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.
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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.
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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.
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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.
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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.
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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.
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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.
- 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.
- 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.
- 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?
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.
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Right, but your earlier post suggested that there was a risk that comes from being viewed as the same entity, not the reverse:
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.
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.
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Why not just have the directors exercise their powers to delegate these responsibilities to the stewards, as duly elected by the council?
I would use the following language: “1) the Directors passing a Resolution delegating its power to the DAO/Council to create the Working Groups and fund them using the Foundation Account.” This is consistent with Article 18 of the AOA. Doing it this way, there would be no need for a vote by the DAO, just the directors on the resolution.
I’m not sure independent contractor agreements are necessary or a good thing. The Stewards are volunteers of the DAO; they are not managed by the Foundation Company. It’s best to keep the Foundation Company as the benefactor of the DAO, which is its “object” (i.e., beneficiary of the Foundation Company’s mission).
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We are on the same page, except I would delegate to the DAO.
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Unless I am misunderstanding your suggestion, this would be consistent with option #3:
Berrios.eth suggests a hybrid approach where the Directors, via Resolution, delegate the Directors’ existing power under the Articles specifically to empower the DAO the to create/fund the Working Groups. This works too, so long as we memorialize the DAO with these powers somewhere.
The IC relationship wouldn’t mean the Foundation manages the Stewards, rather the less control the Foundation has over the Stewards the better for purposes of a lawful IC relationship. The downside would be potential tax reporting requirements for compensation paid to the Stewards as Independent Contractors.
There may be some legal risks trying to frame the Stewards as volunteers because of the compensation they are going to receive, even if the Volunteer relationship could work in light of the compensation, Volunteering to the DAO but being paid by the Foundation Account creates other issues. For example, if a Steward were to file some type employment claim (e.g. Misclassification as a volunteer) , they would likely name both the DAO and the Foundation as defendants - this would result in at least the DAO having to authorize it’s own legal fees out of the Foundations Account which might be or could become problematic. If the Stewards are volunteers of the Foundation, then any potential claims by the Volunteer would likely be limited to the Foundation, effectively keeping the DAO insulated from any lawsuits and potential liability. I have strong concerns about the potential legal risks of classifying the Stewards as volunteers due to the compensation, but whatever the relationship (contractor/volunteer) and the parties (Stewards/Foundation or Stewards/DAO) everyone would benefit from memorializing the same in an agreement.
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I will try to reword: the DAO is not the Foundation. In other words, people are viewing the DAO = Foundation (ie, the same entity) - it is not.
The risk is, actions like EP1 are taken using the term DAO - as if the DAO is the Foundation. If EP1 had been executed on as it was actually voted on (Treasury transferred to the DAO), the risks and liabilities in Scenario 1 would be significant, in addition to creating a good amount of ambiguity. EP1 doesn’t even mention the Foundation.
However, as you mentioned, the Treasury was not transferred to the DAO, it was transferred to the Foundation (which, as a side note, I think is the correct structure actually - going to the Foundation.) However, if we are being technical and legally accurate, that is not what the DAO voted to do. The DAO voted for the Treasury to go to the DAO - not the Foundation. As a result, the argument could be made that the vote was not, in fact, executed on as instructed by the DAO. As we go forward, I am certain that we will evolve into more precise drafting and structuring the language to ensure all this is super clear, while at the same time ending up with the outcomes we want. We are not the only DAO having these discussions and challenges.
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Chipping in with my short contribution (as I am kept very busy in web2 life at the moment):
The DAO is not the Foundation, to paraphrase Kendra. One way to conduct a rudimentary check is to see if a liability or duty of one entity has a complement in the other. For two entities to be considered legally the same, they must share more liabilities and duties than not, quantitatively speaking. In other words, sharing some features is not sufficient, they should share most features. In that sense, DAO =/= Foundation.
The very fact that the Foundation needed to be created as an entity representing the DAO separates it from the DAO. If DAO could be the Foundation, Foundation wouldn’t be needed [?]
There’s a lot of questionable legal opinions in this thread (although I know at least a few people claim to actually be lawyers IRL), and I gotta be honest, a lot of what I’m reading doesn’t make sense to me (as someone that is not a lawyer, but has a lot of contract law experience as a founder and as a son/brother of active lawyers/legislators).
My recommendation here would be to follow @nick.eth’s original suggestion and let Fenwick start things off on the Foundation side, and the DAO right now should focus on the DAO bylaws (as in governance/proposals/etc) instead. If the separation between DAO/Foundation is still an open question (I think @nick.eth is right about them being separate, but it’s a reasonable confusion), I would still recommend pausing discussion a bit and ask Fenwick (or w/e firm) to give an actual legal opinion instead of us guessing. They can likely answer the question in like, minutes.
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