This blog focuses on some of the highlights of the discussion - DLT applications for mergers and acquisitions and for property transactions.
The discussions considered two potential DLT applications for M&A transactions. Virtual data rooms as a method of providing secure, long term storage for key documentation. And, using DLT to make the flow of funds more transparent.
The members felt that there had been little real innovation in this space in the last few years, but questioned the value of DLT as a standalone transformative technology in the VDR context.
Upon completion of a deal, current practice can see documentation held in the VDR get downloaded onto physical media (such as USB drives) which are then stored somewhere on the premises until someone needs to access them; typically several years later when most of the original stakeholders who ran the deal have moved on. This is neither transparent nor efficient and exposes all stakeholders involved in a transaction, such as businesses, solicitors and notaries, to a number of risks. These risks include:
This behaviour, whilst anecdotal, is not uncommon in the commercial world, and can be found in large, innovation intensive areas such as manufacturing consortiums and healthcare.
A solution to this must involve continued secure storage of the data post deal, but it must be cost effective for the Legal Practice. After all, it costs nothing to store deal data on a USB stick but significantly more to archive it on a cloud based system in perpetuity.
DLT, as a standalone technology, is perhaps not the answer here but it could bring its unique capabilities such as immutability, encryption and distributed resilience to a broader system. This system would then include further functionality such as:
Modern enterprise Blockchain systems can do a lot to support these requirements.
There are a number of providers in the market today, such as Drooms and Quicktrust, who offer VDR solutions based on DLT. Whether they are cost effective in practical terms was not discussed.
M&A transactions are regularly funded by numerous parties using multiple combinations of debt and equity. As deals develop, stakeholders expect the Legal teams to act as a bank and handle the flow of funding appropriately.
This raises anti-money laundering (AML) concerns which are costly to overcome - the legal team handling the deal typically charges a small fee for what is often several days of work - reducing their margin significantly.
Additionally, there are lots of other steps in the process that add risk, reduce transparency and increase margin for error such as collecting stakeholder bank details over the phone.
Digitising this process, using a DLT solution that all stakeholders could access appropriately, would accelerate it and drive transparency.
Time spent by legal teams interacting with stakeholders would be reduced and data accuracy improved; significantly reducing risk and increasing margin.
One of the community members was involved in the development of a proof of concept (POC) with the Land Registry, designed to show the benefits of DLT as a technology to expedite and de-risk property transactions. The Land Registry partnered with Mishcon de Reya, Shieldpay, MyHomeMove, Yoti and HMRC to build an end to end system designed to facilitate the entire process.
The results were promising - with the test transaction taking circa 10 minutes to complete. The Land Registry believe that DLT has the potential to deliver:
The initiative seems to have slowed down somewhat - but the results speak for themselves.
The POC used smart contracts to automate elements of a property transaction.
Smart contracts can be extremely useful in many aspects of process automation but one of their perceived weaknesses is that the contract must be baked into the blockchain. This can render the contract immutable and difficult to change.
That doesn’t necessarily need to be the case with modern DLT’s. For example, ByzGen’s Process Management Module delivers process automation in a similar way to a smart contract, but only uses the blockchain at key process touchpoints. The outcome is robust process automation that can be easily reconfigured as processes evolve.
Blockchain as a technology has been subject to over-hype and undeserved negativity in equal measures but it’s well on it’s way to becoming the norm. It’s clear that a lot of the opportunities in the legal sector have yet to be uncovered so please join us for some lively debate and valuable insights.
The next BIC roundtable event will take place online, with the hope that future events could happen face to face.