokens which can then be transferred over blockchain. 

The law does not currently cater for the possibility of having tokenised shares in companies. In fact, our Companies Act was enacted at a time when blockchain was not yet envisaged, and therefore it only caters for traditional shares.

For example, in order for a share transfer to take place, one needs to have a share transfer agreement executed by the transferor and the transferee, and a resolution of the board of directors approving the share transfer. Thereafter, the filing of a number of forms is required - these would typically include the Form T (to be submitted with the Registrar of Companies), and where applicable, documentation under the Duty on Documents and Transfers Act and/or the Capital Gains Rules (to be submitted with the Maltese Inland Revenue).

This process currently necessitates human intervention, something which is anathema to blockchain pursuits. Blockchain can of course provide a partial solution, in the sense that certain processes can be written in smart contracts. In order for this system to work, a common blockchain system would have to be made available to the Registry of Companies and other authorities as required, Company Service Providers, the companies, and their officers, as well as the shareholders.  If the law had to make provision for tokenised shares, a blockchain system could be built whereby:

a)            shares could be transferred over the blockchain reducing the need for paperwork;

b)            holders of pre-emption rights will be allowed to exercise their rights of first preference in a fair and transparent manner;

c)            the register of members is updated automatically and immutably;

d)            official forms are automatically generated and filed with the Registry of Companies;

e)            share certificates can be produced instantaneously while older certificates are 'burned';

f)             dues to the fiscal authorities can be transferred automatically from the wallets of the transferor and/or transferee.

In this way, technology would automate transfer transactions and also benefit from immutability, while cutting down on potential abuse since the history would be traceable. Moreover, at any given point the relevant parties will have a 'live' image of what is happening within the company from a shareholding point of view.

A share transfer transaction would also benefit from speed - a shareholder will be able to transfer a share practically instantaneously at any time of the day from any part of the world. At the same time the Registrar of Companies can be given power to inscribe certain features into the smart code - this will cater for instances where, for example, a warrant of prohibitory injunction is issued which restrains the transfer of shares in a particular company.

If such a system were to be applied, the legislator would definitely have to consider a significant number of changes to the Companies Act. For example, should voting over the blockchain have the same effect as voting at a general meeting? This is quite unlikely to be the case in the absence of an actual meeting which is held physically. However, I can envisage a scenario where a unanimous vote over blockchain is given force equivalent to a unanimous written shareholders' resolution.

Having said so, any technological solution will still be required to respect the fundamental provisions of the Companies Act. A case in point is the fact that Maltese law does not envisage fractions of shares - any transfer of shares over blockchain would have to be restricted to the transfer of whole shares. Of course, the legislator can always amend the law to allow for fractional (up to a given number of decimal places) shares to be issued.

Despite the obvious benefits of a technological system which allows for the tokenisation of shares, this does not mean that such a solution should be mandatorily applicable to all companies. In my view it should only apply on an opt-in basis, possibly within a sandbox environment for the first few years. In this manner, it will not replace the traditional system - both could exist side by side in order to cater for different needs and requirements.

If Malta really wants to walk the talk of becoming a blockchain island, moving towards a technological solution which tokenises shares in companies is a must.

Dr. Anton John Mifsud is Head of Legal at E&S Group and Associate at E&S Law, a Maltese law firm operating under the E&S Group brand.

E&S Group is a boutique, multidisciplinary corporate advisory practice that provides a wide array of services to an international client base, from the simple setting up of a business operation to the more complex related issues. As a multidisciplinary group our pro-active team of practitioners, financial advisors, accountants and corporate administrators are available to assist, advise and deliver to any aspects of our clients' operations. Contact E&S Group on +356 20103020 or via email at [email protected] 


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