On August 12, 2024, the Hong Kong Courts published their decision in Mantra DAO Inc. and Another v. John Patrick Mullin and Others, granting a disclosure order in favour of founder token holders of a decentralized autonomous organization (“DAO”). The decision suggests that operators of a DAO owe duties at law directly to holders of the DAO’s tokens. Though the extent to which such duties can be assumed going forwards remains unclear, the decision is an important landmark in defining the application of traditional legal principles to a world which has sought to replace legal constructs with self-executing computer code. If you’d like more information about the laws governing digital assets, please contact one of our DLT and Fintech lawyers.
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Decentralized autonomous organizations (“DAOs”) are organizations operating on a blockchain that are governed through algorithms on that blockchain by holders of tokens issued by those DAOs who are able to exercise certain right in those DAOs through these algorithms. DAOs are frequently distinguished from traditional organizations as the identity of their token holders is on the blockchain and the rights of these token holders are exercised through self-executing computer code on the blockchain. In contrast, in a traditional organization such as a company limited by shares, the identity of shareholders will typically be recorded in a central registry and the rights of these shareholders are ultimately exercised through the management of the company and, if necessary, the enforcement of companies legislation and the articles of association.
In Hong Kong, the legal status of DAOs, including who owns and controls them at law, has yet to be determined. However, a recent Court decision in Mantra DAO Inc. and Another v. John Patrick Mullin and Others suggests that the governance of DAOs may be subject to legal principles similar to those for a traditional organization. Though the decision did not subject the DAO in question to any duties at law, it held that the individuals operating the DAO were accountable at law directly to the token holders in much the same way as directors of companies are accountable to the companies.
Background
The Mantra DAO case centres on a dispute between the founders of a DAO and employees hired by the founders to operate the DAO. The DAO was focused on a project and the founders claimed ownership, management and control of the project. The founders argued that the defendants had misappropriated the project’s business and assets from the plaintiffs by treating the project as their own and had deprived the plaintiffs of visibility as to the management decisions made by the defendants or how the project’s assets were being deployed.
On the other hand, the employees argued that the ultimate rights in respect of the DAO lay with the holders of the digital tokens issued by the DAO in accordance with a governance agreement operating through computer code. Thus, the plaintiffs did not own, manage or control the project.
Disclosure of Financial Records Relating to DAO
Pending resolution of the central dispute at trial to be held at a later time, the plaintiffs sought interim relief from the Court of First Instance, seeking an order for the disclosure of books and records relating to the operation of the DAO project. The plaintiffs argued that disclosure would (amongst other things) protect their claims to ownership, management and control pending trial and give effect to their right to information under their employment agreements with the defendants.
The Court granted the disclosure order. Though the employees argued that a disclosure order would impose undue hardship, the Court expressed the following views:
“Firstly, no matter what is the substantive entity owning or responsible for the operation of the Project, the 1st to 4th Defendants, as the Councillors, should have a duty to keep proper account about the operation of the cryptocurrency trading business under the Project. Even if the Defendants’ case is to be upheld by the Court, the Councillors would have a duty to account to the OM Token holders about the funds in the Project. The Account Disclosure Order should not cause any additional or significant hardship or burden on the 1st to 4th Defendants, as one would expect that they would have to discharge such duty to the OM Token holders in any event.”
In other words, the Court took the view that the operators of the DAO, namely the Councillors elected by the token holders, had a duty owed directly to the token holders to account for the assets of the DAO.
Duty of DAO Operator to Token Holders
One interesting feature of this decision is that, in reaching its view to grant the disclosure order in favour of the founders of the DAO project, the Court did not seem to rely on any employment duties which the defendants might owe to the plaintiffs (as argued by the plaintiffs). Instead, the Court focused on duties owed by the defendants as governing members of the DAO to account to the token holders about the assets of the DAO. This is significant as it demonstrates the Court’s readiness to recognise certain duties owed by governing members of a DAO (which might be akin to, say, fiduciary duties traditionally owed by directors to a company).