FIRST DRAFT of ENS DAO BY-LAWS

[inplco]

I agree on the need for a call

[berrios.eth]

I going to go through this thread and incorporate or address some issue and provide the Second Draft this weekend.

[berrios.eth]

I disagree; the grant process needs more formality because of the expenditure of DAO assets.

[carlosdp]

I’m not arguing one way or the other, I’m saying that today, the agreed upon governance process the DAO passed doesn’t discriminate on the type of proposal. So I don’t see why grants today wouldn’t be covered by the current proposal process, like any other proposal.

[berrios.eth]

I understand your point. Because a formal process has not yet been developed, the current process is the process.

[serenae]

@inplco @berrios.eth FYI, something that we could consider for future social proposals: Possible New Snapshot Strategy for Social Proposals

[nick.eth]

@KLeong

Simply because the Foundation ‘represents’ the DAO in the real world, however, does not mean they are the same. If the two are conflated without being extremely specific, legalistic, and focused on the facts specific to the situation to which we are referring, we risk diluting the very protections the legal entity - the Foundation - provides. This can potentially putting at risk individual tokenholders for anything the DAO does as a whole, violating tax requirements, being liable for a portion of the DAOs income, along with some other potential items I can think of. Sorry to be hammering on about this, but, it is super important to get this correct.

Can you elaborate on this? I’m not a lawyer, but my understanding is that those kinds of risks would come from not being viewed as a single entity.

@ENSPunks.eth

If this makes sense we should start by creating a list of questions/topics to be discussed starting with the goals of the proposed DAO By-Laws as originally outlined by Nick and coordinate a date/time thereafter.

Agreed, we should start compiling a list of topics that need to be addressed by any DAO bylaws. Here are the ones that have come to my mind:

1. Proposal process
   a. Format of a proposal
   b. Proposal lifecycle states: Draft, Active, etc. See Governance Process - ENS Documentation
   c. Criteria for advancing to each stage in the process.
   d. Who posts votes on Snapshot and how
   e. Acceptable voting strategies (simple voting, ranked choice, etc) and how they are selected
   f. If and how successful snapshot votes can be combined for onchain voting
   g. Handling Snapshot proposals put forward outside this process
2. Grants
   a. Application process.
   b. Eligibility criteria
   c. How to determine when a grant is handled by a WG or the whole DAO.
   d. WG steward involvement and responsibilities for DAO-wide grants.

[bendi]

@nick.eth

It may be simpler to have separate bylaws, though; the Foundation ones can be written by the lawyers and as straightforward as possible, while the DAO bylaws can cover day-to-day DAO operations (many of which will not involve the Foundation taking any action) and be more easily extended and amended.

I guess I don’t understand what the idea of separate by-laws because by-laws can only be enforced by a legal jurisdiction, right? And if the Foundation is the legal face of the DAO, how can you have separate by-laws that apply to the DAO but not the Foundation?

Or, to ask the same question in reverse: by what mechanism can by-laws “for the DAO” ever be enforced?

[berrios.eth]

I disagree. By-laws are an intra-organizational set of rules of governance. The only way they can be enforceable in a court, is if there is a clause that makes them an enforceable contract and provides for a right of action.

[nick.eth]

@bendi

I guess I don’t understand what the idea of separate by-laws because by-laws can only be enforced by a legal jurisdiction, right? And if the Foundation is the legal face of the DAO, how can you have separate by-laws that apply to the DAO but not the Foundation?

Like Berrios says - the DAO bylaws would specify how the DAO conducts itself. They don’t need to be enforceable outside the DAO by a legal mechanism.

[berrios.eth]

@bendi

I would go one step further. The DAO (or an ENS Tokenholder) has no standing to sue the directors or The ENS Foundation. Because the ENS Tokenholders have no capital interest in the Foundation Company, there’s no standing to bring a derivative action, nor is there anything like a class action under Cayman Islands’ law. Generally, it is the Foundation Company who has standing to sue a director for breach of duty or breach of fiduciary duty for pecuniary loss. This is not legal advice.

[estmcmxci]

This is great. Going to get familiar with this. Would be awesome to have a short-form version of the By-Laws made easily accessible by the greater community; for the sake of accessibility and transparency.

[KLeong]

@nick.eth

Can you elaborate on this? I’m not a lawyer, but my understanding is that those kinds of risks would come from not being viewed as a single entity.

I think the problem becomes a significant issue when the term “DAO” is being used as a term as if it has a corporate identity, or as if it is the Foundation. For example, here are two fact patterns - using only a slight tweak of language (NOTE - none of this is legal advice):

Let’s say a proposal is put forward to transfer the ENS Treasury from the ENS Multisig to another entity.

In Scenario 1, the Treasury is proposed for transfer from the ENS Multisig to ENS DAO. This is basically the language in EP1.

Although it is hard for me to find a ‘legal’ definition of the ENS DAO - let’s say the ENS DAO is equivalent to the Council, as defined in the Articles of Association of the Foundation, and is basically ENS Tokenholders. In the proposal, there appears to be no mention of the Foundation. As a result, the ENS Multisig is transferred to the DAO - ENS tokenholders - which, as a result of having no specific corporate identity or designation, would likely be categorized as a General Partnership (GP) under certain jurisdictional requirements (e.g., U.S.) (although local tax/corporate counsel would be best situated to make a formal determination on this). This designation comes with significant tax implications and liabilities. Generally (in the U.S. at least), all partners (i.e., all tokenholders) could be 100% personally liable for all actions of the DAO (the partnership). In other words, if a lawsuit was brought as a result of any issue with the Treasury, liability is not limited to a corporate entity but actually extends to all members/tokenholders. Basically, the important protections that are beneficial for working within a legal/corporate structure are not available here based on drafting that gives ‘control’ or ‘ownership’ to the DAO (not a legal structure or entity).

Scenario 2 - Alternative Language: "Treasury is proposed for transfer from the ENS Multisig to the ENS Foundation, in its capacity to develop, incentivize, and support the growth of the protocol, decentralized network, and ecosystem - including the DAO. The DAO (“DAO or “Council”), having been appropriately delegated powers pursuant to Article XX to manage affairs related to the Treasury, shall be able to do X.” Language similar to this would provide significantly more liability protection to members who generally would not have 100% liability under a corporate legal structure like a Foundation, as well as certainty with respect to tax implications as a result of the Treasury being encompassed within a Foundation Company, duly incorporate within the Cayman Islands. And, with careful drafting, the DAO/Council could likely avail itself of the protections that being under the Foundation provides, while ensuring the DAO has full control over any actions that are taken with respect to the Treasury.

Although the language is only slightly different - Scenario 1 is transferring to the “DAO”. Scenario 2 is transferring to the “Foundation” (with significant delegated power to the DAO to control the Treasury). However, liability and corporate protections afforded under each structure is completely different. If everyone voted for Scenario 1, with the complete understanding of the risks, liabilities, and responsibilities that it comes with - everything is fine. The problem arises when Scenario 1 language is proposed, but everyone assumes that the protections in Scenario 2 are provided (limitation of liability, clarity on any tax obligations or requirements). When, in fact, they are not.

I am not here to say Scenario 1 is a better option, or Scenario 2 is a better option - but simply that they are different. Hopefully this examples helps explain why the terms Foundation and DAO cannot and should not be used interchangeably, and are not the ‘same’ entity.

[berrios.eth]

The DAO does not have a corporate identity; it is a beneficiary of the Foundation Company. I generally agree with scenario 2, because the directors should keep oversight over funds. Even if there is a transfer of the Treasury to the DAO, there should be a residual interest for oversight purposes, which the Foundation Company can’t escape, because of fiduciary obligations.

[bendi]

@nick.eth

Like Berrios says - the DAO bylaws would specify how the DAO conducts itself. They don’t need to be enforceable outside the DAO by a legal mechanism.

So what happens if there is a dispute, or if someone within the DAO simply doesn’t follow the by-laws? How is this resolved?

[berrios.eth]

@bendi

So what happens if there is a dispute, or if someone within the DAO simply doesn’t follow the by-laws? How is this resolved?

Dispute between whom? If someone within the DAO doesn’t follow the DAO by-laws, the DAO can enforce it by removing the Steward(s). Except where recommended in connection with indemnification, there are no individual rights because the by-laws pertain to operations and not personal conduct.

[KLeong]

@berrios.eth

The DAO does not have a corporate identity; it is a beneficiary of the Foundation Company. I generally agree with scenario 2, because the directors should keep oversight over funds. Even if there is a transfer of the Treasury to the DAO, there should be a residual interest for oversight purposes, which the Foundation Company can’t escape, because of fiduciary obligations.

1. I agree with the “DAO does not have a corporate identity.” statement. I am not clear what is meant by being a ‘beneficiary’. (Article 37 specifically indicates the Foundation does not have any beneficiaries). But perhaps, you meant this in a different meaning of beneficiary.
2. I think it should be noted that in this situation - Scenario 1 was already voted on re EP1: Snapshot and passed. Not an issue, if everyone intended for the risks, liabilities, tax implications, etc to occur as outlined in Scenario 1. But, if the assumption was that there would be a corporate veil around this transaction somehow - I think that is where the issue comes in.
3. I am not sure what is meant by ‘residual interest for oversight purposes’ means. I agree there ‘should be’ in theory - although I would also clarify that I do not believe there currently is, as structured. Other than the rights the Council/DAO has over the Foundation as specified in the Articles, I would be interested to know where any ‘fiduciary obligations’ stem from. I think the Foundation has the requirement (or could easily be structured to) follow the instructions from the DAO/Council in accordance with the Articles. But that does not necessarily lead to an overarching fiduciary duty to the DAO (if structured correctly, possibly a contractual duty? Although again, as currently structured, I do not think either of these types of duties exist). Could you explain your rationale a bit more so I understand from where this fiduciary duty form the Foundation to the DAO would stem from?

[berrios.eth]

The use of “beneficiary” in the AOA pertains to person(s) entitled to the remaining assets, if any, of the Foundation Company, if it winds-up its operations. This is something unique to not-for-profits, that no person is entitled to the remaining assets of a dissolved NFP; the assets are given to another NFP with a similar mission, or as close as possible.

Beneficiary in the context that I use it, is as the “object” of the Foundation Company’s charitable work or mission.

I can’t speak to reason of EP1, but the corporate veil of the Foundation Company can encompass the DAO, which is implementing, through delegation of duties by the Foundation Company, its objectives.

Residual interest is where the delegation of power is not complete but reserves an interest of power to the delegator. This is important because the directors have a fiduciary duty in connection with the safeguarding of funds.

The best way to understand The ENS Foundation is as a NFP and the DAO as a wholly owned unincorporated operation.

[nick.eth]

@KLeong

I think the problem becomes a significant issue when the term “DAO” is being used as a term as if it has a corporate identity, or as if it is the Foundation.

Right, but your earlier post suggested that there was a risk that comes from being viewed as the same entity, not the reverse:

@KLeong

Simply because the Foundation ‘represents’ the DAO in the real world, however, does not mean they are the same. If the two are conflated without being extremely specific, legalistic, and focused on the facts specific to the situation to which we are referring, we risk diluting the very protections the legal entity - the Foundation - provides.

@KLeong

In Scenario 1, the Treasury is proposed for transfer from the ENS Multisig to ENS DAO . This is basically the language in EP1.

This is a good point. However the vote was worded, though, TNL (the previous legal holder of the funds) memorialised this as a transfer to the Foundation in a letter.

[ENSPunks.eth]

With confirmation by @nick.eth that the Treasury wallet/funds are an asset of The ENS Foundation controlled by the DAO/Council (the “Account”), I am reposting a diagram I modified from @inplco’s diagrams as it helps visualize some of the gaps between the authorized activities of the DAO/Council and the anticipated/actual activities by the DAO/Council at this time.

Essentially everything above the DAO/Council in the diagram is created by the Foundation Company Act and/or expressly authorized in The ENS Foundation Memoradum of Association/Articles of Association (beneficiaries intentionally omitted). However, everything below the DAO/Council has been created by the DAO/Council. Specifically, the DAO/Council has authorized the creation of the Working Groups to be led by Stewards elected by the DAO/Council that will be funded by the DAO/Council using funds from the Foundation Account which will be used to: 1) pay the Stewards compensation and 2) fund Sub-groups and grants in the discretion of the Working Groups. Unless I have overlooked something, the DAO/Council does not have express powers to create these Working Groups nor fund them using the Foundation’s Account. We can cure this by: 1) the Directors passing a Resolution empowering and authorizing the DAO/Council, in its sole discretion, to create the Working Groups and fund them using the Foundation Account; 2) memorializing these powers/activities in the Foundation’s By-Laws (to be drafted by Fenwick); or 3) revise the proposals such that the DAO/Council doesn’t create the Working Groups rather the DAO/Council authorizes the Directors to create the Steward Led Working Groups and we can create a transaction layer where the DAO/Council transfers the Working Group budgets/funding to the Directors and the Directors fund the Working Groups on behalf of the Foundation (note, the only reason I suggest #3 is that the Directors already have the power under the Articles to create “committees, local boards, agencies” and the Working Groups likely fall nicely within this existing framework, see Section 21-22). No matter the solution, inevitably I think this naturally leads to the question of the legal relationship between the Foundation and the Stewards, which should likely be codified in independent contractor agreements between the Foundation and the Stewards to minimize risks of any employment claims against the Foundation.