A nominee shareholder can be defined as a person who ‘lends his name’ to you so that they can hold shares for your benefit. They act as the registered owner of company shares, on your behalf.
A nominee shareholder will appear to own the shares, and you are perfectly entitled to keep the arrangement secret. If done correctly, you keep all the rights and benefits to the shares (e.g. right to sell, be paid dividends or vote at general meetings).
A nominee director is a person who is appointed to act as a director of a company on your behalf. Both nominee directors and nominee shareholders are often family members or good friends, or they may be accountants or lawyers. Usually, the nominee shareholder is the same person as the nominee director.
This is a legal arrangement under Singapore law, provided it is used for legal reasons. The existence and the identity of the beneficial owner must be recorded so that public agencies are aware of it – bodies such as the Inland Revenue Authority, and the Accounting and Corporate Regulatory Authority.
Why appoint a nominee director and shareholder?
The most common reason for such an appointment is to keep one’s identity as a company owner secret, and to comply with the requirement that at least one director resides locally. However, there are also various other legitimate reasons for the arrangement.
In Singapore, searches on Singapore-registered companies can be carried out by members of the public, if they want to identify who the directors and shareholders are. This means that the names and personal details of shareholders and directors are freely available to anyone who pays a small fee to BizFile. Some entrepreneurs wish to avoid this, and so appoint nominee shareholders and directors.
For instance, if your company wants to expand into a new sector, a nominee arrangement will help to stop your suppliers or distributors finding out that you will be competing with them, or at least delay them finding out.
It is recommended that legal advice is sought in certain circumstances where there is a risk that you may be breaching employment obligations. For example, you should speak to a lawyer if you are considering using a nominee structure in the following high-risk circumstances:
- the terms of your employment stop you from setting up a business, even though the new business would not be in competition with your employer.
- You want to incorporate a new business now, but you’re still serving your notice period or waiting for the non-compete period to end from your previous job.
What are the risks of using nominee directors or shareholders?
Often, nominee directors and shareholders are appointed using a verbal ‘gentleman’s’ agreement, without written proof. This is risky, especially if any of the following situations occur:
- The nominee demands payment (or more payment) to carry out their duty as a nominee.
- Your relationship with the nominee deteriorates and they claim that the shares they received were actually a gift from you, and they are the real owner of them.
- The nominee becomes uncontactable.
- The nominee acts against your wishes, or uses the shares as security for a personal loan, or sells them, or pays themselves a service fee for acting as a director.
- The nominee discloses the arrangement to someone else against your wishes.
- The nominee dies or loses mental capacity and their heirs, deputies or personal representatives refuse to recognise the arrangement, and treat the shares as the property of the deceased or incapacitated nominee.
The risk in each of these situations is that you lose ownership of the shares, lose confidentiality and have to deal with the effects of the nominee’s unauthorised actions. You may also incur substantial legal costs whilst trying to enforce your rights.
How to Correctly set up a Nominee Structure
A nominee shareholder arrangement is most commonly set up by the nominee declaring a trust over the shares for your benefit, and then signing a declaration of trust. You can use other methods, like using a loan option agreement or a call option agreement, but these are more complicated, and are more suited to use in countries where the concept of trust is not recognised, or where the nominee structure is not permitted.
You should typically secure promises in the declaration of trust from the nominee, that they will follow your instructions, promptly transfer shares to you on request, and allow you all the rights and benefits in the shares.
You may consider getting a signed, but un-dated, share transfer form ready, to ensure that the shares are transferred to you even if the nominee refuses, or can’t do it themselves. You can also consider keeping the share certificate with you, (if the company in question is a private limited company).
Obtain a written document signed by the nominee director, where they state that they will only act on your instructions. Consider having a power of attorney granted so that you can act on behalf of the company, open bank accounts for it, and sign contracts. It’s also common for the nominee director to sign an undated letter of resignation, in order to protect the company from any claims they might make against it, and so they can be easily removed at the right time.
Using well-written documents to record nominee arrangements is crucial, and helps avoid the risks listed above.
You can contact us at any time for a free, no-obligation discussion about these matters.