Since the very beginning of IntellectEU’s partnership with Digital Asset, corporate actions have been a consistent theme (DAML Driven Development: IntellectEU) for using DAML as a tool to express and tackle multiparty workflows. DAML’s capabilities, well-recognized through its value proposition, have helped IntellectEU revamp business approaches, while also reshaping their technical implementations. These efforts have led IntellectEU to convey processing efficiencies on the aforementioned use cases and/or value-added solutions to a large set of clients.
As part of IntellectEU’s product research and development strategy, it was decided again to tackle corporate actions. In this case, IntellectEU focused specifically on the existing challenges in proxy voting with respect to the “Shareholder Rights Directive II”, also known as “SRD II”, and corporate governance events.
Shares of listed companies are often held through a complex chain of intermediaries (the “holding chain”), which complicates the exercise of shareholder governance rights and may act as an obstacle to shareholder engagement.
Companies need better ways to communicate with shareholders. The message-based approach shown above leads to multiple challenges during the exercise of shareholder rights. Take for example the general meeting broadcast and the voting process. The inefficiencies in the meeting notification and proxy voting transmitted throughout the holding chain lead to multiple points in which information distortion can occur, impose more conservative voting deadlines than are actually required, require multiple controls to be put in place to verify votes cast against positions held, and offer almost no control possibilities to shareholders to ensure their votes have been properly enfranchised and counted during the general meeting. These challenges are described in further detail below.
Existing workflows dealing with these topics present various challenges to the parties involved. The items below provide a more detailed overview on the effects of the prevalent message-oriented process.
- Risk of information being lost or distorted as information/meeting notifications and subsequent relative modifications take time to cascade up-and-down from the issuer to shareholders and may potentially require translation to and from local languages.
- Conservative deadline for proxy voting notification, especially from intermediaries down the holding chain, even after the regulatory changes that no longer require shares to be blocked for trading.
- Shareholders have no control pertaining to the effective counting and direction of their vote due to the lack of communication and the fact that many intermediaries still opt for Omnibus accounts and cast their vote in bulk, thus hiding the shareholder and their respective vote from the company.
- Cost multiplication occurs due to the number of parties involved in the cascade model that follows a message-based approach (using SWIFT), as well as the requirement for setup of numerous SLAs between all parties, including within the same institutions that play different roles during the voting process (they can be both global or local custodians).
- There is either no reconciliation that takes place or there is a cumbersome and costly reconciliation of shareholders entitlement at the global level. This results in an increased risk of “over voting” or “under voting.” When discrepancies are found, it requires multiple exchanges of communication (emails and SWIFT messages), cancelation of voting instructions, and subsequently casting new voting instructions between account holders and account servicers.
This exercise implements a single place of “communication” between the Issuer and Investor (beneficial owners) built on top of a distributed ledger. This approach eliminates a large amount of processing complexities and challenges resulting from the holding chain and message-based communication. As an example, under the proposed solution, the issuer may wish to approach the Central Securities Depository (CSD) with Shareholder Identification requests. Notwithstanding, through the relationship disclosure contracts, the CSD no longer needs to cascade through the custody chain to identify shareholders.
A first workflow is implemented to set-up the governance event (meeting event or information event) as a shared record (“the golden record”) providing all the information to be spread to beneficial owners. It involves the Issuer and the Issuer’s agent required to gather and structure the information to be spread and to define the agenda on which voting might be required. The shared record will be made accessible to the whole network including dedicated media providers (such as Bloomberg, Thomson Reuters, etc.) once confirmed by the Issuer.
If a vote is required, a second workflow will drive the voting process. Here it would be noteworthy to pull it together with a system capable of maintaining a registry on the beneficial ownership of the shares. Its relevance would be the added capability to automate the calculation of the voting rights at the beneficial ownership level.
Under the focus of the exercise it is assumed for simplicity that the CSD has knowledge on the custody chain for a voting party and is able to input its entitlement position directly into the system. Through DAML, this was achieved by mandating the voting party to disclose the custody chain upfront. However, before that disclosure is done the voting party must first execute a set of straightforward initiate-accept DAML patterns to onboard each of the entities, referred in the code as partners, involved in the custody chain.
The “PartnerProposal” acceptance leads to the creation of the “Partner” contract where the CSD is given the right to approve the partner into the system. This intends to emulate the execution of the CSD’s due diligence towards that entity.
Lastly, as part of the terms of the “ApprovePartner” choice exercise, such entities or partners are individually associated according to their role onto the “CustodyChain” contract. Having this contract setup the CSD becomes capable to leverage this information on-demand. This means that the CSD is now able to communicate more effectively the entitlement position throughout the custody chain.
Apart from the simplicity with which it is possible to model such workflows with DAML, it is noteworthy to reference that DAML was also leveraged in order to enable an immutable audit trail of the workflow processing steps, irrespective of the ledger of choice. Moreover, it guarantees greater transparency on the voting process and will provide sufficient evidence of vote counting. Voting deadlines can be improved since the entitlement will be available as part of the golden record kept on the ledger. Smart contract validation can automatically prevent shareholders from “over voting”, meaning that reconciling votes will be easier and less costly for all of those involved in the process.
By improving and simplifying workflows, reducing time and friction, shareholders gain more time to analyse the impacts of their vote and cast a more conscious vote on each item of the general meeting’s agenda.
Furthermore, through the usage of DAML, stakeholders involved in this process are capacitated with further flexibility on governance models. This flexibility results in it being relevant for a central participant to push for its implementation on a centralized ledger, under the control of the trusted third party. On the other hand it is just as pertinent for a consortium to follow a more decentralized solution following the same workflows. Under any of these options the synchronization and control of the workflow steps is guaranteed by DAML and data segregation achievable through DAML’s Ledger API.
From both perspectives, the current holding chain is enhanced through such a system, in which beneficial owners can have direct and instant access to the governance event shared record and through it be empowered to vote on their position.
The above mentioned solution translates into a range of positive impacts for entities affected by current practices for governance events and proxy voting. The proposed platform constitutes a competitive proxy-voting solution and excels on the points mentioned below in a cost effective way. The advantages include:
- Direct communication is established between the issuer and shareholders. Shareholders have access to the detailed meeting information and the required company information, in line with SRD II. No more information distortion, no more information delays.
- The deadline for voting instructions is both standardized and improved for all shareholders and no longer depends on point-to-point communication which worsen SLAs.
- Transparency pertaining to the access to voting results is immediate and shareholders can access the system to confirm that their vote has been taken into account as per the given voting instructions.
- Reduced operational risk is achieved by global entitlement reconciliation and control can be performed in one place before authorizing the vote to avoid over or under voting.
As DAML’s value proposition has been evolving, IntellectEU has kept up with the pace by delivering applications that leverage its multiparty workflows modelling features. During this time, IntellectEU has delivered on its efforts to also advance the capabilities to support and enable a continuous stream of new DAML ledger integrations such as R3 Corda, Hyperledger Fabric and SQL databases.
In closing, the joint partnership between IntellectEU and Digital Asset continues to move forward in enabling clients to surmount the information silos of an ever connecting world. Learn more about our partnership here and check out their solution on the DAML marketplace: