Decentralized Autonomous Organizations: When Code Mirrors Law – Corporate/Commercial Law

In this piece1, members of Mayer
Brown’s Digital Assets Initiative break down a digital-native
form of business—the Decentralized Autonomous Organization,
or DAO—and examine one of the first DAO mergers. We also take
a look ahead at ways that DAOs may become increasingly relevant to
established technology and financial services businesses.

Decentralized Autonomous Organizations – A Primer

DAOs are a form of digital-native business that can be organized
to do just about anything: management of a crypto protocol (MakerDAO), investment (MetaCartel Ventures), art collection (PleasrDAO), or even completion of a single
purpose (ConstitutionDAO). The key distinguishing
feature of a DAO—beyond its digital roots—is its
decentralized and autonomous governance structure.

Hyper-democratic by nature, DAOs are not historically creatures
of state law, unlike the predominant forms that most businesses
take—corporations and limited liability companies. Unlike
corporations and limited liability companies, DAOs do not have
boards of directors, managers or executive management; instead, in
a DAO’s purest form, decisions made by tokenholders are
implemented with self-executing smart contracts. While shareholders
and bylaws are the backbones of a corporation, the foundations of a
DAO are its tokenholders and smart contracts.

  • DAO membership is derived from ownership of the DAO’s token
    and is often permission-less. As with most crypto-tokens, these are
    typically freely-tradeable on decentralized exchanges or earned by
    performing actions the DAO seeks to encourage, such as providing

  • Smart contracts, a type of program stored on a blockchain,
    allow DAOs to forego many of the management and other authority
    structures of a typical organization by automatically executing
    actions when certain conditions are met, without need for
    intermediaries. Rules of the organization are made by members and
    encoded in smart contracts. Among other things, these rules control
    the DAO’s treasury and spending. Rules can be changed by vote
    of the membership.

This decentralized milieu has also impacted the way in which
discussions, advocacy and battles among DAO stakeholders are
conducted. For example, instead of lawsuits, proxy battles and
traditional media campaigns—the norm for corporate
stakeholders—these issues have played out among DAO
communities in online discussion forums and Discord channels.

DAOs and M&A: Evolve, Combine, Grow

While some states (such as Wyoming) are exploring or have
recently passed laws formally granting legal status to DAOs through
legislation that mirrors existing laws applicable to limited
liability companies and corporations, DAOs are otherwise not
subject to state law-based governance rules that would typically
provide the boundaries of a company’s powers and obligations.
Among other things, these laws regulate a corporation’s conduct
and shareholders’ rights in the context of a merger or

As DAOs evolve and expand, they are beginning to face some of
the very same issues that these laws, rules and customs have been
designed over decades to address, particularly as they begin to use
“merger”-like transactions that seek to combine elements
of two protocols and even DAOs themselves.

In one recent example, one of the largest DAO mergers to date2 was approved by members of two
distinct DAOs: Rari Capital and Fei Protocol. Rari Capital is a DAO
that manages a decentralized lending and borrowing platform and Fei
Protocol is a DAO that manages the issuance of a decentralized
dollar-pegged stablecoin called FEI. In concept, this combination
has some similarities to a typical merger among two

  • One protocol (and corresponding token) —Rari Capital and
    its token, RGT—will be merged into another (Fei Protocol),
    with Fei Protocol (and its governance token, TRIBE) as the merged
    survivor over a two-part “governance transition.”

  • Just like in a merger of two corporations, the surviving DAO
    obtains control of all the merging DAO’s treasury positions and
    assumes all of the merging DAO’s liabilities (in this case, Fei
    Protocol will assume legacy liabilities from Rari Capital’s May
    2021 hack).

  • The members of the protocol merged out of existence will
    exchange tokens for the surviving protocol tokens at a fixed rate
    of exchange.

Because this merger was structured and executed as a purely
commercial arrangement—albeit one that changed the nature of
the business and its ownership—it took place entirely outside
of the state laws that would ordinarily govern the merger of two
businesses. That said, the arrangement itself had several elements
commonly seen in state law that serve to provide owners of the
business with value certainty, ongoing rights and possible
alternatives if they do not agree with or approve the

  • For example, the merger will result in a token swap with the
    exchange of Rari’s RGT for Fei’s TRIBE at a fixed rate of
    exchange—1 RGT will be exchanged for 26.7 TRIBE. RGT
    tokenholders have until August 1, 2022, to exchange their RGT for

  • An effect of this exchange is that Rari Capital protocol
    governance will become fully integrated with the Fei Protocol

The token swap mirrors equity consideration in typical
mergers—RGT holders are receiving governance tokens (as
opposed to being offered cash for the value of an existing
ownership stake).

In addition, TRIBE holders—i.e., current owners of the
surviving Fei Protocol—that are unhappy with the terms of the
merger have the right to exchange their TRIBE tokens for a
proportional share of Fei Protocol’s (i.e., the surviving
protocol’s) treasury, claimed as a payout of newly minted FEI.
This right to be cashed-out of an existing stake is called a
ragequit option, similar to a put right and a mirror image of
dissenters’ rights in a merger under Delaware (and most state)
law (dissenters’ rights allow owners of the entity to-be merged
out of existence—not the surviving entity—to challenge
the value they are receiving in the merger). The ragequit allows
TRIBE tokenholders to exchange their tokens for FEI during a
three-day window, after the voting schedules outlined in the merger
proposals have passed. This option allows those TRIBE holders to
avoid the merged entity all-together by exchanging TRIBE for newly
minted FEI at value that is measured through a formula executed on
the protocol.

This is a “mirror image” of dissenters’ rights
because it is opposite of the way these rights are applied in a
typical merger, where they protect the minority shareholders of the
entity to-be merged who can be dragged along into the deal if a
majority of shareholders approve the merger. In a typical merger,
these rights to challenge the value being paid for the to-be merged
company are exercised through a legal process in court. Unlike
dissenters’ rights, this ragequit option is already built into
the terms of the merger at a fixed redemption price; a token holder
would not have to invoke a statutory right for their tokens to be
appraised or for an alternate value to be ascribed.

Interestingly, while the merger proposal provides a protection
for the disgruntled holders of TRIBE, there is no corresponding
provision protecting RGT holders—i.e., the minority owners in
the “target” entity—if they do not exchange in the
eight-month long window. RGT holders’ dissatisfaction over this
fact—voiced publicly in discussion forums—have not yet
been fully addressed. The founder of FEI has said in the Fei
Protocol voting forum that further amendments and correction to the
proposal will have to be made to work out other details that are
not addressed in the proposal as it passed in December 2021. This
highlights another difference between this DAO merger and a typical
corporate one: the idea that the deal itself may evolve over time,
even after it has been publicly announced and approved by a
majority of DAO membership.

Relevance and Key Takeaways

By all accounts, we are still in the early stages of the
emerging (and still very small) world of DAOs and decentralized
finance in general. That said, there are several contexts in which
DAOs and these issues may become relevant to established
businesses—especially in technology and financial
services—in the not-too-distant future.

  • DAOs and JV partners or acquisition targets: Consider a
    technology or financial services company that wants to partner with
    or purchase a DAO. Understanding the differences between
    corporations and DAOs—the way they are structured, the way
    they function and the way their membership thinks about their role
    in the DAO—may inform how these companies approach and
    structure the deal. This may include commercial arrangements
    cloaked in code, such as the ragequit option.

  • DAOs as investment opportunities and activist targets: In
    addition, as DAOs become more mainstream—and especially as
    traditional pools of investment capital such as hedge funds and
    other institutional investors turn their attention towards digital
    assets—the influence that these pools of capital have in DAOs
    may grow. For example, pooled investment vehicles may be able to
    use their purchasing power to accumulate control stakes in DAOs and
    influence their activities. The analogy here is to activist
    investors and publicly traded corporations—though at this
    time, DAOs don’t appear to have in place the types of activist
    investor restrictions and protections that corporations have been
    using for decades (such as poison pill shareholder rights plans).
    It remains to be seen whether DAOs and their members would look to
    incorporate protections like poison pills into their code protocols
    to limit the accumulation of control by members.

Given the explosion of growth in capital and other resources
devoted to DAOs, it will be difficult to ignore this new form of
business organization in the coming years, especially as it
continues to evolve. Many of the legal and commercial issues they
encounter, while novel in the decentralized finance ecosystem, will
be familiar to lawyers and other advisors who have dealt with them
in “meatspace.” Successfully navigating these issues in
new and emerging contexts will require, among others things, an
ability to identify and solve for these similarities and


1 Danielle Marino also
contributed as a co-author.

2 The combination of these two
DAOs will result in an entity with a total value locked—i.e.,
the sum of all assets deposited in a protocol—of
approximately $2 billion.

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