☝️Key Legal Issues

When start using ComBoox to book equity shares and corporate governance records, you may consider several key legal issues as follows:

🆔 Digital Identification Mechanism VS. Real-Name Requirements

There is a distance between digital identification mechanism of ComBoox and real-name requirements in various countries. ComBoox takes the EVM account address as the basis of user identification, and does not verify the user's social identity such as name, nationality, or residence etc., which has a distance to the real-name requirements of various jurisdictions with respect to finance, securities, foreign exchange, tax, investor suitability, and anti-money laundering.

Not directly managing users’ social identity information is certainly related to the characteristics of blockchain technology, but more importantly, it is conducive to effectively protecting personal privacy, business secrets and other information in the open public blockchain environment.

Even though there exists a distance between digital identification and real-name requirements, while, distance does not mean impossible. Stakeholders of a company can surely cooperate together to register and maintain their social identities in accordance with the legal requirements of the relevant jurisdictions of registration, operation or transaction, and to effectively connect their on-chain digital identity with their real world social identities, so as to satisfy the mandatory real-name requirements of the relevant laws and regulations.

Making full use of the rigid programming logic of blockchain and smart contracts to realize the concept of "Code is Law", thereby effectively overcoming or even fundamentally solving the problems caused by human interference, and enhancing equity value by leveraging the great support of the massive liquidity of crypto markets. All Benefits and advantages brought by blockchain technologies can certainly outweigh costs and expenses incurred by satisfying the real-name requirement.

No matter it is to anti-tax avoidance, anti-money laundering, counter-terrorism financing, to protect financial consumers' rights and interests, to maintain foreign exchange order, or to protect monetary sovereignty, real-name requirements always have their specific legislation purpose and specific interests protection objects. As long as these legislative purposes can be effectively achieved through scientific methods, and the rights and interests of the subjects can be effectively protected, on-chain corporate governance and compliance operation goals can be perfectly combined ultimately.

㊙️ Information Disclosure of Blockchain VS. Trade Secret Protection

Blockchain's technical features determine that once equity shares and corporate behaviors are booked on chain, such records will become publicly aware and cannot be kept as confidential information in traditional way.

However, equity shares and corporate governance records, by nature, shall be public information and should not be regarded as trade secrets. By means of public registration system to ensure a proper transparency of corporate governance, so as to protect rights of creditors, bona fide third parties and other external stakeholders, to establish the fiduciary duties of managers to shareholders, and to determine the apparent agency relationship between managers and the company, these are the general legal principles that most countries adopted to regulate the external legal relationships of companies as per their prevailing commercial laws. It is also a fundamental reason why the public registration system of company archives has been established in so many countries.

Usually, what are protected as trade secrets are usually confidential information that has monopoly legitimacy and commercial value, such as intellectual property rights, major transactions pricing, etc. Most corporate governance documents and most contents thereof obviously do not belong to this category.

For those parts of corporate governance documents that really need to be kept confidential, other workarounds can be used to deal with them, thereby resolving the conflict between information confidentiality and governance behavior on chain.

For example, encrypt the electronic document with natural language first, and then upload the encrypted file to the IPFS, and finally use the CID hash as the content index to be stored on blockchain. In this way, the confidentiality of trade secrets can be satisfied on the one hand, and corporate governance behaviors such as company decisions and shareholder resolutions can be kept on the blockchain on the other, and the original text of confidential information can be retrieved, downloaded, decrypted, and restored from IPFS when necessary, so as to verify the consistency of decision-making results with the subject contents reviewed. With this approach, corporate governance can maintain openness and standardization while achieving effective protection of trade secrets, avoiding the use of "confidentiality" as an excuse to circumvent the voting process on blockchain, or sacrificing the commercial interests of confidential information because of voting on blockchain.

Therefore, the distance between information disclosure on blockchain and the trade secret protection can be solved by smart contracts. While ensuring the information security, the transparency and non-tamperability of blockchain can be well utilized to achieve transparency and standardization of corporate governance.

⁉️ Internal Book-Entry Records VS. Public Registration Information

Public registration system has been widely adopted in various countries as a basic legal principle to maintain the commercial order. At the same time, company laws usually require companies to properly manage corporate governance documents such as the register of shares, register of members, general meetings minutes, register of directors, etc. to ensure the transparency and legality of company operations.

So, if there are any discrepancies between the internal governance records managed by ComBoox and the company files in public registration authority, which one should prevail and will it give rise to a conflict of laws?

In international judicial practices, the delivery of equity and the establishment of shareholder identity are often determined on company's internal legal behaviors, such as issuing a capital certificate or recording names of shareholders in the register of members. In other words, when regulating the "internal" equity investment relationship between shareholders and the company, and when judging the delivery time of the "internal" contractual relationship between the buyers and sellers of equity transactions, the company's internal files are often the decisive basis for judgment. Therefore, it can also be generally understood that the company's internal files are the "effective basis" for judging equity establishment and equity delivery, and are the fundamental basis for handling internal investment relationships and internal contract relationships.

On the other hand, when a creditor relies on the public information to claim that shareholders shall implement capital contribution obligation, the stock investors claim that the managers of a listed company shall bear their fiduciary duties, bona fide third party claims that a contract signed by directors shall bind the company, the internal files’ records (such as equity shares have been transferred, managers have resigned etc.) cannot be used as a defensive reason then. Judicial practice often determines the attribution of liability and the establishment of an apparent agency relationship based on the public registration information. Therefore, the publicly registered company records are the "confrontational basis" for judging the attribution of responsibilities and adversarial legal claims, and are the fundamental basis for handling the company's external relationship of creditors’ rights or apparent agencies.

Therefore, the internal files managed by the company do not conflict with the officially registered company records, but play different legal roles at different levels. Moreover, this problem is not a new problem brought by ComBoox or blockchain technology, but an inherent legal problem that has existed for a long time. Existing legal principles, legal norms and judicial practices have mature rules and jurisprudence to solve them. The internal company records confirm the shareholder’s identity, allocate the ownership of shares, and regulate the internal legal relationship of a company; public registration records deal with credit relationship, insolvency liability and apparent agents, and regulate external legal relationship for a company. The two records system together constitute the legal system of corporate governance, are interconnected and complementary, and jointly ensure the legality and transparency of company operations.

It is worth noting that most countries require companies to update their public registration information in a timely manner in event of changes in shareholdings, managers or major company governance decisions, thus ensuring the consistency of the internal file and the official registry, which proves that both records are well coexisting and complementing with each other.

Therefore, if a company adopts ComBoox to manage its internal records on blockchain, it will not create a legal conflict with the information in official public registration system. Moreover, if ComBoox solution is widely used, it is likely to promote or even revolutionize existing public registration system, and may lead to the integration of two records system into one.

📚Give Legal Effects to On-Chain Books

In brief, through constitutional documents like articles of association or bylaws, the company needs to give on-chain books special legal effects from the following aspects:

(1) Registers of Interests: The contents of Register of Shares, Register of Pledges and Register of Options directly reflect property rights and interests. Therefore, it is necessary to clearly stipulate in the constitutional document that these on-chain Registers shall be regarded as the fundamental basis for the relevant rights and interests, so that changes in these Registers can directly lead to legal consequences of creation, modification, disposal or elimination of the relevant legal rights or legal relationships;

(2) Registers of Governance Behaviors: The core meaning of Registers of governance behaviors (like Board Meeting Minutes, General Meeting Minutes, or Register of Directors) is to record the expressions of intention, and the key points of recording the expressions of intention lies in confirming the binding forces of electronic signatures to their specific subjects, therefore, it needs to stipulate in the constitutional documents that:

① calling commands relating to expressions of intention (such as signing documents, proposing motion, voting, taking office, resignation, etc.) signed (or triggered) by the parties through their electronic wallet (or private key) have legal binding forces upon the perpetrators;

② on-chain timestamp recorded by the system shall be regarded as the time when the relevant legal behavior occurred;

③ the hash digest value stored on-chain shall be regarded as the fundamental basis for verifying the integrity of the expression content; and

④ legal documents that lack on-chain evidence (such as general meeting resolution, board meeting resolutions, or director’s signature etc.) are not legally binding on the company.

(3) Prevailing of Smart Contracts: Shareholders Agreements, Investment Agreements and other smart contracts of the system will automatically control on-chain legal actions, and will directly result in legal consequences like equity changes, inauguration and resignation. Therefore, it’s vital important to clearly specify in the company’s constitutional document drafted in natural language that, in case any descriptions exist (in meaning or in logical) between the natural language documents and their corresponding on-chain smart contracts, the smart contracts shall prevail.