the risks of using a nominee shareholder

Understanding Nominee Shareholder Risks

The use of nominee shareholders and directors has become relatively prevalent over the past decade as, those with wealth, seek to secure their privacy. In fact, obscuring ownership of assets is probably one of the best reasons to utilize a nominee structure as it reduces your visibility as far as lawsuits go.
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The use of nominee shareholders and directors has become relatively prevalent over the past decade as, those with wealth, seek to secure their privacy. In fact, obscuring ownership of assets is probably one of the best reasons to utilize a nominee structure as it reduces your visibility as far as lawsuits go. However, it’s worth unpacking a few key points to improve our understanding of the Nominee Shareholder Risks.

There are some significant risks with using a Nominee Shareholder including, unauthorized transfer of shares, being held to ransom, losing your privacy, and the cost of potential legal action.

What is a Nominee Shareholder

Nominee Shareholder Risks
Nominee Shareholders Hold “Your” Shares in Custody

It’s probably worthwhile defining exactly what a Nominee Shareholder actually is before we move forward. In short, a Nominee Shareholder act as a legally appointed, third party, private custodian of your shareholdings, typically in an offshore company.

The use of such an individual effectively shields the actual ultimate beneficial owner (UBO) from being listed on the company or share registry of the country and this ensures that their name is not publicly connected with the offshore company.

Obviously, this is a relatively large benefit in that you do not legally “own” the company, and, at least on paper, you are not physically connected to it in any way. However, it does bring with it some very large risks that you need to be aware of.

What Are the Major Nominee Shareholder Risks ?

shareholder nominees should have a legal agreement
Make Sure You Have a Trust Declaration or Nominee Services Agreement

In short, because you are not legally a shareholder of the company, you cannot “officially” exercise any legal control over the entity. However, in practice, this may be different depending on how you have structured the nominee relationship.

Some of the major issues that I have seen with Nominee Shareholders are the following:

  • The nominee may demand payment and effectively hold you to ransom over the held shares
  • The nominee may effectively take the shares and treat them as their own assets, or a gift, and provide you with no access
  • If the nominee passes away there may be no succession plan and, therefore, your shares become part of his estate
  • The nominee goes against your explicit wishes and places encumbrances upon the shares or uses them as security for a loan
  • The nominee breaches confidentiality and discloses your private relationship with a third party

These factors, obviously, sound pretty scary but the reality is that they can all be covered with the appropriate nominee structure in place. I always recommend that every relationship should be well documented to provide legal protection for all the relevant parties.

How Do You Protect Yourself From a Rogue Nominee Shareholder

offshore company and nominee director
Protect Yourself By Shielding the Nominee from the Company Operations.

The first thing you need to understand is that the nominee is effectively providing a custody service to you that just happens to contain shares. You wouldn’t give someone a bar of golf to “hold” on your behalf without some legal protection, right? So why do it with a nominee shareholder.

You absolutely will require a formal agreement between yourself and the nominee to ensure that your and their legal needs are protected. It very much depends on where you have based your offshore company, as all legal systems are different, but I would strongly recommend having a declaration of trust in place.

A declaration of trust is a legal agreement that spells out the scenarios on how those assets are dealt with by the trustee. In this case, the nominee is the trustee, and the declaration of trust gives him a legal fiduciary obligation to deal with your assets appropriately.

The trust document should be prescriptive on how you can remove them as the nominee shareholder and what happens if they go against any of your wishes. Additionally, it should have a succession plan where it deals with what is to happen in the event they die or are incapacitated.

Most common law jurisdictions will allow this sort of document to be enforced and, in the cases where a declaration of trust is not recognized, you can get the nominee to sign an undated share transfer agreement.

Additionally, it’s important to note that your nominee shareholder should NEVER have any access to the company bank accounts or, generally, be aware of whom you are banking with.

In summation, you should action the following points to protect yourself:

  • Include a Declaration of Trust and/or nominee custody agreement
  • Consider provisions for their removal and the transfer of shares
  • Detail exactly what the custody costs are on an annual basis
  • Never allow them knowledge, or access, to where the offshore companies’ bank accounts are kept

How Often Does This Happen Given the Nominee Shareholder Risks ?

I’ve been operating in the offshore industry for many years and have never come across a case of a reputable nominee shareholder/service ripping their customers off. Theoretically, it could happen, but the reality is that this is exceedingly rare and any nominee undertaking this sort of action would immediately be blacklisted.

Having said that, it’s definitely recommended to take the appropriate precautions, but I wouldn’t be losing too much sleep over it as it is not something I have ever encountered in dealing with 1,000’s of offshore companies.

Is It Still Worth Using a Nominee Shareholder?

nominee shareholders privacy
Privacy Must Be Paramount in 2022

This is a relatively easy question to answer because it is a very clear YES. The reality is that everything from vexatious lawsuits to privacy breaches has become a very real threat to privacy in 2022. It is relatively easy to discover who owns a company without an appropriate shield in place. Subsequently, using a nominee provides an additional level of protection and keeps your name off the official share registers (in countries that have them).

Additionally, having been a party to quite a few lawsuits in the past, I can tell you that one of the first things that occurs is a very detailed search to see what assets the respondent might have. This way you can assess whether there are enough assets to make it worthwhile going after the person legally.

If your name is listed upon multiple companies and shareholder registers, you make a very inviting target for a flesh-eating attorney to chew into. So, do yourself a favor and start including privacy as one of your primary requirements.

The Cost of Using a Nominee Shareholder

The final question that you likely have left to answer is what cost I will be expected to pay for custody and nominee services. This is a difficult question to answer because it depends on the country and the service you are using.

However, I can certainly state that OCBF, our consulting arm normally charges US$300 per year for nominee shareholder services. From my experience, this falls right in the middle of the range for what most custody services are offering.

Unlike a nominee Director, there is very little risk involved in being a shareholder and this means that the costs are significantly reduced. So, expect to pay somewhere between US$250 and US$350 a year for basic shareholder services.

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