The new organizational structure has brought about relevant governance and judicial issues, and the implementation of the "DLLCA" in Delaware has provided feasible ideas for many Web3 companies.
Authors: Athena, Ray
1. Introduction
1.1. Research Background
The reputation of Delaware as the primary jurisdiction for corporate entities is well known. In recent years, Delaware has also emerged as a leader in providing cutting-edge alternatives for traditional company forms. The "Delaware Limited Liability Company Act" (6 Del.C. § 18-101, et seq., Delaware Limited Liability Company Act, referred to as "DLLCA") is an example of this leading position, which regulates the most popular "alternative" business entity - the Delaware Limited Liability Company (DLLC). DLLC has rapidly become the preferred entity for business owners, advisors, and investors, as it can provide tax advantages (and in some cases, commercial advantages) compared to corporations.
DLLC can engage in almost any lawful business activity, including manufacturing, services, holding and developing real estate, holding and managing intangible property (such as securities and other investments), and acting as a special purpose entity in financing transactions. The main advantages of DLLC include avoiding double taxation, unparalleled contract flexibility, and of course, limited liability. DLLC can be structured in almost any way that best suits the business needs of the parties involved. This flexibility makes DLLC superior to traditional corporations in many cases, and also superior to other business entities such as limited partnerships or general partnerships.
At the same time, new organizational structures such as DAOs (decentralized autonomous organizations) are emerging, which formally allow for decentralized decision-making using blockchain and token voting mechanisms. In a departure from traditional industrial enterprises that rely on the separation of ownership and operation, DAOs provide a completely different template for organizational participation, where ownership and operation are merged - driven by smart contracts, fluid member identities, and transparent transaction channels.
The new organizational structure has brought about relevant governance and judicial issues, and the implementation of the "DLLCA" in Delaware has provided feasible ideas for many Web3 companies.
2. Overview of Delaware Company Law
2.1. Delaware Limited Liability Company (LLC) Form
Limited Liability
One of the most attractive features of DLLC is the limited liability of its owners and operators. The "DLLCA" generally refers to the owners of DLLC as "members" and the individuals designated to manage the entity's business and affairs as "managers." DLLC members can, but are not required to, be managers, thus opening the door for investors or other non-managers or entities to benefit from DLLC. The "DLLCA" provides that no member or manager shall be personally liable for any debt, obligation, or liability of DLLC solely by reason of being a member or manager. Additionally, the "DLLCA" expressly authorizes DLLC to "indemnify and hold harmless any member or manager or other person" from any and all claims and demands. This limitation of personal liability and the broad scope of indemnification allowed are no less protective than those enjoyed by shareholders, officers, and directors of Delaware corporations.
Contract Flexibility
The fundamental policy of the "DLLCA" is to allow the parties to determine their business relationships in the limited liability company agreement, and to provide only for matters on which the parties fail to agree. A well-established policy of the "DLLCA" is to maximize the freedom of contract and the enforceability of limited liability company agreements. This important policy means that parties can establish and maintain relationships that best suit their business needs in a predictable manner. For example, in the limited liability company agreement, parties can specify different classes of members or managers (each with different rights, powers, and duties, including separate voting rights, economic rights, or management rights), and even specify categories of interests or assets of the limited liability company (each with different rights, powers, and duties in specific property, profits, and losses, and even different business purposes). In fact, the parties can determine almost all aspects of their relationships through the agreement. If a member or manager is responsible for DLLC or another member or manager (including fiduciary duties), the "DLLCA" provides that the limited liability company agreement may expand, limit, or eliminate these responsibilities (except for implied covenants of good faith and fair dealing). This flexibility stems from Delaware's long-standing policy in support of freedom of contract.
Management Flexibility
The principle of freedom of contract is particularly evident in management flexibility, which is the cornerstone of the "DLLCA." Parties can choose the management arrangement that best suits them. Under the "DLLCA," members of a limited liability company can participate in management without affecting their limited liability, or they can choose to have others manage the limited liability company, or a combination of both. The limited liability company agreement can include provisions related to the exercise of voting rights, including provisions related to the time, place, or purpose of any meeting at which any matter is to be voted on, waiver of notice of any such meeting, taking action without a meeting by unanimous consent, quorum requirements, and rules for voting in person or by proxy. Members and managers of Delaware limited liability companies can generally freely transact with the Delaware limited liability company. Experienced service providers in Delaware are usually willing to provide or serve as managers or "independent" managers for DLLCs when necessary, for business reasons such as meeting the requirements of DLLC lenders.
Flexibility in Business Combinations
In addition to flexibility in the creation and operation of DLLC, the "DLLCA" provides various methods for restructuring DLLC for the parties involved. For example, under the "DLLCA," a Delaware limited liability company can merge or consolidate with another Delaware limited liability company or "other business entity" (including, but not limited to, corporations, statutory trusts, common law trusts, associations, and partnerships), regardless of whether the other business entity is formed or organized under Delaware law or the laws of another jurisdiction. Delaware provides more flexibility, allowing for the reorganization of DLLC through asset sales, conversions, and transfers. Additionally, the "DLLCA" even allows a business entity formed under the laws of another jurisdiction to convert to a Delaware limited liability company or domesticate it without the need to cease business operations or liquidate and terminate the original business entity.
Ease of Formation
DLLC is easy to form and maintain, as the formation of DLLC only requires (1) an agreement of one or more members of the limited liability company (no written agreement required), and (2) the filing of a certificate of formation with the Delaware Secretary of State.
Upon filing the certificate of formation with the Delaware Secretary of State, DLLC is deemed to be formed. Although the certificate of formation only needs to state the name of DLLC and the name and address of the registered agent and registered office of DLLC in Delaware, it can also include any other matters determined by the members.
The limited liability company agreement is a private contract among the members. It is not a public document. Therefore, under the "DLLCA," the identities of the members and managers of Delaware limited liability companies and the terms of their relationships can be kept confidential. The "DLLCA" does not prescribe any minimum capital investment amount. Non-U.S. entities and individuals can generally freely form and operate DLLC, as the "DLLCA" does not require the members or managers of DLLC to be natural persons or U.S. citizens or residents. Additionally, the records or principal place of business of DLLC do not need to be located in Delaware. They can be located anywhere convenient for the parties, including in any jurisdiction outside the United States. Furthermore, such records can be maintained in electronic or other non-written forms.
No Requirement for Delaware Business Activities
Delaware law does not require DLLC to conduct business or establish or maintain any place of business in Delaware (except for the registered agent and registered office). Regarding the requirement to establish a registered agent/office in Delaware, there are numerous service providers in Delaware that can provide such services for a minimal fee.
In addition to paying the minimum annual fee (referred to as "franchise tax") to the state of Delaware, DLLC is not obligated to pay federal or state taxes to the U.S. government or the state of Delaware solely because it is organized under Delaware law. Generally, if DLLC conducts business in Delaware or earns income from Delaware, it may be required to pay state taxes to Delaware. Similarly, if DLLC conducts business in the U.S. or earns income from a U.S. source, it may be subject to federal income taxes.
Avoiding Double Taxation
Under the U.S. federal income tax law, the structure of DLLC can allow it to avoid taxation at the entity level. Therefore, from a tax perspective, DLLC provides a very attractive alternative, as corporations typically are taxed at the entity level. Members of DLLC can explicitly agree to this tax treatment in their limited liability company agreement. Of course, the freedom of contract granted by the "DLLCA" allows members to agree to other tax treatments according to their wishes.
3. Compatibility Analysis of Delaware Company Law and DAO
3.1. 2017 Amendment to the Delaware General Corporation Law (DGCL)
On July 21, 2017, the Governor of Delaware enacted new legislation allowing companies to use "distributed electronic networks or databases" (also known as blockchain technology) to maintain company records, including stock ledgers. By allowing companies to use blockchain technology to record and transmit company information.
Use of Blockchain Technology for Recordkeeping
The amendment to Section 224 of the Delaware General Corporation Law (DGCL) pertains to the form of recordkeeping by companies: companies are allowed to use blockchain technology to record any company records, including stock ledgers, as long as these records can be converted to paper form within a reasonable time. Specifically, the amendment allows for records on the blockchain to be "maintained by or on behalf of the corporation" rather than "maintained" by corporate officers or agents, meaning that the blockchain can replace the traditional function of corporate officers or agents in maintaining such records.
Regarding stock ledgers, the information recorded on the blockchain must include: (i) the ability for the company to prepare a list of shareholders in accordance with the requirements of Sections 219 (stockholder meetings) and 220 (inspection of books and records) of the DGCL; (ii) the recording of information as required by Sections 156 (partly paid shares), 159 (transfer restrictions), 217 (voting trustees, pledgees, and joint owners), and 218 (voting trusts and other voting agreements) of the DGCL; and (iii) the recording of transfers as provided in Title 6, Section 8.
The amendment further provides that records compiled on the blockchain shall be effective, admissible as evidence, and acceptable for all other purposes. Essentially, blockchain records will be treated equally to the company's paper records.
Use of Blockchain Technology for Notices and Shareholder Communications
A core feature of blockchain technology is the secure transmission of information among multiple parties. Delaware recognized this and amended several provisions of the Delaware General Corporation Law to explicitly authorize "electronic transmissions" for notices through blockchain technology.
Section 232 of the DGCL amended the definition of "electronic transmission" to include: the use or participation in one or more electronic networks or databases (including one or more distributed electronic networks or databases) that creates records that can be retained, retrieved, and reviewed by the recipient, and can be reproduced in paper form by the recipient through an automated process.
Additionally, the amendment allows for notices to be provided to holders of uncertificated shares electronically, informing them of the information required to be disseminated under Sections 151(f) (certificated and uncertificated shares; rights and options) and 202(a) (transfer and all restrictions) of the DGCL.
Delaware's amendments allow companies to leverage technological innovation to expedite and optimize internal recordkeeping and notification procedures. Companies adopting such solutions through the issuance of digital securities can more easily manage and track shareholder voting, provide notifications, and manage stock transfers.
3.2. 2019 Amendment to the Delaware Revised Uniform Partnership Act (DRUPA)
The amendments to Sections 15-501 and 15-403 of the DRUPA provide explicit statutory authorization for the creation or maintenance of entity records using electronic databases (including distributed ledgers and blockchain) and certain electronic transmissions. These amendments are similar to the revisions made to the DLLCA and the DRULPA last year, confirming that general partnerships can utilize this rapidly evolving technology.
3.3. Discussion of the Delaware Limited Liability Company Act (DLLCA) and the Delaware General Corporation Law (DGCL)
Rights of Incorporators
Under DGCL §107, if no initial directors are specified in the certificate of incorporation, the incorporators shall manage the affairs of the corporation until the board of directors is elected and may take all necessary and proper actions to perfect the organization of the corporation, including adopting the original bylaws and electing directors.
Regarding Bylaws
According to DGCL §109(a), the original bylaws may be adopted by the incorporators, the initial directors (if specified in the bylaws), or the board of directors before any shares have been issued. Subsequently, shareholders have the right to adopt, amend, or repeal the bylaws. For non-stock corporations, this right belongs to the members entitled to vote. However, the bylaws may grant the power to adopt, amend, or repeal the bylaws to the directors or governing body. Even if this power is granted to the directors or governing body, shareholders or members still retain the power to adopt, amend, or repeal the bylaws, which is important.
According to DGCL §141(b), the bylaws may contain any provision relating to the business, affairs, management, shareholders, directors, officers, or employees of the corporation, as long as such provisions do not conflict with the law or the certificate of incorporation. Additionally, the bylaws may not contain any provision that would impose liability on shareholders for the attorney fees or expenses of the corporation or any other party in internal corporate claims.
Rights of Directors
Under DGCL §141(a), unless otherwise provided in this chapter or the certificate of incorporation, the business and affairs of every corporation organized under this chapter shall be managed by or under the direction of the board of directors. If there are any such provisions in the certificate of incorporation, the powers and duties of the board of directors granted or prescribed by this chapter shall be exercised or performed within the limits prescribed by the certificate of incorporation by one or more persons appointed by the certificate of incorporation.
According to DGCL §141(f), unless otherwise restricted by the certificate of incorporation or bylaws, any action required or permitted to be taken at any meeting of the board of directors or any committee may be taken without a meeting if all members of the board or committee (as the case may be) consent in writing or by electronic transmission, and such written or electronic transmission consent shall be filed with the minutes of proceedings of the board or committee. If the minutes are maintained in paper form, the consent shall be filed in paper form; if the minutes are maintained in electronic form, the consent shall be filed in electronic form. Any person (whether or not then a director) may act by giving directions to the agent or otherwise specifying the action to be taken in a consent instrument to be effective at a future time within 60 days after the giving of the directions or making of the specification (including a time determined by the occurrence of an event), provided that such person is then a director and has not revoked the consent instrument before such time, and for the purposes of this subsection, the consent instrument shall be deemed to have been given at the time it is effective if the person then a director and has not revoked the consent instrument before such time.
Regarding Electronic Contracts
Under DLLCA §113(a)(1), any act or transaction provided for or involving any action or transaction in the limited liability company agreement may be in a record, and electronic transmissions are equivalent to written records.
According to DLLCA §113(a)(2), regardless of what form of signature is required or permitted by the limited liability company agreement, a manual, facsimile, conformed, or electronic signature is valid. An electronic signature means an electronic symbol or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record. In other words, electronic signatures can be used to sign documents.
According to DLLCA§113(a)(3), unless otherwise specified in the limited liability company agreement or agreed upon by the sender and recipient, electronic transmissions are considered delivered upon entry into the information processing system designated by the recipient for receiving such transmissions, as long as the electronic transmission exists in a form that the system can process and is retrievable by the recipient. In other words, the delivery of electronic transmissions depends on whether the recipient has designated an information processing system for receiving electronic transmissions and the transmission has entered that system. This means that smart contracts can serve as an effective decision-making tool without the need for traditional board or shareholder meetings to implement decisions.
Conclusion
Currently, the relevant provisions of the DLLCA and DGCL do recognize the feasibility of applying blockchain technology to corporate governance in Delaware, but this recognition has not yet reached the explicit permission to use smart contracts for governance.
In a horizontal comparison, currently only three states in the U.S.—Wyoming, Tennessee, and Vermont—allow the formation of DAOs as a form of limited liability company. [1] The legislation in these three states specifically regulates smart contracts when it comes to governance rules involving DAOs. For example, Vermont requires the operating agreement of the company to disclose the voting procedures for resolving certain types of matters, while Wyoming requires DAOs to explicitly specify how members will manage the decentralized autonomous organization in the company's articles, including to what extent management will be algorithmic. [2] In comparison, the DLLCA and DGCL do indeed lack such specific provisions.
4. Conflict between the Corporate Transparency Act (CTA) and DAO
The application of the Corporate Transparency Act (CTA) to decentralized autonomous organizations (DAOs) raises new legal issues. DAOs are a relatively new type of business association and lack the traditional legal entity, thus lacking statutory governance and protection for participants. The legislation attempts to bring DAOs into traditional entity structures to promote their protection, and DAOs operating as business entities will need to comply with the disclosure requirements of the Corporate Transparency Act.
4.1. Requirements of the CTA
Starting from January 1, 2024, reporting companies operating in the U.S. must submit reports to the Financial Crimes Enforcement Network of the U.S. Department of the Treasury through the Beneficial Ownership Secure System (BOSS), including the names, dates of birth, addresses, and government-issued photo identification copies of all beneficial owners.
Reporting companies refer to entities such as corporations, limited liability companies, limited partnerships, or business trusts created or registered in the U.S. by filing with the Secretary of State. Heavily regulated entities, such as publicly traded companies and their regulated advisors, financial institutions, insurance companies, and non-profit organizations as defined in Section 501(c)(3), are exempt. Additionally, large operating companies are also exempt, those with a physical street address in the U.S., 21 or more full-time employees, and annual total revenue or sales reported in the previous tax year exceeding $5 million. Subsidiaries of other exempt entities are also not included.
Companies established before December 31 must submit BOSS reports by December 31, 2024, while companies established on or after January 1, 2024, have 30 days to submit reports and 30 days to submit changes. Federal, state, local, and tribal law enforcement agencies, as well as financial institutions, may access BOSS reports with customer consent, but cannot publicly access them, including through Freedom of Information Act requests. Beneficial owners include those with significant control over the company's equity and those who directly or indirectly own 25% or more of the equity.
Each reporting company must report at least one person, and refusal to disclose ownership may signal non-compliance to the Financial Crimes Enforcement Network. Fines and penalties for failure to report or false reporting may be severe.
4.2. Application and Impact of the CTA on DAOs
The CTA assumes that reporting companies are legal entities with beneficial ownership and governance systems that DAOs may not have. Traditional partnership DAOs will not fall under the jurisdiction of the CTA, but those constrained by traditional state forms, considered legal entities, will need to consider compliance with the CTA.
Given the structure and framework of DAOs (i.e., the lack of managers, directors, or senior officers), the reporting requirements under the CTA will be particularly cumbersome for DAOs, and thus each member (rather than the DAO as an organization) may need to determine if they have substantial control or 25% ownership of the DAO. DAOs operating as member-managed limited liability companies under state law will require each member to submit BOSS reports.
The CTA prohibits blank stock and anonymous reporting of company ownership, directly contradicting the convincing anonymity feature of DAOs. The Financial Crimes Enforcement Network has advised non-traditional entities that substantial control includes control exercised in novel and less traditional ways, and suggested that control can apply to different flexible governance structures, such as DAOs—different control indicators may be more relevant to DAOs. While the Financial Crimes Enforcement Network is uncertain about how the CTA applies, it still applies to DAOs formed by states.
The CTA does not address certain issues specific to DAOs, such as whether token ownership membership qualifies as beneficial ownership under the CTA.
In reality, DAOs will have difficulty appointing compliance personnel without directors and officers. Wrapping DAOs into traditional structures has already subjected DAOs to reporting requirements and compliance protocols, and now extends to include compliance with the CTA. Regulating non-traditional businesses using traditional DAO parameters may be incompatible with the innovative and evolving nature and autonomy of DAOs. DAOs subject to CTA compliance will need to monitor it as the CTA guidelines continue to be rolled out.
DAOs registered in states may find it easier to comply with the CTA, or may lack personnel to track CTA requirements, but still need to track these requirements. Entity-wrapped DAOs should develop CTA compliance protocols (including points of contact) and track ongoing compliance. Building DAOs to adopt CTA disclosure procedures may not be practical due to their operation through blockchain and smart contracts. Traditional DAOs operating as general partnerships will not face CTA risks, while those established as or through state filing entities will need to comply with the CTA. The inherent characteristics of DAOs and blockchain technology will make CTA compliance challenging.
5. Conclusion
The Delaware Limited Liability Company Act (DLLCA) occupies an important position in the field of business law with its flexibility and tax advantages. As an alternative entity, DLLC has advantages such as avoiding double taxation, contract flexibility, and limited liability, making it widely applicable and adaptable. Delaware has also allowed companies to use blockchain technology to record and transmit company information, providing a more efficient solution for businesses.
With the arrival of the Web3 era, DAOs are emerging as a new organizational structure. Delaware's legal framework provides a feasible approach for DAO organizations. However, laws such as the Corporate Transparency Act (CTA) present new challenges for DAO organizations, requiring them to comply with traditional entity disclosure obligations. Therefore, the insight into Web3 corporate governance is that while Delaware's legal framework provides some support for DAO organizations, in the face of new regulations and legal requirements, DAO organizations need to be more flexible and innovative to adapt to the evolving legal environment and maintain compliance and sustainable development.
免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。
