Who controls a Cayman foundation company, and where do token holders fit in?

Directors run it; the constitution decides the rest

A foundation company is managed by its directors.¹ On top of that, the Act says its constitution may give rights, powers and duties of any type to members, directors, officers, supervisors, founders or others.¹

Those powers can cover many things, including these.¹

• Admitting, appointing or removing members, supervisors, directors or officers.¹
• Making and changing bylaws.¹
• Supervising how the company is managed.¹
• Calling general meetings and voting at them.¹
• Changing the constitution, within the limits of sections 9 and 10.^1,4
• Winding the company up and deciding what happens to its spare assets.¹

Who the duties are owed to

Unless the constitution says otherwise, duties under the constitution are owed to the foundation company only.¹ Interested persons, such as members and supervisors, can ask the directors for reports and accounts. They can also sue in the company's name to enforce the directors' duties, in the same circumstances and manner as a member of an ordinary company could.^1,3,5

Supervisors

A supervisor is someone other than a member who has an unconditional right to attend and vote at general meetings.⁵ Ogier, a law firm, describes the role as a "steward" that makes sure the directors follow the company's governing documents.⁶

The Act leaves a lot to the constitution. Unless the constitution says otherwise, a member or supervisor may also be a director, and there is no need for supervisors who are not directors.² Ogier wrote in 2020 that the directors and supervisors need not be people. They could be companies, and could even be the same person.⁷

The model articles in Schedule 2 go further than the Act. They are a starting point that a company may adopt, not a rule for everyone.⁸

• The model needs at least two directors at all times.⁹
• After the founder dies, the model needs at least two supervisors who are not directors.⁹
• Under the model, a supervisor may see the company's files, books and accounts during normal working hours.⁹

Beneficiaries

Unless the constitution says otherwise, a beneficiary has no powers or rights over the company, its management or its assets, and is not an interested person.³ Under the model articles, unless the founder has granted them more, a beneficiary can only keep any benefit properly given to them and give up being a beneficiary.¹⁰

The model lets beneficiaries be named as "descriptions of persons", not only by name.¹⁰ Ogier wrote in 2020 that, because the Act does not require a register of beneficiaries, a DAO can name a class such as "tokenholders" as beneficiaries, with limited rights.⁷

Where token holders come in

The Act lets a constitution grant the right to become a member or supervisor to any "description of persons, whether or not ascertained or in existence".² It also lets the constitution provide for bylaws. Directors and others with duties must follow the bylaws as far as the law and the constitution allow.¹¹

Walkers, a law firm, says the bylaws typically set out the DAO's governance using token-holder votes. Subject to applicable law, the directors then take instructions from the DAO and carry out what it approves.¹²

Bylaws are not part of the constitution. Someone dealing with the company in good faith does not have to check them, or check that the directors followed them.¹¹

A real example. The Arbitrum Foundation's bylaws, adopted in July 2023, show one way to do it.¹³

• Token holders vote on "Arbitrum Improvement Proposals" (AIPs).¹³
• Through AIPs they can elect or remove directors and supervisors, but the foundation may never be left with no director or no supervisor.^13,14
• Directors can reject an AIP that, in their reasonable view, would compromise their duties to the foundation, break the bylaws, Cayman law or other applicable law, breach the foundation's contracts, or be against the foundation's best interests.¹³
• If the foundation and the token holders disagree, the token holders' decision wins, unless Cayman law requires otherwise.¹³
• The bylaws also say the directors are not fiduciaries for the token holders. Their duties run to the company.¹³

How the model counts votes

• An ordinary resolution needs a simple majority of the votes cast.⁹
• A special resolution needs at least two-thirds of the votes cast.⁹
• The quorum, the minimum needed for a meeting to do business, is a majority of the people entitled to attend, and must include the founder if the founder is alive and able.⁹

When it breaks down

If a foundation company runs out of directors or supervisors, or they stop doing their jobs, and the constitution can't fix it, the Grand Court can step in.¹⁵ It can appoint or remove directors and supervisors, change the rules about appointing them, or wind the company up.¹⁵ The directors and officers have a duty to apply to the court when the problem is a lack of directors.¹⁵