Hale and Dorr LLP
60 State Street
Boston, MA 02109
TO: Charlie Nesson
CC: Belinda Juran
FROM: Jorge Contreras
DATE: April 7, 1999 (revised Apr. 10)
RE: H20 Governance
Below is a list of questions that can kick off the discussion of H20 governance. I would envision each of these questions as the starting point for a threaded discussion that would be conducted in parallel with similar discussions covering technology and intellectual property issues.
I will plan to monitor the discussion actively and give it as much structure as possible. After a couple of weeks, I would propose ending the discussion so that we could begin to prepare documents based on whatever consensus is reached, sufficiently in advance of the "signing" being held on May 20.
H20 GOVERNANCE DISCUSSION
(Partner, Hale and Dorr LLP; Fellow, Berkman Center of Harvard Law School)
H20 is intended to be a not-for-profit, self-governing organization dedicated
to the open code principles espoused by the Bollier article. The organization
will be a consortium of
The purpose of this discussion is to gather input from interested participants and to achieve consensus surrounding the structural parameters that will be used as a basis for the H20 organization. The following outline presents a number of open-ended questions and statements that are intended to elicit response and commentary from discussion participants. As you will see, many of these questions are interrelated and cannot be answered without answers to other questions. Some of them are dependent on questions that must be answered in other discussions, such as those relating to technology and intellectual property. Finally, all of these questions reflect my own thoughts and experiences in this area, and some are phrased deliberately to instigate discussion. I welcome any responses that you may have, including further questions, no matter how banal or controversial. I will monitor the discussion and interject explanation and commentary as appropriate.
A. Organization. Some basic organizational choices must be made with respect to any newly formed entity. The most important of these are the following:
1. Form of Entity. A consortium such as H20 may be embodied by a variety of different organizational forms, including an unincorporated association, a partnership (including a limited partnership or a limited liability partnership), a limited liability company, and a corporation (either a stock or a non-stock membership corporation). The choice of entity will be dictated by numerous factors, including liability protection, tax treatment and ease of administration. Non-profit consortia exist and thrive using each of these forms, yet it will be important to choose one that best suits the needs and expectations of H20. What are your views regarding this choice?
2. Jurisdiction. Ultimately, I would expect H20 to achieve an international character. However, initially I believe it will be based in, and operate primarily within, the United States. Thus, I would suggest that the organization be formed in the United States. The choice of a jurisdiction of incorporation should be based both on the legal protections afforded by the various states, as well as practicalities such as cost and convenience. Delaware is the most common U.S. state of incorporation, has a well-understood body of law, and offers an efficient and speedy registration process. On the other hand, H20 will not be operating in Delaware, and would, thus, be required to register as a foreign corporation in whichever state(s) it actually operates (requiring the payment of relatively minor fees and the filing of appropriate foreign qualification documentation).
3. Tax Status. Should H20 seek tax-exempt status under Section 501(c) of the Internal Revenue Code? Such status would make its revenues tax-free, and would enable other organizations to deduct contributions made to H20 as charitable deductions. However, H20 may have to constrain its activities (particularly any revenue-generating activities) in order to qualify for and maintain tax-exempt status. Remember, not all non-profit enterprises are tax-exempt, and there may be advantages (political or otherwise) to remaining non-profit, even if tax-exempt status is not sought or obtained.
B. Membership. The next question that must be considered is who will participate in this organization, or what, if any, qualifications for membership in H20 will exist? The answer to this question will depend, to a large degree, on the rights and responsibilities of members, discussed in Section C below. However, it is important to begin that discussion with an understanding of the general scope of the membership. That is, will membership be open to all interested individuals and organizations (i.e., the whole Internet), or will it be limited to specific categories of institutions? It is not uncommon to have separate "classes" of membership defined by industry sector or constituency, each having different rights and responsibilities. For H20, I could envision constituencies consisting of universities, technology providers, and non-profit/governmental organizations. What mix of rights and responsibilities might be appropriate for each of these different H20 constituencies?
C. Rights and Responsibilities of Members. Closely tied to the question of membership eligibility is the definition of membership rights and responsibilities. Possible rights and responsibilities of members fall into the following categories:
1. Voting. Members of an organization can have varying levels of influence over the organization's operation. Some membership organizations, such as VISA and Mastercard, give their members very little voice in the organization's operation. These members are required to abide by a set of operational rules promulgated by the organization's governing body, and generally have no ability to change these rules. Other organizations give members significant rights, including the right to approve or reject changes to the organization's charter documents, to admit new members, to expel existing members, to assess charges on the members, and to elect Directors. These voting rights, or course, can differ among membership classes, and may, in some instances, require a "supermajority" vote to take action. How "empowered" should the membership of H20 be? Should this empowerment differ based on membership classification?
2. Election of Directors. Specific details relating to the Board of Directors of the organization are discussed in Section D below. However, at this point it is sufficient to ask whether the members will elect the directors and, if so, whether all members will have an equal vote or whether certain classes of members will designate specific directors.
3. Funding. A membership organization often receives a significant portion of its funding from membership dues or assessments. What, if any, funding will be required of the H20 membership? Should different funding commitments be required of different membership classes? Should funding levels be based on characteristics of members, such as size, revenue, or profit v. non-profit status? When, if ever, will the organization be entitled to assess additional contributions from its members, and what will be the effect of a failure to pay?
4. Meetings. When, where and how frequently should the membership of the organization meet? What business should be conducted at members' meetings? Should members be permitted to designate other members as "proxies" to represent them, or vote on their behalf, at meetings?
5. Benefits. Other than playing a role in the oversight of the organization, what benefits will members of H20 receive? Should they have early access to software, the ability to attend technical conferences, free documentation, access to H20 development resources, reduced prices for development work, licenses with enhanced rights, or other benefits? If members are expected to fund the organization, they will probably expect some benefits along these lines. However, these types of enhanced rights often pose problems in the tax-exempt and antitrust areas. Thus, these factors should be balanced against any potential adverse consequences of providing such enhanced benefits to members.
D. Board of Directors. Most organizations are governed by a Board of Directors or similar body. The appointment and composition of this body is of critical importance to the organization.
1. Size of Board. How many members should be on the Board? It should not be so large as to be unwieldy, but should adequately represent all constituencies. How should changes to the size of the Board be determined?
2. Board Composition. Should the Board be composed solely of persons representing the members or different constituencies, should outside "experts" also participate, or should the membership simply hold general elections to select Directors? Most for-profit companies find it valuable to enlist the assistance of industry experts or veterans on their Boards, both to take advantage of their experience and to lend them credibility. However, the power to elect directors in stock corporations is vested in the stockholders, and even the most qualified candidate may be voted down. The members have significantly greater flexibility to determine the method of electing or appointing directors in other entities, such as non-stock corporations, partnerships and LLCs.
3. Term of Office. Board members often serve one year terms, which may be renewed by the members. Under the laws of many states, a "classified" Board is permitted, in which the Board is divided into 3 classes having staggered 3-year terms. With some corporate structures (such as an LLC), there is almost unlimited flexibility in determining the terms of Board members.
4. Voting. Typically, Board decisions are effected by a majority of the quorum at any meeting. However, certain matters are often reserved for decision by a higher percentage of the Board. Such matters could include amendments to the organization's charter documents, merger or liquidation of the organization, incurrence of significant debt, expulsion of directors and members, and funding assessments on the members.
5. Transparency. Many governmental bodies (such as permitting and zoning boards) are required to make their meetings and deliberations open to the public, so as to permit the citizen constituencies being affected by their actions to participate in the deliberative process. This desire for transparency has also manifested itself recently in the discussions surrounding the formation of ICANN, which has inherited certain important Internet management functions from the U.S. government. As a result, the ICANN Bylaws provide that all Board meetings must be open to the public. In contrast, most companies, including non-profits, keep Board deliberations closed. This closure is viewed to foster open and frank discussion within the Board of subjects that are often sensitive and which could relate to the ongoing viability of the organization. In addition, openness of Board deliberations could limit the Board's ability to formulate the best means of releasing or "spinning" information to the public (as information would be "released" as it is discussed). To what degree should H20 open its Board deliberations to persons not on the Board?
6. Advisory Bodies. In technology organizations, it is not uncommon for the Board to appoint advisory bodies with specific technical expertise. Should H20 have one or more technical advisory bodies? If so, what areas should be represented, how large should they be, and who should be members? Should these bodies have any policy-making authority, or should they simply advise the Board when requested to do so?
7. Payments. Very few non-profit entities pay Directors for attending Board meetings. Some, however, reimburse Directors for expenses incurred in attending Board meetings, particularly if meetings are expected to be frequent and/or distant. Other organizations, however, expect the Directors' employers (or the Directors themselves) to pay these expenses. What policy should H20 adopt in this area?
E. Officers/Employees. Although the Board of Directors has ultimate responsibility for managing the affairs of the organization, its day to day operations will be overseen by one or more officers. The officers are appointed by the Board and serve at its pleasure. Typically, a corporation would have the following officers, at a minimum: President, Secretary and Treasurer (all of which offices could be vested in the same person). Other forms of entity could have the same or different officers. Issues to consider with respect to the officers are the following
1. Identity. Who will be eligible to serve as an officer of the organization? Can Directors or employees of members serve as officers?
2. Compensation. How will officers (and other employees) be compensated? Will compensation be fixed or performance-based? Will the organization enter into employment agreements guaranteeing employment for certain periods of time, or will officers and other employees be employees "at will"? What benefit plans will the organization put into place (medical, dental, disability, 401(k), severance, etc.). An organization's ability to attract and retain qualified employees is directly related to its compensation package. Non-profit entities are at a distinct disadvantage in that stock options, a significant source of compensation in high tech ventures, are not available to non-profits.
F. Funding. How will H20 be funded? Many non-profits rely largely on membership dues/assessments for their funding. Other traditional sources of income for non-profits include charitable contributions and grants. In addition, organizations can generate revenue directly from the sale or licensing of goods and services. However, tax-exempt entities must take care in the type of revenue-generating activities in which they engage. H20's revenue generation model will necessarily be tied closely to its licensing and intellectual property strategy, which is under discussion.