CoSec, digitalisation and the law

Digital systems are replacing paper for many of the key tasks performed by company secretaries. However legal and organisational imperatives often mean that not all technology-driven efficiency gains can be used to the full, the ILA Breakfast Briefing on 29th November heard. 

How far and fast can boards go to embrace digital solutions? Electronic messaging, electronic document delivery, remote voting, conference calling, and the rest are hugely appealing when connecting geographically dispersed boards. Directors enjoy the convenience, and digital tools streamline processes for the CoSec before, during and after meetings. Elodie Duchene and Jean-François Trapp, both partners with the law firm Baker & McKenzie Luxembourg, looked at the legal details.

"The issue is that the law can never be in advance of what is happening in society–especially the digital world," Jean-François noted. So while one of the advantages of Luxembourg is the flexibility of its legal framework that enables innovative business ideas to flourish, sometimes a more secure legal context is more comfortable. Luxembourg's legislators tend to prefer to wait for neighbours to act and then align with this environment, and this can leave legal grey areas.

Use email, but with care

"A balance between speed and legal security is required," Jean-François added. For example and depending upon the circumstances and the articles, convening notices to board and shareholder meetings can be sent by email, but the CoSec must have evidence that it has been received, normally via a delivery receipt. Yet given that there are relatively few legal challenges to corporate governance procedures in Luxembourg, one cannot make sure that different alternatives are legally watertight. The law is particularly demanding regarding convening notices for shareholder meetings, given that a shareholders decision can be declared void in case of a formal irregularity especially if this irregularity would have had influence on any decision taken. Specific acceptance has to be given by each shareholder for digital solutions to replace the traditional registered letter.

Furthermore digital communication for these key procedures is not specifically mentioned in the legal texts, so has to be provided for in the organisation's articles of association. 

Because email has been around for nearly three decades, its use is generally well understood by courts, particularly in the case of issuing convening notices or distributing key documents. This is less so for new tools such as social networks for boards (e.g. Yammer and Trello), for digital platforms like SharePoint, and for instant messaging. There is also the question of confidentiality. The security credentials of email are well known but other communication media are less well tested. For these reasons, Elodie and Jean-François recommended playing it safe and using email.

Remote communication and voting

For remote electronic communications the law requires express approval to be given, so this must be inserted into the articles. There is also a requirement that the technology is robust so that all parties can hear each other and participate to the fullest. Systems that use facial recognition technologies may eventually add to security.

Remote electronic voting, though, is a work in progress in legal terms. Systems can be used for indicative votes and non-essential matters, but these don't have legal force until they are signed off in the minutes. Also we are some way from blockchain-based systems being a legal basis for voting or for signing documents.

"Beyond these legal questions we need to take substance into account," noted Elodie. Voting and participating remotely is convenient but it is a clear reduction in substance in the eyes of international tax authorities.

Minutes for board and shareholders meetings need to be signed either with wet ink or legally watertight digital systems. Notaries also need to be involved for shareholders meetings, and here Luxembourg lags behind other country's digital innovations. For example, French notaries have developed a strong electronic signing system available country-wide, but Luxembourg's lack of scale may make this uneconomic for now in this country.

Which electronic signature?

Electronic signatures open the way for many efficiency gains, but only the highest level of "qualified electronic signature" (QES)shall be used and and is also recognised across the EU as being fully legally sound. This technique ensures that after an electronic document is signed no changes can be made. This is why using a finger or stylus on an iPad to sign a pdf has scant legal value. "Advanced" systems are uniquely linked to the signatory, and they allow changes in documents to be detected. This has some legal validity but the two experts warned that this was not automatic. Yet, while QES works in many cases, it isn't sufficient for contracts that require more than written form or documents requiring notarisation.

LuxTrust provides QES in the Grand Duchy, using a USB stick or smart card. The phone apps and dongles used for private use aren't adequate. Also, we are a way from having harmonised national systems, although LuxTrust can be used from abroad.

As for electronic archiving, merely scanning a document is not sufficient. Full digitisation by a CSSF regulated service provider is required. Digital transcription tools take the drudgery out of minute taking, but care is needed here too. GDPR requires that prior consent is given by those being recorded. 

Digital is more efficient, giving the CoSec more time to perform more of their broader corporate governance role. Yet local and global law and regulations often only allow careful steps.