COALA 2

Article 8. VOTING RIGHTS― The voting rights of Members will be distributed in the following manner: (1) The By-Laws must set out the distribution of voting rights of the classes of Members in a DAO. The method by which these voting rights are computed and distributed must be accurately set out in the By-Laws. Commentary Unlike modern corporations, DAOs do not need default voting rights because the distribution of voting rights must be proactively delineated when creating a DAO. Thus, there is there no need for a default rule for voting in the context of DAOs. Article 9. PROXIES― With respect to proxies: (1) The Members or Participants may represent themselves or be represented by a proxy. (2) Proxies may ask questions, vote and exercise all other rights of Members or Participants. 33 Commentary In contrast to the rule in some jurisdictions that equity holders, such as shareholders and cooperative members, cannot be represented by proxy, the Model Law embraces the contemporary practice of allowing proxy representation and voting. Delegation of voting rights is already common in DAOs operating today. For example, in the case of compound.finance, any COMP holder may delegate their voting rights to another Public Address. Many compound.finance votes have been 41 delegated to high profile ecosystem members.42 Article 10. MINORITY PROTECTION― In the interest of minority Members of DAOs: (1) The DAO must clearly state in its By-Laws whether it provides for any kind of minority rights protection. Commentary The protection of minority rights, such as those of minority shareholders, is an important principle in the corporate law of every jurisdiction. With respect to DAOs, the ease of entry and exit, in conjunction with the extensive disclosures inherent to such entities, act as a first line of protection for minorities against abuses by majorities. Furthermore, in line with the objective of using the DAO’s Dispute Resolution Mechanism to resolve disputes among Members (Article 4(1)(j)), minority Members may raise a dispute through the mechanism that is specified at the time of DAO formation. DAOs may wish to provide even greater protections to minority DAO Members, particularly in the event of major or contentious decisions and transactions. The Model Law provides room for such protections to be introduced through the DAO’s By-Laws (Article 10(1)). Several DAOs, for instance, have implemented “ragequit” features (e.g., MolochDAO, MCV), whereby Members unhappy with specific decisions may immediately exit the DAO with their proportional share of On-Chain funds. 42 Compound Finance, ‘Leaderboard’ (Compound Finance Governance, 8 May 2021) accessed 8 May 2021. 41 Compound Finance, ‘Delegate’ (Compound Finance Docs, 2021) accessed 8 May 2021. 34 Chapter 4 Internal Organization and Disclosure Article 11. INTERNAL ORGANIZATION― (1) The internal organization and procedures of the DAO must be set out in its By-Laws. Commentary The Model Law seeks to avoid being overly prescriptive about the internal organization of DAOs. Therefore, the founders, Administrators and Members of a DAO have considerable leeway in designing the internal organization and procedures of the DAO. This is akin to the flexibility afforded to LLCs in several US states, and to LLPs and private companies limited by shares in the United Kingdom. Given the nature of DAOs, several of these procedures will be part of the code of a DAO’s Smart Contracts, but to maximize accessibility to laypersons, these internal rules and procedures should be accurately represented in the DAO’s By-Laws as set forth in this Articles 11(1) and Article 4(1)(f). Article 12. MEETINGS― (1) A DAO will not be required to convene a general Meeting, but Meetings may optionally be included in the By-Laws; (2) There will be no requirement to have physical, in-person Meetings, unless explicitly specified in the By-Laws; (3) If the By-Laws do include a requirement to have meetings, it must have an explicit, transparent mechanism of giving 35 notice of Meetings to Administrators, Members or Participants, as well as a defined time period for deliberating upon submitted Proposals. This Notice must be communicated through a GUI. (4) The quorum and majority requirements for Meetings of DAO Administrators, Members or Participants will be specified in the By-Laws. Commentary In contrast to the archetypical Berle-Means corporation, characterized by delegation to day-to-day management, frequent board meetings and annual general meetings of shareholders, the current technical reality of DAOs means that any decision for an action is taken by way of Proposal, such that all On-Chain interactions may be considered part of a continuously ongoing online general meeting. Questions may be asked at any time and Proposals can be submitted continuously. This form of direct participation makes the separate organization of a Meeting redundant and potentially cumbersome. However, there may be DAOs which may find it necessary to organize Meetings, between Administrators, between Members or Participants and between all three, a need that can be met through appropriate provisions in the By-Laws. The global and digital nature of DAOs, in addition to the desire to preserve the anonymity/pseudonymity of stakeholders, militates against the holding of physical Meetings. If such in-person Meetings are compulsorily held, this should be specified in the By-Laws. If Meetings are required in a DAO, the requirement in Article 12(3) can be fulfilled through the practice of submitting a Proposal to a DAO as a suggestion for actions to be taken by the DAO, with this Proposal clearly visible on a GUI and open for a defined time period (e.g., 2 weeks) for deliberation and voting. The Article 12(4) requirements as to quorum and majority voting requirements can be technically set to prevent a Proposal from passage with insufficient quorum or by less than majority support. 36 Article 13. ADMINISTRATORS― With respect to the delegation of powers and duties to certain persons: (1) The DAO is not required to have Administrators, including a board of directors or a trustee, unless mandated in its By-Laws. In the absence of such a provision, all the powers and tasks of Administrators will be vested in the DAO Members as a class; (2) The voting mechanism for nominating and appointing Administrator(s) will be set out in the By-Laws. Commentary Article 13(1) makes horizontal, direct decision-making the default of DAOs, as opposed to the vertical, delegated management that can be seen in the typical Berle-Means corporation. The specific manner in which decision-making power and tasks are distributed is to be determined by the DAO itself in its By-Laws. This, naturally, can include opting for some form of delegated decision-making. Where a DAO has appointed one or several Administrators(s) to represent the DAO, the Administrator(s) will be elected by the DAO Members according to a procedure agreed in the By-Laws of the DAO. The DAO’s public documentation will explicitly state who the authorized Administrators(s) are. 37 Article 14. LEGAL REPRESENTATION― With respect to the appointment of Persons to complete Off-Chain tasks: (1) A DAO may choose to have one or more Legal Representatives to undertake tasks that cannot be achieved On-Chain. Legal representation can be limited to specific tasks, or it can be generic to a broader category of tasks. (2) Legal representation of the DAO will be carried out by the Legal Representative in the manner provided in the By-Laws and as evidenced by an authorization displayed on a Public Forum, whose validity must be verifiable by cryptographic proof. The Legal Representative(s) may undertake and execute any and all acts and contracts included within the scope of such authorization. (3) There are no requirements as to the residence or seat of the Legal Representative(s). (4) A Legal Representative will not be personally liable for acts done on behalf of the DAO. Commentary The position of Legal Representative was created to enable DAOs to engage with Off-Chain systems and processes, which may be increasingly necessary as DAOs become involved in increasingly complex tasks and activities as well as engagement with traditional third party entities. As it cannot be expected that all foreseeable actors will interact with the DAO On-Chain, the appointment of a Legal Representative allows for DAOs to undertake specific tasks and activities—without leading to classification of such Persons as fiduciaries of DAOs. 38 To give third parties transacting with DAOs assurance that a person is authorized by the DAO as a Legal Representative, the continued validity of an authorization should be verifiable by cryptographic proof and simultaneous post in the Public Forum. If the authorization of a Legal Representative is withdrawn, it should be withdrawn in the Public Forum in which it was originally granted, as well as On-Chain, in order to prevent tampering. In this instance, an example of a Public Forum could be a website administered by a centralized operator or hosted in a decentralized manner. A cryptographic proof could be a plain text message cryptographically signed by a DAO multisig or individually by a quorum of signers. Article 15. NO IMPLICIT FIDUCIARY STATUS― With respect to Persons who make discretionary decisions in the interest of the DAO or specific stakeholders: (1) Developers, Members, Participants or Legal Representative of a DAO must not be imputed to have fiduciary duties towards each other or third parties solely on account of their role, unless: (a) They explicitly hold themselves out as a fiduciary. (b) Their fiduciary status is stipulated in the DAO’s By-Laws. Commentary In broad terms, a fiduciary is a Person who is entrusted with the responsibility of acting in the best interest of another party and a fiduciary duty is a legal obligation that seeks to ensure said Person does in fact act in such a manner. Fiduciary duties are typically assigned ex ante on the basis of a specific role (director, trustee, etc.), or they are imputed ex post by a court to remedy for unconscionable conduct in a relationship of trust and confidence. Among examples of ex ante allocation of fiduciary duties is the corporate board members’ fiduciary duty to a corporation and a trustee’s fiduciary duties to the trust's beneficiaries. Thus, typically, a fiduciary is 39 aware of the fact that they are acting as fiduciaries on behalf of another party and will accept legal and ethical obligations that flow from holding such a fiduciary position. Fiduciary duties include the duties of good faith, care and loyalty, and as these duties are open textured, objective or subjective standards are used to assess whether such duties have been violated. However, as breaches of fiduciary duty entail significant penalties for Persons held liable, only egregiously self-serving or negligent conduct by Persons with control and wide discretion over a particular asset, information or set of decisions are found guilty of such breaches. Ordinary errors or failures that occur as part of the operation of a business are sometimes protected by some version of a ‘business judgement’ rule. In short, courts are reluctant to intervene in run-of-the-mill commercial decisions. Blockchain Developers, like most open source developers, make their code available for public inspection and use code repositories such as Github. They do not have control over the ways in which their code, once written, is used or modified, nor can they usually impose a particular code change onto the users of the software once released. Every blockchain node must willingly upgrade their software in order to incorporate a particular code change. Unlike service providers who can force changes into an online platform without the consent of their user base, blockchain Developers have no power to impose any code change on the blockchain nodes. Similarly, and as opposed to many commercial cryptocurrency exchange operators or custodial wallet providers, individual DAO Members and Participants do not usually have full control over the operations of the DAO, although they might have different degrees of influence to the extent that they can participate in the DAO’s governance. It would be unfair to hold these Members and Participants collectively liable by default, for specific operations that they did not explicitly undertake or operations they did not agree to in the decision-making process. Finally, the DAO’s Legal Representative, unless specified otherwise, is merely an agent with limited and narrow discretion, appointed for undertaking only specific administrative or procedural tasks mentioned in the By-Laws, as opposed to taking decisions on behalf of the DAO. The DAO’s Legal Representative should not be considered to hold any fiduciary duties towards any of the DAO Members or third parties affected by the operations of the DAO. Accordingly, to ensure that Developers, Members, Participants and Representatives of a DAO are not implicitly classified as fiduciaries arising from their conduct in relation to a DAO, the Model 40 Law clearly states that a fiduciary relationship does not arise solely on account of their role. The Model Law acknowledges that there may be circumstances in which a DAO wishes to assign fiduciary duties to specific Administrators, Members, or Representatives, and therefore provides for such a fiduciary position to be created via the DAO’s own By-Laws or through explicit action of the fiduciary (Articles 15(1)(a)-(b)). This Model Law does not circumscribe the power of a judicial authority to impute fiduciary duties on a Person ex post on account of actual unconscionable behaviour, as opposed to such duties being imposed on any Person who holds a particular role. By clarifying the nature of DAO stakeholders’ responsibilities and powers, we seek to provide greater legal certainty to these stakeholders

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