As described in our Part 1, especially to limit the liability of users, it is advisable to create a secure legal framework when setting up a DAO by deliberately choosing a corporate form. In practice, various options have become established internationally.

1. Wyoming DAO LLC

In the US state of Wyoming, a special legal form for a DAO has been created. Since 2021, it is possible to form a DAO as a Limited Liability Company (“LLC”) due to an appendix to the LLC Act.

The LLC is a hybrid form of a company that has characteristics of a partnership and a corporation. A DOA formed as an LLC has its own legal personality. It can therefore acquire its own rights and incur liabilities. In principle, the LLC is liable for these and not the users of the DAO. This should be a considerable advantage. The DAO LLC may pursue economic or idealistic (also non-profit) purposes. A special feature tailored to the DAO is that the articles of association of a DAO LLC can determine whether the DAO is managed by the members or by the algorithm. However, the choice of the legal form of a DAO LLC is also accompanied by consequential obligations, such as the fact that a DAO must have a permanent representative in Wyoming.

2. Switzerland

Switzerland is one of the leading locations in the area of distributed ledger technologies and blockchain, is fundamentally open to technological innovations and strives to create innovation-friendly framework conditions.

Therefore, some DAO projects, such as the Ethereum Foundation, have already chosen Swiss law to create clear legal structures. In Switzerland, the most popular legal forms for setting up a DAO are the association or the foundation.

An association is an union of several persons who jointly pursue an ideal purpose. The association’s assets are exclusively liable for liabilities incurred by the association (Art. 75a Swiss Civil Code). The liability of the users of a DAO is therefore also limited, which is an advantage. The main bodies of the association are the general assembly and the board. The general assembly is the governing body of the association and consists of the members of the association. It appoints the board and decides on the admission and exclusion of members. In particular, the joint management by all users of the DAO corresponds to its structure. A disadvantage of an association, however, might be that it is only allowed to pursue idealistic purposes.

A foundation also has its own legal personality and is therefore liable for the obligations it enters into. Hence, the liability of the users is also limited. The foundation assets must be dedicated to a specific purpose. Unlike an association, this purpose does not have to be idealistic. However, only non-profit foundations are tax-privileged. The purpose of the foundation can only be changed to a very limited extent. This can help to strengthen confidence in the decentralization of the network. At the same time, however, this could lead to the foundation being perceived as a rigid construct that may not be able to react appropriately to technological innovations. In addition, compliance with the foundation’s purpose is monitored by a supervisory authority, which can make it even more difficult to act quickly and flexibly.

3. Marshall Islands

The Marshall Islands have also enacted regulations specifically tailored to a DAO. According to these, a DAO can be established as a non-profit company in the form of a limited liability company that is managed by its members. In principle, such a company is formed in accordance with the generally applicable company law of the Marshall Islands, but it has some special features. For example, the company’s earnings cannot be distributed to the members or the management. This should be taken into account in particular for DAOs that pursue a financial investment objective.

When initiating a DAO, different legal systems and legal forms can be chosen, each with its own advantages and disadvantages. Our team will be happy to advise you on the questions that arise in this context.

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¹ Fleischer, ZIP 2021, 2205, 2209 f.

² Fleischer, ZIP 2021, 2205, 2214.

³ Federal Council report of 14.12.2018, Legal foundations for distributed ledger technology and blockchain in Switzerland, p. 8.

⁴ https://www.fundraiso.ch/sponsor/stiftung-ethereum

⁵ Expert Focus Spezial, March 2022, S. 19 f.

⁶ Schauwecker, Steuer Revue 73/2018, 932, 936 f.

⁷ Cf. https://www.midao.org/.

Cybersecurity in M&A transactions

While classic audit points of the target company are analysed during a company acquisition, for example through business, tax or legal due diligence, and thus become a tangible part of a transaction process, this does not apply equally to cyber risks. Cyber security is still a difficult task for many companies to solve. Therefore, this aspect is predominantly ignored in the M&A process.  This is mainly due to the fact that there are no (legally) recognised standards in this regard so far, and therefore few competences have been formed on the market side to remedy this circumstance. The risks and resulting damages affect all parties to the transaction. The buyer acquires a company that may not be protected against a major threat, the seller subsequently faces warranty, withdrawal and damage claims from the buyer. Mirroring these risks, a coherent and stable system for the defence against cyber risks established in the course of a cyber due diligence is a real value factor that has to be examined in the transaction process and adequately assessed by the parties in the purchase price.

Content of a Cyber due diligence

A cyber due diligence carried out by qualified professionals and adequately considered by legal advisors in the transaction process is an indispensable part of any transaction in today’s world. The result of the cyber due diligence is, depending on requirements, a report on the results or instructions for action by the service provider commissioned for this purpose. The cyber due diligence is ideally started with a penetration test. With the help of this simulated analogue and digital attack, the status quo of cyber security in the target company or its current defence capability is analysed. Following on from this, the target’s data protection concept and the existing cyber risk management system (“CRMS”) should be examined. In this context, the management, in particular the CEO, CISO and data protection officers, must also be interviewed in cooperation with the cyber security service provider and the legal advisor of the transaction parties. The scope (holistic or selective) and the accentuation of the CRMS on essential, operationally relevant assets and processes of the company are particularly relevant. At least with respect to the assets and processes, a cyber security incident response plan (“CIRP”) should also be in place to ensure the continuity of the company’s operations in the event of realised cyber risks. To the extent that a Target does not have a CRMS or CIRP, one must be developed with the service provider and made an essential contractual basis of the transaction. In addition, the human factor, by far the highest security risk, must be assessed with regard to the employees, any existing cyber insurance policies and their insurance exclusions. In order to safeguard the target company during the transaction, it is advisable to have it monitored by Cyber Defence Operation Centres (“CDOC”) at very short intervals or permanently for the duration of the transaction. The CDOC reflects the security situation of the target to the transaction parties in real time (“cyber monitoring”). This meaningfully addresses the increased risk of a cyber attack as a result of the corporate transaction itself, as a virtual data room is usually set up with all confidential transaction data, which can be a target for ransomware attacks.

Cyber security in the M&A contract

There are several ways to consider the findings of a cyber due diligence in the M&A contract adapted to the needs of the parties. First, strong cybersecurity can be considered as a value factor in the purchase price. If, on the other hand, cyber security is more of a risk factor, additional contractual clauses can be included in the contract. Consideration can be given to indemnification agreements for the realisation of certain cyber risks, an independent seller’s warranty with regard to the cyber security of the target or a material-adverse-change-clause formulated as the buyer’s right of withdrawal in the event of significant negative changes between the conclusion of the contract and the actual takeover of the company. In addition, a Warranty & Indemnity insurance can also be concluded for the M&A contract, whereby the cyber due diligence is used as the basis for the risk assessment with regard to cyber security.

Conclusion

In view of the ever-increasing number of cyber attacks and the high financial and reputational damages of such an attack, cyber due diligence is highly recommended for a secure corporate transaction.  Strong cyber security is a value driver. A lack of cyber security is not necessarily a knock-out criterion, but can be addressed fairly and in line with interests by correct wording in the purchase agreement. Legal advice and the work of a service provider with regard to cyber security should be done in tandem for the optimal satisfaction of needs and protection of the transaction parties.

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¹ M&A Report 2022 by Bain & Company, available at https://www.bain.com/insights/topics/m-and-a-report/.

² Tagesschau from 18.01.2022, available at https://www.tagesschau.de/wirtschaft/unternehmen/cyberattacken-unternehmen-risiken-101.html.

³ FedEX, the Marriott Group and Verizon are just three prominent examples where a lack of cyber due diligence in the course of a transaction led to losses in the millions.

⁴ In detail on cyber due diligence, Grieger WM 2022, 1865 ff.

Introduction

The DAO is described as the corporate form of the future. The basis of a DAO is the blockchain or distributed ledger technology through which “a reliable, open and programmable accounting system”¹ is made possible.

This possibility of the purely virtual existence and execution of a company simultaneously leads to difficulties in understanding and classification. In order to make the best use of the DAO’s opportunities, it is not the DAO that should adapt to the legal system, but at least the development of new company concepts should be encouraged. Instead of company shares, cryptocurrencies are issued here in the form of tokens. The organisation and execution of the society functions via the networking and execution of smart contracts, i.e. self-executing programme codes.²

Examples

Although the organisational form is still very young, there are already a large number of DAOs with different focuses. These include social network DAOs as platforms on which Web 3.0 developers can exchange ideas with each other or investment DAOs as member-managed venture capitals.³ The best-known investment DAO was “The DAO”, founded on the Ethereum blockchain in 2016, which collected huge sums within a short time and lost them again just as quickly due to a hacker attack.⁴

In addition, there is even a draft of a model law developed by blockchain experts from a wide range of industries, the so-called DAO Model Law,⁵ as a harmonised and transnational framework for legal recognition.

Chances and risks

The structure of the DAO offers enormous opportunities:

• The company does without an executive board, managing director and hierarchies.
• The smart contracts and thus the operational business are publicly available on the blockchain and thus transparent.
• The global networking of the company and the token holders is practically automatic via the blockchain and the internet.
• Access restrictions are eliminated through peer-to-peer transfer.⁶

However, these opportunities are also accompanied by enormous risks, especially liability risks for the initiators. Therefore, it is all the more important that a DAO does not “float in the air” completely decentralised from a legal framework and is classified de lege lata as a partnership, but is directly established as a (liability-limiting) company with its registered office.

Not only do different types of companies come into consideration as possible legal forms, but there is also a wide range of possible countries of incorporation, some with their own DAO legal forms.

More on this in Part 2 of our mini-series…

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¹ Mienert, RDi 2021, 284.

² Fleischer, ZIP 2021, 2205 f.

³ ar.ca, May 2022, DAOs: An Institutional Guide to Decentralized Governance, mit Beispielen auf S. 11 f., available under Link.

⁴ Gyr, Dezentrale Autonome Organisation DAO, in: Jusletter 04.12.2017, S. 5 und Grassegger, Die Zeit 26.05.2016, Die erste Firma ohne Menschen, available under Link.

⁵ Accessible at https://coala.global/daomodellaw/.

⁶ ar.ca, May 2022, DAOs: An Institutional Guide to Decentralized Governance, S. 7, available under Link.

Advantages of a DLT trading system

One of the most important differences, and thus advantages, compared to traditional trading venues is that in DLT trading systems, retail customers are allowed to trade as participants.

Unlike traditional token exchanges, a DLT trading system also allows security tokens to be traded. In addition, it is possible for DLT trading systems to offer custody of DLT securities without requiring an additional license as a central securities depository.

No clearing

A DLT trading system cannot perform central clearing to mitigate risk. This is still left to central counterparties. However, clearing appears to be less important when settling a trade through a DLT trading system than it is for traditional trading venues. Unlike traditional trading venues, where trade settlement often takes two days, with a DLT trading system, trading and its settlement can occur simultaneously. In addition, the Swiss National Bank has announced that it will grant FINMA-approved DLT trading systems access to the Swiss Interbanking Clearing System, provided they operate a securities settlement system and settle payments in Swiss francs via the SIC system.

High licensing requirements

The requirements for authorization as a DLT trading system are similar to those for traditional trading venues. In particular, these include requirements for the organization, guarantors, ancillary services and business continuity. If custody services are offered, there are additional requirements that are similar to those for a central securities depository. These include requirements for the safekeeping, booking and transfer of securities, own funds, collateral and liquidity. Reliefs apply to so-called small DLT trading systems.

Probably also due to the high licensing requirements, there is no DLT trading system approved by FINMA as of today (as of March 11, 2022).

Fintech Permit

The Fintech Authorization was created by the Swiss legislator to promote digital innovations and to facilitate the market entry of Fintechs. The Fintech license can also be described as a “bank license light”. It represents an authorization from FINMA under simplified conditions.

A Fintech license allows its holder to accept public deposits up to a maximum amount of CHF 100 million or certain crypto-based assets designated by the Federal Council.

Facilitations for a Fintech Permit

In contrast to a classic bank license, a company with a Fintech license does not have to meet quite as high requirements as a classic bank. This applies in particular with regard to minimum capital and organizational requirements. Also, the regulations on deposit insurance, such as the holding of privileged deposits and their immediate disbursement, do not apply. In addition, accounting is governed by the provisions of the Code of Obligations and not by the provisions of banking law.

Interest and investment not possible

A holder of a Fintech license is not permitted to pay interest on or invest the public deposits accepted or crypto-based assets designated by the Federal Council. The classic lending business of banks is thus reserved for companies that have a classic banking license.

Due to the low requirements that a company must fulfill in order to obtain a Fintech license, market entry hurdles are reduced. However, if the planned business model also includes investing and earning interest on the collected public deposits or crypto-based assets, it is necessary to apply for a classic banking license, regardless of the volume of assets accepted. In this case, Fintechs cannot benefit from the Fintech authorization.

Pic: Shutterstock

SPACs have become increasingly popular in recent years. A Special Purpose Acquisition Company (SPAC) is an investment vehicle that allows unlisted companies, especially startups, to go public. The SPAC is an empty shell company in the form of a corporation with no operating business of its own, established to raise investor funds in an IPO and then identify and acquire a suitable target company within a specified period of time, typically 12 – 24 months after the IPO. SPACs are regularly founded by experienced investment managers, the so-called sponsors. They use the capital raised to invest in high-growth targets.

The capital collected through the issuance of shares is usually deposited in an escrow account and may regularly only be used in accordance with the cases outlined in the prospectus of the respective SPAC. The shareholders decide by a majority of regularly at least 50 percent on the use of the trust assets and thus also on the business combination proposed by the management. If the investors do not approve the business combination, they can usually return the shares of the SPAC at the issue price.

Some advantages over a traditional IPO

An IPO using a SPAC usually takes 3 – 4 months to list on the stock exchange and is therefore less time-consuming than a traditional IPO. In addition, with a SPAC there is greater flexibility with regard to contract negotiations. The target company can also benefit from the expertise of the sponsors. However, the high dependence on management can also prove to be a disadvantage of the SPAC. Furthermore, it must be taken into account that investors invest their money in a company they do not yet know.

Development of SPACs in Germany

In Germany, the first SPAC was listed in 2010. Since then, there have been only a handful of other SPACs. A boom of SPACs like in the U.S. has so far failed to materialize. However, German capital market law is sufficiently flexible for SPACs listed in Germany. The obstacles to SPAC structures that exist in German stock corporation law can be circumvented by using foreign legal forms, as these offer more flexibility.

VT5 first SPAC on the Swiss stock exchange

VT5, the first SPAC, was listed on the SIX Swiss Exchange in December 2021. An adjustment to the SIX framework now allows SPACs to be listed in Switzerland. In Switzerland, however, unlike Germany, only public limited companies can be listed under Swiss law.

SPACs can be interesting from both an investor’s and entrepreneur’s point of view and have been experiencing a major boom in recent years, especially in the USA, and are seen as a stock market trend. Whether such a trend will also occur in Switzerland remains to be seen and depends not only on the market situation but also on players. SPACs are part of our area of expertise and we will be happy to answer your questions about them.

Image source: Shutterstock

Translated with www.DeepL.com/Translator (free version)

3. December 2021

Sanctions may affect various sectors of the economy. For example, trade sanctions lead to bans on the import and export of goods, while financial sanctions lead to disruption of payment systems and the freezing of funds in foreign bank accounts. Hence, sanctions not only affect the sanctioned persons, but also have an impact on international companies and, in some circumstances, on private individuals.

Moreover, sanctions apply from the time they are imposed. Companies and private individuals must comply with them immediately. Thus, affected companies and individuals face the major challenge of gaining an overview of which regulations apply, how to comply with them and how to manage the resulting challenges as quickly and effectively as possible. Even greater challenges arise for people who are subject to sanctions. Their options for action are severely limited in no time at all.

Our team will be happy to assist you in overcoming these special challenges. Our experts will be happy to advise you on the following topics, among others:

Sanctions: existing sanctions and sanctions to be observed

Compliance: additional compliance checks

Termination and settlement of terminated business relationships: consequences under contract law and tax law

Impairment of the financial market: exclusion of SWIFT, attempts at circumvention, restrictions on the financial market

Supply difficulties: consequences under contract law, claims for damages, contractual penalties

Contract execution and drafting contracts: compliance with sanctions; enforcement of claims

Cybersecurity: cyberattacks and manipulation, data protection

Payment defaults and frozen funds: restructuring, deferrals, claims for damages

Sanctioned individuals / companies: support in administrative procedures to apply for an exemption.

Picture: Shutterstock