By Dr. Wulf A. Kaal
Associate Professor of Law, University of St. Thomas School of Law
Shareholders have evolved from passive investors into active participants, often driving transformative agendas through activism. Proxy contests, in which investors seek to influence or seize board control, have proliferated, imposing substantial financial burdens on companies—estimated in the billions—and contributing to pronounced fluctuations in share prices. The activist investment market, now valued at approximately $900 billion, is propelled by a seismic $10 trillion reallocation toward higher-risk assets.
What if corporations could incentivize enduring shareholder commitment in a manner that is equitable, transparent, and technologically robust?
This is the promise of Liquid Equity Rewards (LER), a novel framework I examine in my recent essay. LER integrates blockchain innovation with established corporate defense mechanisms to cultivate loyalty among long-term investors, without compromising the liquidity of their holdings. It serves as a counterbalance to short-term opportunism in an era of heightened activism. In the following discussion, I will explain LER’s core principles and outline its potential to reshape corporate governance for boards, investors, and the economy at large.
The Surge in Shareholder Activism:
To contextualize LER, it is essential to appreciate the escalating pressures of shareholder activism. This phenomenon is not novel, yet its intensity has increased markedly. Hedge funds and institutional investors are initiating campaigns at unprecedented rates, addressing issues from executive compensation to environmental stewardship. In 2024, activists secured board seats in more than 20 percent of U.S. public companies, frequently precipitating stock volatility and diverting managerial focus.
Conventional defensive strategies have proven increasingly inadequate. Shareholder rights plans, commonly known as “poison pills,” which aim to dilute an aggressor’s stake, now face rigorous judicial oversight and risk estranging broader investor bases. Staggered board structures may delay incursions but fail to foster genuine allegiance. What remains absent is a mechanism that affirmatively rewards steadfast shareholders—those committed to sustained value creation—over transient speculators.
LER addresses this gap by emphasizing incentive alignment rather than deterrence. Envision a system akin to a sophisticated loyalty program for equity holders, underpinned by blockchain technology akin to that powering digital currencies. It prioritizes positive reinforcement, transforming potential conflict into collaborative progress.
The Mechanics of LER:
Fundamentally, LER employs blockchain to deliver time-weighted rewards, wherein the duration of share ownership directly correlates with the magnitude of benefits. This design discourages impulsive divestitures, particularly during proxy battles, while preserving the fluidity of capital markets. The system’s operation can be distilled into key components:
Tokenization of Equity: Corporations digitize shares as blockchain-based tokens, drawing on initiatives like NASDAQ’s tokenized securities platform. This converts conventional stock into programmable assets—secure, auditable, and transferable with immediacy.
Bifurcated Structure for Adaptability: LER operates across dual planes:
- Off-Chain Vouchers: These facilitate seamless integration with traditional trading platforms, such as brokerage applications, manifesting as digital entitlements linked to ownership records.
- On-Chain Units: Leveraging smart contracts on the blockchain, these automate reward accrual and disbursement, calibrated precisely to holding periods.
Utility-Focused Incentives: Rewards eschew voting enhancements or dilutive issuances, focusing instead on practical value. Distributions may take the form of stablecoins—digital assets pegged to fiat currencies for stability—or liquid staking derivatives inspired by decentralized finance (DeFi). In DeFi paradigms, such as those in Ethereum ecosystems, participants earn yields on staked assets without forgoing liquidity, enabling sales or collateralization alongside accruing benefits.
Practical illustration: An investor acquires shares in a corporation that has implemented LER. Upon six months of uninterrupted ownership, they receive tokens equivalent to 2 percent of their position’s value, redeemable at a network of merchants. During an activist incursion, extended holders might qualify for amplified rewards, thereby bolstering the case for continuity. This approach builds upon validated technologies: NASDAQ’s security token protocols ensure regulatory compliance, stablecoins provide value constancy, and DeFi’s liquid staking models demonstrate proven efficacy in yield generation. Deployment could occur through a straightforward board resolution, harmonized with extant capitalization tables.
Comparative Advantages Over Traditional Defensive Measures: One might inquire: Why innovate when refinements to existing tools, such as poison pills, suffice? LER complements rather than supplants these instruments, offering a forward-looking evolution. Whereas poison pills react defensively and may provoke antagonism, LER proactively cultivates partnership.
- Superior Efficacy: LER could diminish activist triumph rates by 15 to 30 percent. By erecting a “loyalty barrier,” time-sensitive incentives render short-term interventions less viable, as opportunistic actors forgo accruing bonuses. Proxy simulations reveal a 10 to 20 percent reduction in share price volatility during campaigns, benefiting all stakeholders through enhanced predictability.
- Broader Stakeholder Alignment: LER extends its utility to pressing governance challenges
- Mergers and Acquisitions: Prolonged holders gain enhanced influence over transactions, mitigating unsolicited bids.
- Political Engagement: Rewards could be conditioned on disclosures of political action committee expenditures, promoting accountability in advocacy.
In contrast, poison pills have encountered judicial constraints, as evidenced in high-profile disputes like the acquisition of Twitter by Elon Musk. LER, by contrast, promotes cohesion over confrontation. For legal practitioners, LER’s compatibility with prevailing norms is reassuring. Under Delaware corporate law—governing the majority of U.S. public entities—directors possess broad discretion to implement non-dilutive, utility-based incentives, provided they uphold fiduciary duties and transparency. Absent share dilution, such measures encounter minimal resistance. Securities regulations in the United States accommodate tokenized equities through frameworks like Regulation Crowdfunding, with stablecoins regarded as cash equivalents. In the European Union, alignment with the Markets in Crypto-Assets Regulation (MiCA) supports utility token deployments.
Potential vulnerabilities, including cybersecurity risks or evolving oversight, warrant vigilance. Yet blockchain’s immutable ledger surpasses legacy documentation in resilience, with embedded auditing protocols. From a fiscal perspective, initial implementation for a mid-sized enterprise might range from $500,000 to $2 million, offset by substantial savings from averted activism expenses—often exceeding $50 million per engagement—and access to the burgeoning $900 billion activist asset pool.
Implications for Corporate Governance: LER represents not merely a tactical defense but a scalable blueprint for governance reform. Initial adoption could commence with targeted pilots, expanding to encompass S&P 500 constituents. Amid the $10 trillion migration to risk-oriented investments, LER captures enduring value by tethering capital to commitment—a principle resonant with the philosophies of investors like Warren Buffett, amplified through technological precision. Concerns regarding equity, such as preferential treatment for large holders, can be mitigated via graduated thresholds and proportional allocations. For individual investors, integration with platforms like Robinhood would render these benefits universally attainable, broadening participation.
In essence, LER reorients corporate stewardship from adversarial posturing to mutual advancement. It equips directors to affirm: “We are constructing value in concert with you.” As activism matures, so too must our instrumentalities. LER heralds not defense alone, but deliberate evolution.
I invite your perspectives: Might LER temper the tempests of corporate contestation, or does blockchain’s novelty pose undue challenges for established markets? Your insights in the comments are most welcome.
Dr. Wulf A. Kaal is an Associate Professor at the University of St. Thomas School of Law, with expertise in empirical corporate governance, artificial intelligence, and blockchain applications.
His essay, “Liquid Equity Rewards in Corporate America,” is available on SSRN (ID: 5583610). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5583610#:~:text=LER’s%20contributions%20include%20the%20potential,capital%20shift%20to%20risk%20assets.
Wulf Kaal 