Why Only LIMITED Token Holder Rights?
“We issue an equity token that confers voting- and profit share rights” — a common phrasing in the crypto space for ICO companies issuing asset tokens. Sounds actually pretty nice to have a digitised/tokenised share, no? However, it’s actually not that straightforward and the wording above is misleading. I will try to explain in this concise post why there is a big caveat — at least under Swiss law — equipped with the voting- and profit share rights of token holders.
Let’s get started with the legal backbone under Swiss law (I’m sorry for being a little bit technical however this is necessary for the sake of the argument): By law, the General Meeting as well as the Board of Directors of any limited company has certain inalienable powers. These are listed in Art. 698 para 2, Art. 716a, and Art. 706b of the Swiss Code of Obligations (CO) and cannot be transferred to the token holders. This means that there is currently no Swiss legal framework where token holders are granted voting- or profit rights by nature of law. Any right granted to token holders comes at discretion of the Board of Directors and the General Meeting of the limited company, the legal entity behind the tokens.
Furthermore, the Annual General Meeting of the limited company decides, inter alia, upon the disposable profit (Bilanzgewinn) and the dividends for the benefit of the shareholders after having deducted the allocations to the reserves required by the law and the articles of association (Art. 698 para 2 section 4, Art. 674 para 1, and Art. 671 ff. CO). This is mandatory by law and cannot be changed. Moreover, the General Meeting may resolve on the formation of additional reserves (Art. 674 para 2 CO) and the Board of Directors is entitled to build up hidden reserves (Art. 716a para 1 section 3, Art. 960a para 4, and Art. 960e para 3–4 CO).
By determining the dividends for the shareholders, the General Meeting can also define a certain amount of the disposable profit to be distributed to the token holders (’Profit Right’). The token holders can then decide with a binding effect how they want this profit to be used and/or distributed (’Voting Right’). In the future, the Board of Directors can announce Voting Rights on certain matters with a consultative character.
The rights granted to the token holders are thus limited since current Swiss legislation does not allow to give direct and inalienable powers and rights directly to token holders. These rights are granted and derived at the sole discretion of the corresponding limited company.
For the sake of simplicity and since pictures can say more than thousand words, I tried to illustrate below how a potential dividend process could look like. I hope this makes disappear any ambiguities.
Generally, I would like to emphasise that the abovementioned facts must be checked within each jurisdiction — but mostly important don’t get fooled by just believing the ICO firms!
Eventually, in terms of our own token sale, why should you believe us that we grant you these voting- and profit share rights? Well, since we reflect transparency, neutrality, stability, and sustainability we just have one chance to deviate from this and we are going to destroy the entire business case, and please don’t forget that the founders are vested for 5 years! It’s simple game theory.
Alethena is the first swiss blockchain-asset rating that is 100% independent, transparent and neutral. Visit www.alethena.com for more information.
