UGANDA MARTYRS UNIVERSITY NKOZI

NAME: NYINOMUNTU ANNET

REG.NO: 2019-B411-12400

YEAR: III

COURSE UNIT: BUSINESS ASSOCIATIONS I

LECTURER: MR. OKECHO PATRICK

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Decentralized Autonomous Organizations (DAOs) are new forms of social organizations
deployed in the dematerialized environment of the block chain organization represented by rules
encoded as a computer program that is transparent, controlled by the organization members and
central government. 1For example, Decentralized finance (DeFi) which is an emerging financial
technology based on secure distributed ledgers similar to those used by cryptocurrencies. The
system removes the control banks and institutions have on money, financial products, and
financial services. Its evolution has abundant literature on decentralised organisations of several
kinds. Therefore, since it is an evolving, it has to be integrated in existing businesses to create a
legal opinion and get its legal aspect to identify its advantages and disadvantages.

It is important to know that there are many businesses or corporate organizations, and
therefore, integration, advantages and disadvantages are discussed as a legal brief herein.
According to Section 2 of the Companies, 2012 a company means a company formed and
registered under this Act or an existing company or a re-registered company under this Act. With
reference to Professor David Bakibinga in his book Company law in Uganda 2 a company is
an artificial entity separate and distinct from its members and shareholders. The possession of
legal personality shows that a company is capable of enjoying rights and being subject to duties
separately from its members. In the case of Salomon v Salomon3House of Lords well expressed
the principle of corporate personality by stating that a company is a corporate entity separate and
distinct from its members. Thus, it can sue and be sued in its own, it has perpetual succession, it
can be a creditor, it can own property, among others.  In my opinion, decentralized autonomous
organization is a group of people who come together without a central leader dictating any of the
decisions. They are built on a block chain using smart contracts, here the members of DAOs
often buy their way in by purchasing a governance token specifically for the DAO that gives
them the ability to vote on decisions that are made around the group of people operating the
system and how the money is spent and managed.
When addressing the legal implication of liability, we ought to understand that as you intend to
integrate the DAOs into this mode of business formation, one should understand that DAOs lack
1
Clinical Professor of Law, Benjamin N. Cardozo School of Law; Director of Cardozo
Blockchain Project.
2
at page 2
3
(1897) AC 22
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any formal legal recognition, creating potential liabilities for DAO members and exposing
members to the organization’s liabilities and responsibilities. DAOs also remain outside of
traditional systems, limiting the ability of these organizations to transact with more traditional
legal enterprises. Thus, like the Internet, a public block chain is an open infrastructure, not
owned or controlled by one central authority which makes it difficult to trace liability in case the
system shuts down or operates in error or is hacked .in spite of the promises DAOs present in
there encoded secured system for example that  DeFi, uses emerging technology to remove third
parties in financial transactions thus eliminating issues like Pre Incorporation Contracts where
promoters  of companies usually enter contracts with 3rd parties on behalf of the unincorporated
companies. They are not binding on the company because its not yet in existence hence it has no
capacity to contract.

In company law, where there has been fraud or improper conduct by any member or partner of
the company what you would call a member in DAOs. Here, the veil on incorporation may be
lifted where the corporate personality is used as a mask for fraud or illegality. in D.K
construction Company ltd and Another v Barclays Bank of Uganda Ltd 4 Uganda commercial
court law reports 201 it was held that the veil incorporation can be lifted by court if it is satisfied
that the company was used as a vehicle for fraud by its directing mind. The other advantage of
DAOs is that they offer a solution well recognised and examined by its peer-to-peer code to the
principal-agent dilemma.

Another legal implication would be governance in DAOs often is achieved in a less hierarchical
manner, and in a way that is generally more reliant on group consensus. These new organizations
do not necessarily rely on boards of directors or chief executive officers rather, an increasing
number of DAOs are managed by distributed consensus using smart contracts to aggregate the
votes or preferences of members, On the positive side companies operate with a Memorandum of
Association is the constitution of a company. MOA prevails overall. In Hickman v. Kent (1915)
1 Ch. 881 Hickman was fired from company after arbitration as the articles provided, his attempt
to go to court was stayed as he was bound to submit to the arbitration. It also spells out the main
objectives and powers of the company; however, some powers may be implied in the
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[2002-2004]
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Memorandum of Association. For example, in Ferguson v. Wilson 5, a power to appoint agents &
hire employees was implied in MOA. This is only sensible because a company as a fictitious
person can only work through agents, hence if that power wasn’t implied co. would never work.

Pooling of capital is yet another legal implication to address upon integration since it is just one
of the potential operational efficiencies presented by DAOs. DAOs also streamline group
decision-making by either deferring entirely to an algorithmic system or by deploying
blockchain-based voting schemes 6. Currently many DAOs are exploring the latter approach,
implementing mechanisms for DAO-members to engage in secure digital voting. Participants in
DAOs sign a block chain-based transaction and record evidence of a vote on a block chain, with
comparative voting weights assessed by capital contributions, ownership balances, or ownership
of a DAO‟s native token ,at this point one may agree with the confidence that companies provide
since they carryout voting at Meetings and each member has one vote and it is by show of hands,
irrespective of number of shares and no proxies allowed under Section 136,Section 137 of the
Company’s Act Cap ,a poll may be demanded in a company with share capital where each vote
is represented by shares’ AOAs cannot exclude right to demand a polls. Here the rationale is that
those with higher stake have more care in what they choose or else they lose more and if the
voting by poll is not done in good faith can be invalidated Re Clemens v. Clemens Ltd 7 which
happens to be a safeguard over DAOs that simply internet-native organizations collectively
owned and managed by their members and have built in treasuries that are only accessible with
the approval of their members and their decisions are just made via proposals the group votes on
during a specified period.

Legal Issues of the nature in which a DAO versus a Partnership may arise. In W v.
Commissioner of Taxes 8 is to the effect that for a partnership to be established, the parties have
to pool resources together, the business must be carried on jointly among the parties, the
objective must be to make profits. The parties in the instant case have pledged contributions
towards the set-up of a business for tailoring and sale of face masks. A partnership is the ideal
business entity in the circumstances as it will allow the intending partners to pool resources
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6
DE FILIPPI & WRIGHT, supra note 13, at 131-45.
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[1976] 2 ALL ER 268
8
(1969) EALR 99
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towards the collective establishment of the proposed business, while generating a profit. This
business entity which has a maximum of 20 persons as a requirement for validity will
accommodate the intending partners considering that the number. Furthermore, under general
partnerships as a mode of business formally recognised in law, all parties are jointly liable for all
debts and obligations of the firm. On the other hand, according to Section 47(3) of the
Partnerships Act, 2010, limited liability partnerships consist of at least a general partner who is
liable for all debts and obligations of the firm and one or more limited liability partners who
partners contribute a stated amount of capital to the firm, and are not liable for the debts or
obligations of the firm beyond the amount of capital so contributed.
A limited liability partnership is proposed considering that the partners in a limited liability
partnership are not liable for claims made against themselves or other partners which is not the
case with a general partnership which seems to look like the DAOs that have an ecosystem
which is still riddled with infrastructural mishaps, hacks, and scams because these DAO groups
can be made up of people from around the world, who often communicate on Discord channels.
In that sense my opinion of the aspects of integration would be to first explore more on the
nature of DAOs and emphasizes highlights several areas where regulators before one  can adapt
existing legal regimes to potentially accommodate DAOs in all jurisdictions despite the fact that
Uganda for example realises another on common law as a source of income it can as well
examine international law to realise the relevance of DAOs so as to draft proper regulations to
monitor them domestically.

Legal implications on dissolution or withdrawal, in DAOs, the members control over any assets
deposited into the organization. An increasing number of recently launched DAOs provide
members with smart contract-enforced mechanisms to withdraw their capital with a swipe of a
finger. If a DAO no longer serves a given member’s purpose, they can receive back all or a
portion of any contributed assets. This process, colourfully branded by technologists as “rage
quitting,” provides members with strong downside risk protection and a degree of control over
any funds deposited into a DAO. Members have the choice to vote to deploy assets for a
particular purpose or can withdraw those assets if they disagree with the decision of the group.
Before we begin to even address Duties of partners under Partnerships as under Section 22 of the
Act require parties to apply partnership property exclusively for the purpose of the partnership in

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accordance with the partnership agreement. Additionally, partners have a duty to render true
accounts and full information of all things affecting the partnership to any partner or his or her
legal representative this is to say on the dissolution of a partnership, any partner may publicly
notify the dissolution according to Section 39 of the Partnerships Act, 2010. This is according to
Regulation 9 of the Partnership Regulations, 2016, the public notice required to be given upon
dissolution is to be in law as provided for in Form 4 in Schedule 2 to the regulations that
highlighted such issues.

We should realise that with DAO membership is not viewed as necessarily long lasting and may
prove to be transitory in nature. Members may join for limited periods of time, participate in the
organization, and exit a DAO due to a lack of interest, a better opportunity, or for other reasons.
In this sense, under law of Partnerships ,Section 28  of the Partnership Act Cap 2010 is to the
effect that where no fixed term has been agreed upon for the duration of the partnership, any
partner intending to dissolve the partnership shall Give reasonable notice to the other partners of
his or her intention to do so and obtain the consent of the other partners regarding the dissolution
of the partnership. Therefore, a business owner intending to withdraw from such an arrangement
must give reasonable notice to the partners and thereafter obtain necessary consent from the
same. Additionally, Section 39 necessities a retiring partner to issue a retirement notice. And is
to the effect that on the dissolution of a partnership or retirement of a partner, any partner may
publicly notify the dissolution or retirement of that partner, and may require the other partner or
partners to concur for that purpose in all necessary or proper acts, if any, which cannot be done
without his or her or their concurrence this is to say partnerships created an assurance kind of
formal proof of the withdraw with notice which may be a downside in DAOs at the moment it
being an evolving organization not yet embraced in our laws but rather in the USA cooperate
system .

In conclusion, decentralized autonomous organizations aren’t perfect but they are extremely new
technology that has attracted much criticism due to concerns regarding their legality.
Therefore, comparison will help us to better understand the DAO aspect growth, activity to be
integrated into our existing business modes when we finally understand its regulations
applicability into our system and loopholes in our common law system which we subscribe to.

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I would therefore, advise my client basing on the advantages discussed above.