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March 3, 2020
In previous articles we have discussed how France progresses in the process of digitalization of the business world with a special focus on adoption of blockchain technology.
With this publication, we continue to shed light on how blockchain really participates in the legal corporate services in France.
After having presented in the first article The dematarialized registers of companies (I), and in second – The protection of Intellectual Property (II), we will analyze in this third publication the framework of the dematerialized data room and the use of blockchain in the auditing practice of a business pre-acquisition. The series will be ended with an article about the use of blockchain as a judicial proof, and more exactly about the probative force of information anchored in blockchain (IV).
Two words: security and immediacy
In the first and the second part of Blockchain serie, we briefly recalled the definition of blockchain, presented very schematically its functioning and its exceptional qualities.
One of the definitions we referred to says: “The blockchain is a technology for storing and transmitting information, transparent, secure, and operating without a central control body” [1]
It is therefore a database with encrypted events or elements that are grouped by “blocks” and whose history is frozen and can be traced in a chronological order.
On one hand, all elements are inked in an immutable manner. On the other hand, it is said that they are shared between its different users, without any intermediaries. But the elements remain invisible and therefore confidential because the transmission does not relate to the elements themselves but to a part of code that represents them. They are therefore both mobile and immutable.
This inalterability and confidentiality is very interesting for the field of business law and has started to be exploited for example in the context of audits of mergers and acquisitions.
II. Blockchain and due diligence : the dematerialized and secure data room
The use of blockchain has changed audit practices and influenced the agreements in the context of negotiations prior to merger and acquisition transactions.
The confidentiality of the information shared in the context of negotiations with partners, employees or consultants is a main concern in the context of M&A. Yet A another constraint is linked to complex management of a very large number of documents in a precise and limited period of time.
Today, blockchain technology offers the possibility of securing and simplifying the process, which will strengthen the protection of the interests of the target company.
Following the first contact between the parties, negotiations begin with a letter of intent (LOI) from the potential buyer. The LOI contains, in addition to an initial offer, financial and legal elements which the investor wishes to take note of in order to adjust his proposal.
It is very frequent that at this stage a clause or an autonomous confidentiality agreement, commonly called an NDA (. Eng.Non disclosure agreement) is put in to place insofar as the general law principles of good faith and confidentiality odo not offer sufficient protection because of their great generality.
The effectiveness of an NDA will then consist in its precision. Besides elements such as the recipients of confidential information, or the duration of confidentiality, it will be essential to rigorously identify information which will be considered confidential.
In particular, it will be possible to stipulate a clause providing for anchoring in the Blockchain all documents containing confidential information to ensure proof of their existence.
Indeed, access to target information is given to a certain number of people in the context of a data room. In the past a physical space, nowadays, most commonly it is an online platform regrouping documents covering legal, accounting, financial, tax or social information of the target company.
Beyond a doubt, a virtual data room (VDR) placed on a blockchain offers invaluable advantages in this type of operations. In particular the security and confidentiality of the documents made available, as such are shared without “dispossession”, thus without a risk of modification or destruction. Also, a strict control of access to information only by people who are authorized such access and are clearly identified. Needless to say that the dematerialization represents an obvious facility, especially in cross _border operations with a geographical distance, contributing to cost and time reduction of an audit, .
The efficiency of dematerialized data rooms makes audits accessible even for medium-sized companies or even for small entities. Strengthening the confidentiality and traceability of document consultations considerably limits the insecurity of data rooms. These advances, enabled largely through the use of blockchain, will contribute to the increase in pre-acquisition audits and the securing of these operations.
The use of blockchain will also allow the parties to obtain the necessary evidence in the event of a dispute, the subject that will be addressed in a fourth part of our series on the application of blockchain in the field of business law.
Ewa Kaluzinska Nicolas Renault Iga Kurowska
Verne Legal, Partner Verne Legal, Lawyer Verne Legal, Partner
Verne Legal provides a customized legal and tax advisory service to both French and foreign companies. It advises clients in running their business in France, offering strategic assistance enriched by multicultural sensitivity. For more information on the tax law in France, we invite you to download “Doing business in France” e-book and to contact our team at info@vernelegal.com.
[1] https://blockchainfrance.net/discover-the-blockchain/c-is-what-the-blockchain/