The nominee shareholders are generally the representatives, or we can say agents of the actual owner of the shares, who continue to exercise all the control over the assets that a nominee holds on behalf of the actual owner. As a rule, a nominee shareholder is appointed by the actual holder of the shares in a company so that the nominee can represent him/her in the company. The nominations of nominee shareholders can be done even before the actual formation of the company or, say before the actual title of the assets is passed to them. The nominee shareholder also protects the identity of the original shareholders by listing their name and information on various business filings done by the company (such as Articles of Association or, say, incorporation documents). However, this nomination does not in any way affect the rights and benefits of the original shareholder, and the same are always taken care of when making the appointment of a nominee shareholder. Once nominated, the nominee shareholder becomes the official shareholder of the shares of the original owner in the company, and the name of the nominee shareholder shall have to be mandatorily registered in all the public records as well as certificates. The nominee shareholders also get all the rights with respect to voting, which are actually conferred to the original holder of the shares as provided by the company in its article of association. There has to be an agreement between the original shareholders and the nominee shareholders, which will govern the terms and conditions of the services to be provided by the nominee. The agreement is signed by both the nominee and the original owner.
Agreement for Appointment of Nominee Shareholder
The main prerequisite for the appointment of a nominee shareholder is an agreement to the appointment of the nominee shareholder in the company. The nominee shall file a statement of confidence stating that he/she does not have rights to the assets of the original shareholder until the founding proprietor passes away. The commitment given by the nominee shareholder that he/she shall not have any command over the shares until the original shareholder is alive is known as a custodial contract. The law provides flexibility with regard to the nomination and even a minor can also be nominated for shares in a firm, and the firm’s shares can be held by an individual or a business organisation. When the shares are transferred at the time of the demise of the original shareholder, the nominee shareholders are created. They are vested with all the rights that the original shareholder had with regard to the shares, and the nominee shareholders become trustees for the legal heirs.
Utility of an Agreement
The are multiple genuine reasons as to why a nominee shareholder arrangement shall be made. The most common reason is that such an arrangement would keep one’s identity as the owner of the company confidential and comply with the company requirements of the place where the company is located. The agreement is required to be signed by both parties and shall always include an acknowledgement from the nominee that he/she has no power over the shares of which he/she has been made nominee and is not the legal owner of such shares. All sorts of income and capital gains that may arise from the shares shall only belong to the original shareholder, and the transferring or returning of such shares shall be done upon the original shareholder’s instructions.
Are Nominee Shareholder Agreements Legal?
Yes , they are absolutely legal. If the person who has been authorised to administer the will of such deceased original shareholder and he/she by negligence allows some other person to take away the shares of the original shareholder, then the nominee shareholder has all the right to take the legal ownership back of such shares by just signing his name under the nomination made by the original shareholder.
Requirement of Nominee Shareholder Agreement
The main reasons for the execution of the nominee shareholder agreement are discussed below:-
- Confidentiality and Privacy:- The primary use of this agreement is that the actual original owner can hide his identity from the public and may not appear on the public records as the shareholder of that company. This can ensure privacy and confidentiality to a great extent.
- Declaration of Trust:- Any company will not record the details of any trust arrangement on its share register, and so far as the company is concerned, any person who has been named in the company’s share register is regarded as the registered shareholder. The person who is the original shareholder often wants the nominee shareholder to execute a declaration of the trust in order to record the terms and conditions on which the nominee holds the shares of the original owner. A nominee can be an individual or any body corporate.
Pros of Nominee Shareholder Agreements
The nomination of the shareholder eases the difficulty for the company of tracing out and contacting the legal representatives of the deceased original shareholder and also, by way of nomination, the dispute with regard to the legal title of the shares between the legal heirs of the deceased shareholder can be avoided to a great extent. The nomination helps the company quickly and easily find out who is supposed to be contacted by the company after the death of the original shareholder.
Cons of Nominee Shareholder Agreements
The main problem that arises before the company in the case of the nomination of shares of the company is that, at times, the nominee’s authority extends to the rights attached to those shares. However, a company is legally under no obligation to accept the nominee’s shareholdings. The following types of problems arise on different occasions: –
- The nominee exceeds its rights and refuses to return the shares to the actual beneficiary.
- The nominee goes beyond its authority and exercises such rights or has the rights associated with those shares without the actual consent or knowledge of the real beneficiary. Mostly, they are used a security and are sold.
- In the event of death of the original shareholder or his deregistration, the beneficial owner is not able to obtain the share which are transferred to himself.
Process of Setting up of Nominee Shareholder Arrangement
The most common method of setting up a nominee-shareholder arrangement is by the nominee declaring the trust over the shares for the benefit of the original shareholder and signing a declaration of trust. Apart from this, another method of setting up a nominee shareholder agreement is This arrangement is called as the call option agreement, but this method, as compared to the other methods, is more complex and is generally used in countries that do not recognize the concept of trusts or that prohibit the use of nominee structures.
When a declaration of trust is created, the original shareholder shall typically ensure the following:-
- That the nominee shall promise to act only upon his instructions.
- The nominee shall transfer back the shares to him upon a request made by the original shareholders.
- To keep the original shareholder informed about all the rights and advantages associated with the nominee.
An original shareholder may, as a method of precaution, obtain a signed but non-dated share transfer form in his favour to ensure the share transfer back to him even if the nominee refuses or becomes unable to do so. In addition, if the firm is a private limited company, then the original shareholder may keep the share certificates with him only.
The nominee director needs to sign a properly written document stating that he will abide to the instructions issued by the original shareholder. Also, the original shareholder may obtain a power of attorney so that in his favour from the company so that he may act on its behalf, enter into contracts and open the bank accounts etc for it.
Major Responsibilities of a Nominee Shareholder
The main objective of a nominee shareholder is to prevent client secrecy by providing a protective shield to the actual owner of the company from being associated with the company in the public domain. In case of a nominee shareholder situation, a confidential legal document (can be of different types such as declaration of trust, deed of transfer nominee service agreement or other similar document) would be issued by the nominee shareholder and will be held by the beneficial owner.
Such documents act as evidence in case of disputes between the beneficial owner/original shareholder and nominee shareholder for establishing the fact that the nominee held the shares on behalf of the original shareholder to establish the actual state of affairs, holding of shares by the nominee and that original shareholder has all the rights to dispose of those shares and is entitled to enjoy all the fruits and benefits arising from those shares.
