Nominee services and their role in the offshore industry

What are nominee services?

In terms of law, nominee services are a system of contractual arrangements between nominees (directors and shareholders) and actual owners (beneficial owners) of a company.

Nominee services are an optional service under which a person other than the real owner who effectively manages the company is appointed as a director at the time of incorporation or at a later date. That is to say, the company will have a so called ‘shadow’ director. The same applies to a company shareholder – this can also be a nominee.

Where the company has nominee directors and nominee shareholders, and in some cases even nominee secretaries, it is said to have full nominee services.

The most common reason why nominees are appointed to a company is to maintain the confidentiality of the corporate structure, as the identity of the owner can be fully concealed since the corporate documents show only the details of nominees. The nominee director and shareholder do not control the business of the company and only act on instructions of the owner. But this is all in general terms.

When and how did nominees appear?

The system of contractual arrangements between nominee directors/shareholders and beneficial owners has been known since straw men were first used. But it was only in the second half of the past century, at the dawn of the offshore industry, that this concept developed into its classic form.

The first providers of nominee services were UK lawyers who chose residents of the Island of Sark as nominees. The island still has laws dating back to nearly feudal times, in particular laws related to the taxation of individuals. The inhabitants of Sark had willingly begun providing (for a certain fee, of course) their services as nominees. In fact, they did not have to do anything, but simply give their consent to act in this capacity. The same was true of trustee companies – there was normally little control over their activities in those days.

Then, lawyers from other jurisdictions went down the same route and became providers of nominee services. Nowadays, however, this business cannot usually be conducted without a licence and is subject to strict control in every part of the world.

When are nominees needed?

First of all, nominees are needed when the country of incorporation has a public register of shareholders and directors, on which you do not wish your name to be listed. For example, the local laws of the United Kingdom and Cyprus require that at the time of company formation the registrar is provided with details of directors and owner of the company, which will in the future be available to general public. It is not possible to track the connection between a nominee and an actual owner of the company through official, publicly available documents in these cases.

If we are talking about a classic offshore, then having nominees in the company is not particularly relevant as these jurisdictions do not keep a state-level register of directors or shareholders since these details are only submitted to the registered agent.

Appointment of a nominee is also an obvious choice where it is beneficial for the proposed business of the company, — for example, you need to demonstrate that the company is managed and controlled from the jurisdiction of its incorporation; or you intend to set up a representative office in another country and are unwilling to act as director etc.

Another reason is the inability to incorporate a company without a local director. The laws of some European countries such as Sweden, Switzerland, Netherlands, and Liechtenstein, specifically require that the company director be resident in that particular country or in the European Union.

Besides, one cannot ignore the image factor: you may want your company to be represented by a director who is a citizen of, say, the United Kingdom…

What is a nominee director?

The nominee director is a person who manages a company’s affairs, but who does not perform these duties at his sole discretion. The nominee acts strictly on instruction from the beneficial owner with whom he is bound by contractual arrangements. If the owner so wishes, the nominee director may have broader powers, but the beneficial owner is still able, at any time, to cancel the decision of the nominee director.

Normally, the company’s affairs are managed by the attorney of a company (who is, of course, appointed by the beneficial owner) under a power of attorney granted by the nominee director.

What is a nominee shareholder?

A nominee shareholder is a person who does not actually own the shares in a company, but only holds them for the benefit of the actual owner of the company. The relationship between the nominee shareholder and the owner is based on a type of trust called Bare (Simple) Trust, where the beneficial owner has direct and absolute interest in the property put into trust and the income from it.

The actual owner may, at any time, change the nominee holder of shares. As in the case of a nominee director, it is impossible to track the connection between a nominee and an actual owner based on publicly available documents.

What is the difference between a nominee and a real shareholder?

The major difference between a real and a nominee shareholder is that a nominee shareholder de facto does not have legal title to the shares in the company.

A real shareholder is the true owner of a company. The nominee shareholder is the owner on paper only. He holds shares for the owner and has no right to make independent decisions about the company’s business.

What is the beneficial owner?

BENEFICIAL OWNER (from the Latin beneficium — benefit) is a person who enjoys benefits under an agreement or on other legal grounds; a person to whose benefit a trust is created; a recipient of money under a letter of credit or an insurance policy. This is how this term is defined in legal literature.

This concept is also defined in EU Directive 2005/60/ЕС, where the beneficial owner is the natural person(s) who ultimately owns or controls the business or the natural person(s) on whose behalf a transaction or activity is being conducted.

The beneficial owner, or beneficiary, is the real owner of the company to whose benefit the nominee shareholder holds shares and the nominee director manages the company. Only a specific individual, a natural person, can be a beneficial owner.

However complicated and intricate a corporate structure may seem at first sight, it always has an ultimate beneficial owner behind it, and it is invariably a natural person. And the identity of this person can be ‘dug up’ whenever needed, for example when the company opens a bank account.

The ownership of or control over the business is determined based on direct (immediate holding) or indirect (through a chain of legal entities) ownership or control of the relevant block of shares or participations entitling to vote (25 per cent plus one share).

What is a resignation letter and what is it for?

When nominee services are ordered, a whole package of documents should be in place. When appointed director, the nominee signs an undated Resignation letter stating that he or she agrees to their future resignation from the director’s office. The beneficial owner is free at any time to replace the nominee director with any other person. He just needs to fill in a date on the resignation letter.

Once the Resignation letter is dated, the director’s powers are immediately terminated. It can be any date, but make sure it does not conflict the authority of an attorney to whom the nominee director earlier granted a power of attorney.

Thus, the Resignation letter is a legal defence of the beneficial owner’s rights against unauthorised actions of a nominee director.

What is a declaration of trust and what is it for?

When issuing shares, the director passes a resolution of the share issue and signs the share certificate and, in the case of a nominee shareholder, a declaration of trust is also made.

A Deed of trust, or Declaration of trust, is an agreement regulating the relations between the nominee shareholder and the beneficial owner. The declaration clearly states that the holder of shares in the company is a nominee only, has no right to manage the shares at his or her sole discretion and acts exclusively on the instructions of the owner.

The declaration of trust also states the number of shares, the date of their issue and the details of a particular natural person to whose benefit the nominee shareholder holds shares. It is the declaration of trust that constitutes the major proof of ownership of the company by its true owner.

If the company has several beneficial owners (which is also possible), there are as many declarations of trust as there are beneficial owners, each for the beneficial owner’s participation in the company.

What documents are included in the nominee services package?

In addition to the declaration of trust and the resignation letter, the standard nominee services package includes the following documents:

Unexecuted Stock Transfer Form/Unexecuted Instrument of Transfer of Shares. The instrument is signed by the nominee shareholder as transferor, with transferee name and details left blank. This document allows the beneficial owner to change the registered holder of shares at any time.

General Power of Attorney. The power of attorney is issued by the nominee director to a person designated by the beneficial owner or in the name of the beneficial owner. In this document, the nominee authorises the attorney to exercise the major powers of company management, including the power to open, operate and close bank accounts, set up and close down the branches and representative offices, sign contracts, represent the company in courts etc.

Declaration of Nominee Director. In this declaration, the nominee confirms that he or she is a nominee director only, acting on instruction from the beneficial owner and has no claims whatsoever against the company or its assets. It is dated the date of appointment of the nominee as company director.

Blank Resolution of Resignation and Appointment. This resolution is an undated resolution of nominee director change with blank spaces for the new director name and details. Thanks to this resolution, the beneficial owner is able to change the company director at any time.

Non-Trading Declaration/Warranty confirming that the company has not traded.
This warranty is included in the company documents package in such jurisdictions as, for example, Hong Kong, the United Kingdom and Cyprus, where companies are subject to annual audit. In this warranty, the nominee director confirms that up to the date of its signing, the company

Can a nominee director be a legal entity?

Yes, it can. A legal entity can act as nominee director of a company. The director and shareholder of such legal entity are also nominees – individuals who would sign for and on behalf of corporate nominee any documents of your company and take other actions necessary for the management of the company.

Firms providing nominee services offer ready-made companies that can act both as nominee directors and ‘shadow’ shareholders.

How to manage an offshore company with a nominee director?

The management of an offshore company usually comes down to two issues: operation of company bank accounts and carrying on commercial activity represented by documents. As a rule, the bank accounts are operated by the beneficial owner or their attorneys.

An offshore company can be managed in two ways: on instructions given by the beneficial owner or under a power of attorney. Sometimes, both methods are used together.

The nominee shareholder/director takes action strictly on receipt of specific instructions from the company owner. Who and how can instruct is up to the beneficial owner who specifies this when ordering nominee services.

In addition to general powers of attorney, the nominee director can also issue special powers of attorney with limited powers as to the management of company’s affairs (including the power to make one particular deal only). They would include details of people authorised to represent certain interests of the company during a specifically defined period of time. The number of powers of attorney, the scope of their authority, the identity of the attorneys and the validity period are all at the sole discretion of the beneficial owner.

What problems can a general power of attorney create?

Despite the obvious advantages the general power of attorney has for the practical management of the company, there is also a downside. Regular use of the power of attorney may give tax authorities reason to qualify the attorney’s actions as a permanent establishment for tax purposes. A permanent establishment has the same profit and losses and pays the same tax as any local company would.

More often than not, the attorney is regarded as the actual owner of a company, which leads to a loss of confidentiality. However, if the attorney is a person other than beneficial owner, there is always a risk of his abusing the powers granted.

Can a nominee director manage a company?

The nominee director can initial various documents on behalf of the company. This is the authority given to him or her by the company law, and normally specified in the articles. But what and when he or she should sign is, again, up to the beneficial owner alone. They instruct the nominee and the nominee signs accordingly. The nominee director of an offshore company cannot therefore manage the company at his or her sole discretion.

Can a nominee director control the activities of a company?

Generally speaking, it is possible to distinguish several types of control over a company’s activities on the part of a nominee. The first type is the so called ‘total’ Swiss-style control, when all the company’s affairs, including operation of bank accounts, are managed by the director.

The second type is where a nominee does not operate the bank accounts, but always carefully reviews all the documents sent for signature for their compliance with the laws of the country of incorporation (as is the case with Cyprus, for example). The nominee will never sign a document in a language he or she does not speak, they will ask for a translation and then get a professional translator to check its accuracy.

Another type is where a nominee director has ‘limited’ control over the activities of a company. This is the case with the overwhelming majority of offshore company directors. For example, if the nominee is requested to sign a resolution which he or she thinks infringes upon the interests of other shareholders of the company, they will ask the beneficial owner to clarify the matter.

And the final type is where the director signs absolutely everything sent for signature, including, say, a Chinese-language IOU stating he or she owes the beneficial owner… a million dollars in cash.

Can a nominee director refuse to sign?

Yes, this is quite possible, especially if the nominee director suspects the beneficial owner of attempting to commit fraud.

Sometimes a nominee director of an offshore company may refuse to sign a backdated document or a document referring to obligations which obviously cannot be fulfilled etc.

Can a nominee director withdraw money from the company account?

The only person who can withdraw money from the account is the account signatory, no one else. The signatory is usually the owner themselves or a person who is designated by them and whose name appears on the bank card. Thus, the nominee director has no access to the account and may even not be aware of the account’s existence, unless the bank demands a director’s signature on its internal forms or unless the beneficial owner informs the director accordingly.

Nominee service providers do not regard the account signatory as a popular service and are in no hurry to offer it, though in certain circumstances this can be arranged. The situation is different in a number of countries of continental Europe (Switzerland, Luxembourg, Liechtenstein, Austria, and the Netherlands) where a local director is required by domestic laws and in common law countries (the United Kingdom, Ireland, Channel Islands, Isle of Man, Cyprus, Malta) where trust services are customary for business practice and therefore are very strong. But here we enter the domain of trust law, which is a completely different story.

Does the company have to appoint a nominee secretary?

Some jurisdictions, for example Cyprus, and until recently the United Kingdom, require companies to appoint a secretary. The secretary’s duty is to complete and sign certain forms both at company formation as well as for subsequent maintenance of the company.

In particular, the secretary has to file annual returns with the public registry, liaise with tax authorities, etc. This is why company owners in such cases usually use nominee secretary services.

Which company documents show the details of directors and shareholders?

The name of the nominee director appears on the first director appointment; he or she also signs the resolution issuing shares to a nominee and the share certificates. Once these documents are made, a register of directors and a register of shareholders are created and sent to the registered agent where these registers are kept during the entire existence of the company.

If any change takes place such as a director’s resignation or the appointment of an additional director, transfer of shares from an existing shareholder to another person or additional share issue, these registers are updated and re-sent to the agent.

If the company owner so wishes, it is also possible to file this information with the public registry of the offshore jurisdiction where the offshore company is incorporated. In this case you will receive a document stamped by the registry as confirmation of filing.

This, however, is rather an exception. Normally, the overwhelming majority of offshore company owners order another document called a Certificate of Incumbency, which is issued by the registered agent. It states who the company directors and shareholders are.

Which details of the beneficial owner must be disclosed to a nominee?

The nominee shareholders will want to know, at least in general terms, the nature of your business. They may also ask that the beneficial owner provide a copy of his or her passport and proof of address.

The same is the case with a nominee director. If he or she issues a power of attorney, they have the right to request the attorney’s passport copy.