Nominee director and nominee shareholder – Who are they, and do i need them?
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Are you planning to start an offshore business? Then you need to have information about who is a nominee director and nominee shareholder. When opening a company, whether in your home country or abroad, several things are required of you to make sure that everything is as per the company’s Act.
It is crucial to get all these legalities right for your own protection and safety of your investment in the company.
Some of the requirements you need to keep in mind are;
- The name of the company
- Company’s physical address
- Other officials of the company, including directors
- Share structure
- Article and memorandum of association
- The industry classification of your company
- Tax details of the company
Now, some company investors may prefer not to name themselves as a director or shareholder for various reasons, and therefore nominate someone else to act on their behalf.
Most of these investors make this decision to remain anonymous to the public — they will not be publicly associated with the operations of the company.
This is where a nominee director and shareholder come into the picture.
If you own an offshore company, you most probably have an offshore bank as well, and you may wonder what will happen when you appoint a nominee to act on your behalf.
In this case, every offshore bank understands the existence of nominee services.
Through a Declaration of Trust or Power of Attorney, you will be authorized to access the account as the ultimate beneficial owner of the company.
For you to understand how nominee services work, learn more about a nominee director and nominee shareholder from this context.
Who is a nominee director?
Every company needs directors who serve the company in different ways. They are the people who usually finalize the most strategic decisions in a company.
While most of the directors are independent directors, a nominee director can also be appointed by anyone who has a significant interest in the company.
The appointors can be a shareholder, creditor, bank, investor, or any other interest group. Therefore, a nominee director is a director who acts on behalf of another person or entity. He offers his loyalty to the appointor at the board level and the company at large.
The agreement can be made contractually or through a resolution during a company meeting. A nominee can either be an individual or an entity.
This nominee happens to be a compulsory requirement for some countries when you open an offshore company. It means that a non-resident beneficial owner of an offshore company needs to appoint a resident non-executive director to represent him on the board of directors (opens in a new tab).
The main question here is, can a conflict of interest occur based on the loyalty of the nominee director?
Conflict of interest with a nominee director
One of the responsibilities of nominee directors is that they must always have the company’s best interest at heart, just like any other director of the company.
However, these directors are expected to report to the appointors about the performance of the company.
Sometimes they can also represent an appointor commercially when need be.
Now, assuming that the appointor owns another business, which is a competitor or customer to the company, what should the nominee do to protect the interest of both parties?
Remember that all directors of the company, including the nominated ones, are entitled to every information regarding the company so as to carry out their duties properly.
This is where a conflict may come in — the nominated director is torn between keeping the information from the appointor and sharing it with him.
A nominee needs to make an informed decision to avoid such conflicts of interest or breaching his duties according to the law. A court will rule based on the interest in which the director was acting.
Therefore, a nominee can only consider the interests of an appointor other than those of the company when;
- It is a paramount interest of the company for the nominee to have considered the interest of the appointor
- The director reasonably and in good faith determined that considering the interest of the appointor is part of fulfilling his duties in the company
Conflicts of interest may cause losses, among other issues, to the company. Therefore, it is essential to define some protocols that would prevent competing interests between the parties involved.
The protocols set will help in conflict resolution and also define when information should be shared or withheld from the nominee — for the best interest of the company.
However, the protocols should consider the legal duties of the director, the rights of the company, and the balancing fact that the nominee is there to represent the appointor.
A power of attorney for the nominee
As the ultimate beneficial owner of an offshore company, you should know that your rights are always protected through the Power of Attorney (opens in a new tab).
The legal document shows that you are the rightful owner of the company, and you have full control over it — the nominee is only there to represent you.
This is a contractual agreement between you and the nominee, and every action made by him will be as per stipulations therein.
When the contract ends, you will get back all your rights in the company, and the nominee will not act on your behalf any longer.
The roles of a nominee director
Whether it is a domestic or an offshore company, there is one primary reason why individuals and entities appoint a director — anonymity.
The rightful owner of the company wants to be shielded from any public association with the company.
The non-executive director is actively involved in the regular business of the company, whereby he literally fills the position of the ultimate beneficial owner.
This means that he can make invoices, sign contract documents, and accounts, among other business correspondences, as if he is the owner of the offshore company. This is done as per the directives of the appointor.
His participation in the company is formal, and he will be paid a fixed responsibility fee for the services delivered.
Nominee’s director fees
The fees charged by the director depending on the nominee services they are providing to the company. In most cases, people and entities do not appoint a nominee directly, but they do this through firms that offer such services.
This means that they are the ones who charge you the fee as the appointor, and they ensure that the nominee directors carry out their duty as stipulated in the contract.
For instance, for a nominee to shield your identity in public, you can be charged about $500 to $800. To get the nominee’s signature under a legal agreement, you may pay about $300 to $500.
Finally, if you want the Power of Attorney agreement to be certified through a Notary Public, then a $300 to $500 fee may apply.
This means that the fee paid for appointing a non-executive director depends on the notary services you receive from the provider.
Some of the third-party firms may group these services and offer it to you as a package.
Comparison of the Top 5 Offshore jurisdictions
A shareholder also referred to as a stockholder, is a person or an entity that owns at least one share in a company’s stock. They are the parties who enjoy the benefits of a successful business and, of course, suffer the consequences when a company is not doing well.
The rewards they get from the offshore company are dividends from the profits and success of the increased price of the company’s stock. Now, what if a shareholder wants to remain anonymous, resulting in the appointment of a nominee shareholder?
What are the consequences?
A nominee shareholder is an apparent stockholder who gets to hold shares in a company on behalf of the beneficial owner.
He is also referred to as a nominee stockholder, and he acts accordingly under the stipulation of a custodial agreement. The main reason why the rightful owner of the shares may decide to appoint a nominee is that they do not want the stock to be registered under their name.
A nominee stockholder can either be an individual or an entity.
Most stockbrokers take advantage of such arrangements, whereby they form a company and then seek to act as nominees. This way, it becomes easy to buy and sell shares for their clients because they are actively involved in the company.
One thing you must remember is that even if the nominee is registered as the owner of the shares, he is only holding that stock — the benefits will still go to the actual shareholder.
The main consequence of appointing a nominee stockholder is that you do not appear to the public as the owner of the shares you bought.
This arrangement needs to be kept a secret.
However, you still own the rights to sell the shares, vote in general meetings, and also receive dividends.
Most people prefer appointing nominees close to them or, in other words, people they can trust. For instance, a nominee stockholder can be your relative, friend, or professional such as an accountant or a lawyer.
When you appoint a nominee stockholder, you are also required to appoint nominee directors to represent your interest in the company.
A nominee stockholder will hold your shares under the conditions stipulated in the Declaration of Trust — a custodial agreement.
It declares that a nominee stockholder does not have any claim over the shares of your offshore company.
It is a way of protecting the assets of the beneficial owner — in other words, the rights to these assets. A nominee stockholder is not allowed to make decisions or even sign shares documentation on behalf of the company.
Also, they will not have access to your home or offshore bank accounts.
The primary purpose of appointing a nominee stockholder is to shield the ultimate beneficial owner from getting associated with the affairs of a company publicly.
The Declaration of Trust would be used to identify the duties of the nominee and assertions that he is promising to uphold. It also shows the total number of shares held by the nominee and a clause declaring that the beneficial owner still retains the rights over the shares.
Therefore, the work of the nominee stockholder is simply to hold the shares by getting them registered under his name. Again, you may not need to appoint the nominee by yourself — the best option is to work with a firm offering nominee services.
The third-party involved will ensure that the nominee carries the duties properly, and once the contract is completed, they will oversee the resignation of the nominee stockholder.
When a nominee resigns, you will regain your power to continue running the offshore company without any objection.
Most risks of appointing nominees are brought by the inadequacy of the agreement between the appointor and the nominee.
For instance, you can decide to nominate an individual or entity and fail to provide written proof of your arrangement. The only evidence that a beneficial owner relies upon is an oral or verbal agreement with the nominee. This is one of the main reasons why you need a third party to help you seal the contract properly.
Otherwise, here are the main risks you are exposed to without a written agreement.
- A nominee might betray you and claim that they are the real owners of the shares of the company — they may begin by treating the stocks as a gift from you.
- A nominee can decide to demand more money than you agreed to carry out his duties.
- In case a nominee dies or is mentally challenged, his representatives may refuse to honor the agreement you had and start treating the shares as property for that nominee.
- Sometimes, a nominee can just decide to become uncontrollable for no good reason, which means they are not carrying out their duties in the right way or are not doing it altogether.
- A nominee might decide to do things as they wish without following your directives. For instance, they can start selling your shares, using your stock as collateral to acquire a loan, or pay themselves a service fee as a director.
- Finally, instead of shielding your identity, they may opt to disclose the arrangement to other people.
With all these scenarios, there is a high chance that you can lose stock ownership. You may also become answerable to the unauthorized actions of the nominee. While you may recover your rights to the stock or control of your offshore company, you will need to hire a reliable lawyer — this comes with hefty legal fees.
What should you do to mitigate these risks?
You must take advantage of documents such as the Declaration of Trust because they provide a declaration from the nominee that they will abide by the rules stipulated therein.
You need to retain these documents and use them as evidence in case a nominee acts contrary to the agreement.
You do not want to face a nominee who refuses to transfer shares or rights to you when you need them to.
Again, if your entity is a private limited company, make sure that you keep the share certificate.
In the case of a nominated director, you can ask them to sign an undated letter of resignation in addition to the Power of Attorney to keep the company’s protection at bay.
It will be effortless to remove him if they are not acting accordingly.
Also, follow the right procedure to appoint a nominee director or shareholder.
You can never be too careful with your investment — be serious with every protection measure before you relax.
Question & Answers
What Is the Difference Between a Nominee Director and Independent Director?
Both the nominee and independent directors are non-executive directors who are not part of the management.
The difference between the two directors is that the independent director is free from business relationships that could substantially interfere with his independent judgment when exercising his duties.
A nominee, on the other hand, does not have any independence in his opinions.
The main difference is, therefore, on the control of the decisions they make.
A nominee makes decisions based on the directives of the appointor, but the independent one makes autonomous decisions without the control of others.
However, all directors act in the best interest of the company — sometimes in the interest of an appointor when it comes to a nominee.
Generally, all directors have the same responsibilities and duties towards the company regardless of the title they carry.
Appointing a nominee shareholder is perfectly legal as long as you are doing it for the right reasons and carry it out in the right way.
Therefore, when you are registering an offshore company, consider appointing a nominee to hold your shares and take up the roles of a shareholder.
Again, to ensure that your rights are secured to ensure the nominee signs the Declaration of Trust and hand it to you.
If you are registering a limited offshore company, you may consider appointing a nominee director or a shareholder to act accordingly on your behalf in the company. The main reason for this option is to retain your anonymity and shield you from any connection with the entity in question despite being a rightful owner.
The first thing you must remember is that it is perfectly legal to appoint these representatives.
Secondly, to safeguard your interest and rights in the company, ensure that the necessary documents are written, signed, handed over to you.
Finally, consider involving a third-party firm to help you set up the agreement between you and the nominee.