What is the Difference Between a Nominee Shareholder and a Nominee Director?
A nominee shareholder is someone that “lends his name” to you to act as the registered owner of shares in a company. In truth however, he only holds the shares for your benefit.
If you appoint a nominee shareholder, he would appear to the world to be the owner of the shares, and you get to keep the arrangement a secret. And if the appointment is made in the correct way, you retain all of the rights and benefits in the shares, such as the right to sell the shares, receive dividends, and vote at general meetings.
On the other hand, a nominee director is a person who acts as a director of the company on your behalf.
Nominee directors and nominee shareholders are usually the same persons. They are often the family members or trusted friends of the entrepreneur, or professionals such as lawyers and accountants.
Nominee shareholder arrangements are not illegal under Singapore law. This is as long as:
- The arrangement is used for legitimate reasons
- The existence and identity of the beneficial owner (i.e. you) are recorded for the benefit of public agencies such as the Inland Revenue Authority of Singapore and the Accounting and Corporate Regulatory Authority
Why Appoint a Nominee Shareholder and Director?
There are various legitimate reasons for using a nominee shareholder and director arrangement. However, the most common reasons would be to:
- Keep one’s identity as the owner of a company confidential
- Comply with the requirement that at least one director of a Singapore company is a locally-resident person
In Singapore, members of the public can do searches on Singapore-incorporated companies to identify the directors and shareholders of those companies. In other words, the names and other personal details of directors and shareholders are publicly available to anyone for a small fee, which is something some entrepreneurs may wish to avoid.
For example, if your business intends to expand into a new vertical or sector which its customers, suppliers or distributors are in, using a nominee arrangement may help delay or prevent them from finding out that your business is in direct competition with them.
We have also advised employees aspiring to start their own businesses on adopting a nominee structure where:
- They were prevented by the terms of your employment from setting up a business, even if the new business was not in competition with their employer
- They had resigned from their job and were currently serving out their notice period, or had already left their job and were waiting for the non-compete period to end, but wished to incorporate a company early
If you find yourself in such situations, you should be extremely careful and seek legal advice before proceeding to minimise the risk of being sued for breach of your employment obligations.
Risks of Using Nominee Directors and Nominee Shareholders
In our experience as corporate lawyers, we have come across instances where nominee directors and shareholders are appointed without any written proof of the arrangement, and the beneficial owner relies on a verbal agreement or a “gentlemen’s agreement” with the nominee.
The risks of not getting proper advice or using proper documents to set up the arrangement is that you incur the following risks:
- Your relationship with the nominee sours, and he treats the shares as a gift by you and claims that he is the real owner of the shares in the company
- The nominee demands payment (or more payment) to honour the arrangement
- The nominee passes away or loses mental capacity, and his personal representatives, heirs, donees or deputies refuse to recognise the arrangement, and seek to treat the shares as the property of the deceased or mentally incapacitated nominee
- The nominee becomes uncontactable for any reason
- The nominee does things contrary to your wishes or intentions, including using the shares as security for a personal loan, or selling them, or paying himself a director’s fee
- The nominee discloses the arrangement to other persons
In each of these scenarios, the main risks are that of:
- Losing your ownership of the shares
- Losing confidentiality
- Dealing with the consequences of unauthorised actions of the nominee director
- Incurring significant legal costs to enforce your rights
How to Properly Set Up a Nominee Structure
Nominee Shareholder Arrangement
The most common way to set up a nominee shareholder arrangement is for the nominee to declare a trust over the shares for your benefit, and to sign a declaration of trust.
While there are other ways of doing so, such as using call option agreements or loan agreements, these are more complex and are more appropriate to be used in countries which do not recognise the concept of a trust or which prohibit the use of nominee structures.
In the declaration of trust, you would typically secure promises from the nominee to act only on your instructions, to promptly transfer the shares to you on your request, and to account to you all the rights and benefits in the shares.
To ensure that the shares are transferred to you even if the nominee refuses or cannot arrange for the share transfer, you may obtain a signed but undated share transfer form in favour of you. You may also wish to keep the share certificate with you (if the company in question is a private limited company).
Nominee Director Arrangement
For nominee director arrangements, you should have a properly-written document signed by the nominee director stating that he will act only on your instructions. You may also wish to have a Power of Attorney executed so that the nominee director can act on behalf of the company, sign contracts and open bank accounts for it.
It is also common for an undated letter of resignation to be signed by the nominee director, to protect the company against claims by him and to make it easier to remove him at the appropriate time.
The importance of using well-written documents to record nominee shareholder and nominee director arrangements cannot be overstated, given the risks highlighted above.