No longer the exclusive domain of cryptocurrencies and gaming, the metaverse and Web3 provide an attractive marketplace for companies and investors alike – but also raise numerous new corporate law issues. The metaverse and Web3 are significantly characterised by what are known as decentralised autonomous organisations (DAOs). The establishment and management of these integral components of the metaverse and Web3 demand special legal expertise. As “corporations of the metaverse”, DAOs require both effective governance structures and token-based incentive systems to function. Investing in metaverse and Web3 companies – usually using cryptocurrencies and tokens – also requires navigating new legal complexities.
It’s not only start-ups that have gained a foothold in this market – large, established companies and investment funds have long since begun to position themselves in the metaverse by strategically investing in or acquiring Web3 firms. In response to increasing demand for suitable access options, especially access via DAOs, the market for metaverse infrastructure providers is also growing.
Unlike traditional corporate structures, decisions at DAOs are made not by management bodies, but by tokenholders with voting rights, and then implemented using self-executing smart contracts.
Smart contracts – which run on blockchains – can be used to simplify corporate governance processes. For example, organisational rules like those normally found in corporate statutes and rules of procedure can be created within the DAO and automatically execute when certain criteria are met. DAOs are not subject to state governance regulations, but instead use smart contracts to set and enforce the framework that provides the boundaries of powers and obligations. This gives DAOs a certain leeway under corporate law to create governance structures tailored to their specific needs.
M&A deals involving DAOs therefore require not only special expertise in IT law but also indepth knowledge of the specifics of a DAO. To acquire a stake in a DAO, a traditional company, investor or another DAO must hold tokens in the DAO concerned. Not only acquiring the stake, but also implementing and observing tokenholder rights trigger highly complex corporate law issues. If two DAOs merge, the surviving DAO implements the merging DAO’s smart contracts – making it necessary to change the currency and tokens they use – and the merging DAO’s tokenholders exchange their tokens for the surviving DAO’s tokens.
Such transactions still involve the standard M&A processes, but with additional attention to the specifics of DAOs. Due diligence requires experience with smart contracts, governance structures of DAOs, and special knowledge of IT law – to adequately cover traditional matters such as warranties and liability when drafting token swap contracts.