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27 April 2020
The Foundation Companies Law 2017 was a welcome addition to the Cayman Islands legal landscape. The law introduced a brand new legal entity known as the 'foundation company' – a remarkably flexible vehicle that operates like an incorporated trust, allowing it to function like a civil law foundation or common law trust while retaining the separate legal personality and limited liability of a company.
The timing of the law's enactment was fortuitous as it coincided with the popularisation of decentralised autonomous organisations (DAOs), most of which utilise blockchain technology. As DAOs are launched with the goal of becoming fully decentralised and governed by the DAO's community, the foundation company vehicle helps the developers of DAOs to achieve their goals.
Developers are often reluctant to create a legal personality for the DAO as its purpose is to be a decentralised organisation that is governed by a community, so the idea of centralising responsibilities or ownership rights into a legal person is seen as anathema to the project's core values. Further, the legal structures available in many jurisdictions require a person or group to act as the owner of a DAO. However, DAOs without legal personality run into problems, including the inability to:
As a result, developers can sometimes find themselves carrying out actions on the DAO's behalf and, consequently, be personally exposed to potential liability.
The solution to the problems above is for the DAO to establish a foundation company. Similar to a typical company, a foundation company has legal personality to enter into contracts and undertake actions with third parties. It is also managed by directors who carry on the DAO's business. However, unlike a company, a foundation company can be structured without shareholders. Effectively, it can be ownerless, just like the DAO that it represents. In place of shareholders, a foundation company can be supervised by a supervisor (or even multiple supervisors). A supervisor has no ownership or economic entitlement in the foundation company but simply acts as a steward, ensuring that the directors of the foundation company observe their obligations to the DAO pursuant to the foundation company's governing documents. Therefore, with no shareholders, all of a foundation company's officers have the DAO's objectives as their priority, similar to trustees and enforcers carrying out the objectives of a trust.
As a further benefit, the law provides the utmost flexibility to a foundation company when drafting a DAO's governing documents. These governing documents comprise of the memorandum and articles of association. With some limitations and restrictions, a foundation company's memorandum and articles could include almost any form of governance structure, so long as the foundation company:
The directors and supervisors need not be natural persons (eg, they could be corporate vehicles) and could even be the same person. The memorandum and articles could mirror the governance structure of the DAO itself, with each user or node of the DAO entitled to one vote on any number and type of matter included.
At a minimum, the memorandum and articles could include provisions that require a DAO's directors and supervisors to carry out its decisions or provide that the directors or supervisors be nominated by majority resolution passed by the DAO. The possibilities are endless, and the foundation company's flexibility is a great advantage to any existing or future DAO.
DAOs often wish to hold assets for the benefit of the DAO community or issue tokens or distribute rewards to users. Once again, the foundation company is a perfect fit as it acts like a legal trust and has the power to designate beneficiaries. However, one particular benefit of the law's concept of a beneficiary is that it will not be treated as a beneficiary under a legal or common law trust arrangement. This is because the starting position under the law is that a designated beneficiary has no rights or powers against the foundation company.
Therefore, the law excludes the creation of any inadvertent common law trust rights and limits the beneficiary's rights to those expressly stated by the foundation company. This is particularly useful for DAOs which are then free to designate the users or the nodes of a DAO as beneficiaries but with limited rights.
Further, a foundation company need not maintain a beneficiaries register under the law. This means that a foundation company need not specify individuals as beneficiaries but can designate beneficiaries by class of persons (eg token holders or node operators) and reward beneficiaries according to class. While anti-money laundering considerations are always a factor, this could be particularly useful for DAOs built on blockchain technology where the DAO intends to undertake distributions, airdrops of tokens or other rewards to the DAO community.
As a DAO is decentralised and in theory has no fixed location, developers are reluctant to incorporate the DAO into any particular jurisdiction as this may lead to unintended and unwanted tax consequences. However, as a tax neutral jurisdiction, the foundation company need not worry about taxes being levied against it in the Cayman Islands.
Further, a foundation company limited by guarantee is specifically excluded from the economic substance regime of the Cayman Islands and therefore a DAO need not move staff, nodes or resources to the Cayman Islands to prove that it has substance. This means that the DAO can be a truly globally focused project. It also means that it can hold and even profit from the DAO's intellectual property (or any other relevant activity under the substance regime) without creating substance in any particular jurisdiction.
A foundation company has legal personality, can act like a trust, is inherently flexible, can have a truly global location and, under Cayman Islands law, is tax neutral. Arguably, the Cayman Islands' foundation company is the perfect fit for any DAO or other decentralised project.
For further information on this topic please contact Bradley Kruger or Michael Robinson at Ogier by telephone (+1 345 949 9876) or email (email@example.com or firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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