Who Enforces Your Foundation?

The Potential Governance Gap in Foundation Companies

Introduction

The Cayman Islands foundation company (referred to herein as the foundation or the foundation company) has come to be the vehicle of choice for structuring a wide range of Web3 projects. Given its prominence, there is an important question that doesn’t arise all that often but one that should be considered: Who has the power to get your foundation back on track when it stops doing what it was created to do? There is a simple answer to this question: potentially nobody.

This article explains why, what the relevant law says and what can be done about it. As always, Horizons Global stands ready to cater for your governance needs.

Why Use Foundation Companies?

The foundation company is a flexible vehicle that lends itself to a variety of Web3 projects due to its ability to:

• be established without shareholders, members or any form of traditional owners, making it distinctly suitable for community-governed projects;

• to hold assets, enter contracts, engage third parties and employ people in its own name, giving an otherwise ownerless protocol a real-world legal identity;

• for its constitutional documentation to mirror on-chain governance structures; and

• to be incorporated under the laws of the Cayman Islands, which are well-tested and widely respected.

In summary, a foundation lets a decentralised project exist in the legal world without handing ownership to any single person or entity. For many Web3 founders, that is exactly the point. However, this flexibility comes with a structural feature that is frequently overlooked at the drafting stage which risks frustrating a project's stated mission.

The Devil is in the Detail

The Foundation Companies Act (2025 Revision) (the FC Act) governs how foundations work. Section 7(5) contains the following rule:

“A foundation company has a duty to carry out the objects set out in its memorandum if, and only if, the memorandum (a) expressly so declares; and (b) designates, or provides for the designation of, persons with standing to enforce the duty by action against the foundation company.”

The Objects Clause Is Not Enough

Every foundation has a memorandum of association (Memorandum) which is filed with the Registrar of Companies when the foundation is established. The Memorandum includes an objects clause (i.e. a description of what the foundation exists to do). For a Web3 project, this might include something like: "to support the development, use and adoption of the ABC Protocol and a cryptographic token associated with the ABC Protocol“. That sounds clear and purposeful.

However, under the FC Act, stating an object in the Memorandum and being legally bound to pursue it are two very different things, and a duty only arises to carry out that object provided that (a) there is an express declaration of duty and (b) an enforcer has been designated.

Express declaration of duty

The Memorandum must explicitly state that the foundation is under a binding duty to carry out its objects. Simply listing what the objects are is not sufficient. The obligation must expressly state the obligation and not provide room for discretionary choice. This is a surprisingly common drafting omission, especially in foundations set up quickly during a token launch or protocol fundraise.

Designating an enforcer

Even if the duty is expressly declared, it means nothing without someone who has legal standing to enforce it. The Memorandum must designate (or establish a mechanism to designate) specific persons who can bring a legal action against the foundation in the event that it fails to carry out its objects. We refer to this designated person as the “enforcer”. It is important to note that the enforcer does not manage the foundation, nor are they a director. The sole function of the enforcer, in this context, is to be able to hold the foundation accountable to its stated mission. Without an enforcer, no one inside or outside the foundation has a legal basis to take action if the standing directors simply stop pursuing the foundation’s goals in line with the Memorandum’s objects.

No Access to Grand Court?

There are further consequences where section 7(5) is ignored. The FC Act includes a valuable mechanism for foundations where it’s directors are uncertain about how to act. This involves the right to apply to the Grand Court of the Cayman Islands for guidance or directions. This right, set out in Section 20 of the FC Act, is seemingly only available to foundations that have an operative section 7(5) duty. If a Memorandum was not drafted to satisfy section 7(5), this option is apparently unavailable. Where a foundation operates with real on-chain governance complexities, multi-jurisdiction regulatory considerations or disputes between ecosystem contributors, this loss of access to a resolution mechanism is potentially a fundamental failure of governance.

Are You Affected?

The Memorandum is filed with the Registrar of Companies and is not publicly available. This means it is not possible to conduct a comprehensive review of how foundations across the market have handled the section 7(5) question. What we can say is that (a) the model Memorandum set out in the FC Act does not include an express duty declaration or an enforcer designation (b) in our experience, a majority of foundations appear to have been incorporated using broadly standard constitutional documents without specific attention to the section 7(5) requirements and (c) enforcement issues are sometimes covered in by-laws which act in parallel with, but do not supersede, the Memorandum and would not satisfy the statutory test. The practical conclusion is that a significant number of foundations may be operating with object clauses that are legally unenforceable.

What Can You Do?

If you are assisting with the set up of a new foundation, work closely with your Cayman Islands’ legal counsel and your foundation directors in order to avoid the pitfalls of Section 7(5).

At a minimum, the Memorandum should stipulate (a) an express declaration that the Foundation is under a binding duty to carry out its objects and (b) designate an enforcer. As the “interested person” of a foundation (typically a supervisor) already has other enforcement powers, we suggest appointing this person as the designated enforcer.

If your foundation currently exists, consider whether the current structure remains fit for the project's purposes and governance needs as the project matures. Please note, however, that a Memorandum may only be altered where an express power of alteration is included. If no amendment power exists, the objects may be fixed.

In all cases, you should discuss your options with your legal counsel.

Conclusion

A foundation does not automatically have a binding legal duty to carry out its stated objects. That duty only exists if the memorandum expressly declares it and designates someone with the legal standing to enforce it. Without both elements, no one has a legal basis to hold the foundation accountable to its mission - no matter what the objects clause says. For Web3 projects that have chosen to utilise a foundation, this is potentially a gap worth closing.