Introduction
This paper sets out proposals to implement a legal wrapper entity to represent the DAO, outlines why using a company limited by guarantee as the legal wrapper for the DAO is useful, how stakedotlink is and would be structured, and the governance rights in respect of stakedotlink.
The proposal is being submitted by LinkPool, in its key role as a member of the stake.link protocol.
By way of background, LinkPool and certain members of the stake.link community engaged leading international English and British Virgin Islands legal counsel. These law firms are active in the blockchain space and together with accountancy and tax advisors, have advised on the design of an appropriate legal entity that can (a) serve as a real-world extension of the DAO; (b) act as a legal wrapper and enable the DAO to take actions which must be taken by a legal person. Using a legal wrapper will also provide the protection of the corporate veil to members of the stake.link community, who could otherwise, in certain circumstances and jurisdictions, be potentially held individually responsible and liable for governance decisions made in respect of the DAO – implementing these acts through a legal wrapper such as stakedotlink aims to mitigate the risk of individual DAO members being personally liable.
A range of possible legal, governance and operations structures were considered to represent the DAO. A BVI company, limited by guarantee, which is not authorised to issue shares was determined to be the most suitable structure. This also takes into account regulatory, tax and corporate governance matters as well as overall costs and expenses.
Working with advisors, the governance and constitution for stakedotlink has been prepared. The new BVI company limited by guarantee has been incorporated, and reputable service providers have been selected who will administer stakedotlink to implement the decisions of the DAO.
Upon approval of the proposal, the new governance arrangements (as described herein) can be implemented immediately and steps can be taken to implement the operations and transfer of the DAO to stakedotlink.
Approving this proposal would enable the DAO to carry out acts off-chain, including “real world” activities that require human actions, legal identity and/or non-blockchain based assets to execute. This will therefore facilitate the further development of the DAO, while providing appropriate risk mitigation to members of the stake.link community.
Important notes
This proposal is not a prospectus and does not constitute or form part of any offer, invitation, or solicitation of any investment and does not pertain in any way to an offering, invitation, or purchase of securities in any jurisdiction.
This proposal has not been and will not be submitted to, registered with, reviewed or verified by any regulatory authority in any jurisdiction. No regulatory authority has examined or approved this document, and no action has been or will be taken in respect of obtaining such approval under the laws, regulations or rules of any jurisdiction.
No representation, warranty, undertaking or assurance whatsoever is made with respect to SDL tokens or stakedotlink (including their fitness for particular purposes).
No information in this proposal shall constitute or be construed as business, legal, financial or tax advice regarding SDL tokens or stakedotlink. You shall consult your own legal, financial, tax or other professional advisor regarding the proposals and other matters contained herein.
This proposal is not a definitive statement of the legal position or structure of stakedotlink. It should also not be taken to be a guarantee or any form of assurance that stakedotlink will be treated as legally representing the DAO under all relevant laws and in all relevant jurisdictions.
Recipients should make their own decision in respect of supporting or withholding support for the proposal contained herein and should consult with their own advisors if they have any questions relating to the proposal or its impact on them or their own position.
Legal and tax advisors who have assisted with the development of this structure have been engaged by LinkPool for such purposes and no other person may rely on the legal or tax advice provided by such advisors.
There is significant legal uncertainty relating to cryptoassets and DAO structures, and no representations are being provided relating to the implementation of this proposal or whether it will achieve the objectives set out herein.
What will stakedotlink do?
stakedotlink will take on activities delegated to it and as approved by votes of the community. It will become the instrument through which the DAO conducts off-chain activities. Such activities will include things which need a legal contract to be entered into to further the purposes of the DAO, matters which require payments to be made in fiat, and generally activities which are required to be conducted off-chain. Custody of the DAO treasury will remain within the current multi-sig arrangements. The current multi-sig holders will continue to operate on instruction from the Council (as defined below), but will do so for the benefit of stakedotlink as the legal representation of the DAO.
In short, stakedotlink is designed to act on and implement proposals as directed by the DAO. Its uses and governance arrangements may develop further over time, at the direction and votes of the community.
Why a legal wrapper is required
There are a number of reasons why a legal wrapper would be beneficial to the DAO and the community, but a few fundamental points are as follows:
-
a corporate wrapper seeks to provide limited liability to holders of SDL tokens for the actions of the DAO. Without a legal entity, it is significantly more likely that in certain circumstances holders could be personally held liable for anything the DAO as a whole does;
-
it can be advantageous from a tax and legal certainty perspective - without a legal entity, there is no legal segregation of assets, revenues or liabilities, meaning that the DAO and one or more individual participants may be held liable for a proportion of the DAO’s income/gains, even if they are not able to access these funds; and
-
a legal wrapper is capable of entering into contracts with other “real world” entities, holding assets, setting up operating organizations, enforcing contracts and generally carrying out “off-chain” activities.
Corporate structure
stakedotlink has been carefully designed, with the benefit of professional advice, to include a number of features which will best give effect to representation of the DAO within a legal wrapper.
As a BVI business company limited by guarantee without shareholders, stakedotlink benefits from a corporate structure which gives rights to tokenholders, free of traditional concepts of “ownership”:
- no shareholders – stakedotlink doesn’t have any shareholders or other person entitled to economic ownership or claim to a distribution of the assets of the DAO. Freedom from such traditional ownership structure and using a structure which is well known in the context of not for profit entities enables stakedotlink to be operated in the interests of the community it serves rather than in the economic interest of an owner;
- guarantee member – stakedotlink has a guarantee member, who provides a guarantee (of up to US$1.00) of the liabilities of stakedotlink in the event of its liquidation. The guarantee member’s role under the governing documents is primarily to supervise the board of directors of stakedotlink and enforce the governing documents (including in respect of matters proposed by the community and ratified by the governing council of the DAO (the “Council”)). A guarantee member has legal standing under BVI law to enforce the memorandum and articles of association and as these specifically provide for the directors to respect tokenholder rights (and give effect to the same in various instances), the guarantee membership provides an important safeguard for community interests;
- tokenholder entitlement to become guarantee member - as a novel and unique design feature to bolster such rights, tokenholders will be given a right under the governance documents to be admitted as guarantee members of stakedotlink. This right has been hardwired into the governance documents, and provides a direct means for any tokenholder to be able to have standing to directly enforce the governance documents;
- director – stakedotlink is managed by its director, who is under fiduciary duties to act (among other things) in the best interests of the company. The purposes of stakedotlink have been drafted to ensure that this means that the director will have to discharge its duties in the furtherance of the interests of the community. In addition, under the governance documents the director is required to give effect to Council votes, as further detailed below (subject to certain limitations, for example if any such act were to be illegal or in breach of the director’s fiduciary duties). stakedotlink has initially been set up with a corporate professional director from Little Bay Directors, being a reputable and experienced independent professional director based in the British Virgin Islands. More information on Little Bay Directors can be found here: https://littlebayconsulting.com/directorship-services
- community rights: stakedotlink seeks to preserve the current governance arrangements within the new corporate structure. These arrangements may evolve over time in accordance with proposals and votes under the current governance system, and as such arrangements develop the constitution of stakedotlink is designed to be able to evolve in a corresponding manner. As currently provided, stakedotlink gives effect to voting rights of the Council in respect of community proposals and protection of the current governance system, including in respect of the right to:
- change the name of the company (clause 2 of the memorandum);
- change the registered agent and/or registered office of the company (clause 6 of the memorandum);
- amend the memorandum and articles of association (clause 16 of the memorandum);
- be admitted as a guarantee member of the company (article 7A);
- expel guarantee members who are tokenholders (article 12);
- require the convening of a meeting of guarantee members (article 25);
- nominate directors (article 49);
- remove directors (article 52);
- direct matters relating to the management of the business and affairs of the company (article 60A);
- approve or reject the exercise of borrowing powers of the company (article 68);
- approve the variation or revocation of bylaws (if any are adopted) (article 92);
- approve the voluntary liquidation of the company (article 126 and article 126A); and
- approve the migration of the jurisdiction of registration of the company to a jurisdiction other than the BVI (article 129).
Documents
Drafts of stakedotlink’s proposed memorandum and articles of association (being its primary initial governance documents) may be found here. If proposed and determined by tokenholders, stakedotlink may amend its governance documents, and the initial documents also contemplate for bylaws to be adopted if proposed and approved, which may further regulate how community proposals and Council votes are implemented through stakedotlink.
Budget
For the establishment of the new stakedotlink structure to embody the DAO and give effect to the proposals above and for the first year of fees, the anticipated budget is c.US$90-110k, broken down as follows:
| Service | Cost (US$) |
|---|---|
| Directors | 30,000 -40,000 (depending on time costs) |
| Guarantee member | 5,000 |
| One off incorporation cost | 2,180 |
| Registered agent and registered office | 3,650 |
| Legal | 45,000 – 50,000 |
| Miscellaneous / ad hoc ongoing costs | 5,000 |
Next steps
All the necessary documents have been drafted and the team is in place to adopt the new governance structure through stakedotlink, transfer the DAO to stakedotlink and thereafter for stakedotlink to represent the DAO. The project and transition to stakedotlink will be enacted promptly after approval of these proposals.
FAQs
Why is a BVI company limited by guarantee being used and not another structure?
We considered a range of different options for the legal wrapper and discussed with legal counsel, including looking at other jurisdictions, foundation companies and trusts. In the end, the flexibility offered by the BVI company limited by guarantee, the tax neutrality of the jurisdiction, the familiarity of service providers and industry participants with the BVI as a jurisdiction, and the regulatory environment led to us deciding that a BVI company limited by guarantee was the best solution for our community.
How does this corporate structure help tokenholders and Council members not be subject to liability?
Once the legal wrapper is in place, the company (as a corporate entity) will be responsible for the actions it takes on behalf of the DAO. The BVI offers robust protection via the corporate veil, and generally (for example, absent fraud, a structure being a sham or in respect of certain criminal legislation) directors, shareholders, Council members, tokenholders and other parties will not be directly liable for the acts of the company. This is a key advantage of using a legal wrapper such as the company.
How does the community exercise its rights to direct the company to do something?
As noted above, the existing governance arrangements will be implemented through the new company. The community will continue to be able to elect certain members of the Council, submit proposals and the Council will continue to be responsible for voting on and ratifying such proposals. Through provisions hard-wired into the constitution, the directors and guarantee member are obliged to give effect to such rights. As such, tokenholders can continue to submit proposals, the Council will continue to vote on matters and the company will give effect to the outcome of such votes (subject to very limited exceptions, for example if something would be illegal or cause a breach of fiduciary duty of the board). We have also designed a novel mechanism to enable tokenholders to have direct standing to enforce the constitution, by conferring on tokenholders a right to become a guarantee member. We believe that this confers greater protective rights for tokenholders than is often seen in projects like this.
What controls are there on the directors and the guarantee members?
The Council will have the ability to vote to appoint or remove directors at any time (including where a proposal is submitted to be voted on by the Council). Tokenholders also have the ability to become guarantee members which gives a direct right to enforce the articles. The community could also decide to introduce additional requirements as to governance arrangements, for example requiring periodic rotation of directors, introducing term limits or other controls. These are not contained in the current governance documents but can be submitted by the community by way of proposal and voted on by the Council at any time.
Directors are also subject to fiduciary duties and are required to act in the best interests of the company. Given the governance arrangements in the memorandum and articles, this in practice will mean that the directors are under a duty to implement the will of the community (if approved by and expressed through a vote of the Council) unless such act would be illegal, contrary to the provisions of the company’s memorandum and articles or the directors determine that it is not in the best interests of the company.
The articles also provide that the guarantee member must exercise its rights to ensure that the directors manage the business in accordance with the purposes of the company.
What prevents a bad actor from gaining overall control by becoming a guarantee member?
The guarantee membership rights are limited and have no economic rights. We have further designed the guarantee membership rights which a tokenholder may obtain to being limited, essentially giving a right to enforce the memorandum and articles. In essence while this right gives a very useful protection to tokenholders, it is narrow in how it may be used and could require an application to court to enforce the contract in the memorandum and articles.
Can the directors misuse the treasury?
The treasury will continue to be operated in accordance with current multi-sig arrangements, which will not be affected by the new structure.
Who can fire directors?
The memorandum and articles provide that directors can be fired (i) by the Council (with or without cause), (ii) by a majority of at least 75% of the other directors (if there are three or more directors in office) (iii) by the guarantee members following a written proposal from the other director (if there are two directors in office) or (iv) where there is a sole director, by the guarantee members in the case of wilful misconduct, fraud or if approved by.
Can tokenholders sue or directly enforce the governance documents?
Yes! We have taken a novel approach in designing the governance documents in a way that we believe gives tokenholders a route to directly enforce the governance documents (through the exercise of the right to become a guarantee member). The guarantee member is required under the articles to exercise its rights in the interest of the attainment of the company’s objects and in the fulfilment of and to give effect to the determination of votes of the Council. As the directors are required to respect and give effect to votes of the Council, this adds an additional layer of protection and, in the event that the community believes that the directors are not properly carrying out their duties, there is the right to replace the directors through a proposal and vote of the Council.