Oct 2024
Cayman Foundation Companies are growing in popularity as a vehicle of choice for decentralised autonomous organisations (DAOs) to take on legal personality.
In a landmark decision, the Hong Kong High Court recently ordered that a DAO provide disclosure of financial documents related to its operations. This development demonstrates some of the novel issues confronting common law jurisdictions across the globe in relation to the true ownership, management and control of decentralised finance projects. It remains to be seen how the Cayman Islands courts will grapple with and decide this issue. However, the Court’s responsive and proactive approach to disclosure applications against digital asset exchanges augurs well for the Court’s adaptability in handling the ever-increasing novel issues concerning DAOs and digital assets.
Background
In the recent decision of Mantra DAO Inc & Anor v John Patrick Mullin & Anor, the Hong Kong Court of First Instance was confronted with interesting interlocutory questions about the appropriate level of financial transparency in the context of an underlying dispute about the true ownership, management and control of a DAO finance platform project.
The Plaintiffs, Mantra DAO Inc. and RioDeFi Inc., claim that they ultimately own, manage and control the Mantra DAO Project (the “Project”). They allege that they initially conceived of and established the Project, secured the initial investors and purchased its email and domain names, and delegated the day-to-day management of the Project to the First and Second Defendants, as their employees, as the Project developed.
However, they allege that over time the reporting on the Project by those employees became more and more infrequent and that they began treating the Project as their own. The Plaintiffs claim that they now have no visibility of management decisions or how the assets of the Project are being deployed, and that the Defendants have misappropriated the Project and its business assets.
Conversely, the Defendants claim that the Project should not be owned or controlled by the Plaintiffs because a DAO is an organisation where the ultimate decision-making power lies with the holder(s) of digital tokens, operating through computer codes which exist on a blockchain.
Decision of the Hong Kong Court
In granting an interim order that the Defendants provide the Plaintiffs with the financial spreadsheets of the Mantra DAO Project, together with the supporting documents for each of the entries, Judge David Lok emphasised the following matters:
- Damages would not be an adequate remedy if the application were refused, because:
(a) The cryptocurrency industry is fast-growing, and decisions are often made with a view to obtaining a first-mover advantage;
(b) It is important that the Plaintiffs be given regular updates on the financial operation of the Project, given their claim over the ownership, management and control of the Project;
(c) It is difficult if not impossible to quantify the Plaintiff’s loss in monetary terms if they have no visibility of the Project’s financial operations; and
(d) This is further complicated by the difficulties in tracing crypto transactions, which are often anonymised.
- The order would not disrupt the operation of the cryptocurrency trading business under the Project. Rather, the managers of the Project should be under some kind of duty to keep proper accounts, and the order would promote the healthy operation of the business; and
- A properly worded non-disclosure undertaking by the Plaintiff’s legal and financial advisors should address the Defendants’ concern about the documents concerning confidential business secrets.
This order was made on an interim basis to preserve the status quo of the parties pending trial, by giving the Plaintiffs some visibility over the financial operation of the Project that they allege they own. Determination of the primary proceedings will involve the Court further grappling with fascinating and novel questions concerning the legal ownership of decentralised finance projects, and we await further developments on the case with interest.
The Cayman Position
The Cayman Islands Courts are yet to face this issue in any decided judgments. However, it is only a matter of time before this issue arises in this jurisdiction, not least in light of the increasing popularity of Cayman Foundation Companies as legal wrappers for DAOs.
The Cayman Islands Courts are no strangers to complex and fast moving litigation concerning digital assets. For example, Conyers has obtained injunctive relief and Norwich Pharmacal disclosure (on an urgent and confidential basis) against various digital asset exchanges in order to aid in digital asset tracing and recovery. The Conyers team has acted for individuals, service providers and officeholders in finding novel solutions to new issues, including in relation to Atom Holdings, Aubit International and others.
The Cayman Islands Courts will no doubt continue to adapt existing tools and legal principles in response to the new issues presented by DAOs and digital assets in the months and years to come. The Conyers team is here to help. Please reach out to the authors or your usual Conyers contact with any queries.