What is a Nominee Shareholder?

Put simply, a nominee shareholder is an entity or individual that holds shares on behalf of someone else. The most frequent form of a nominee is a trustee holding shares on trust for beneficiaries. Furthermore, nominee structures have many benefits, including tax management, regulatory compliance, and simplified corporate governance and company administration. This article explains formal nominee structures where a company engages a nominee company to hold shares of minority shareholders. 

The Nominee Structure

When a company has a lot of shareholders that hold small parcels of shares, the company may consider establishing a nominee structure.

The nominee entity is often either an entity engaged by the company (there are a number of businesses that provide nominee services to hold shares and manage nominee structures) or a subsidiary incorporated by the company. 

To implement the nominee structure, you will need the following documents:

Shareholders Agreement

You will need to amend the shareholders’ agreement in respect of the company to incorporate changes to the voting rights of the beneficial holders (being the former minor shareholders), and take into account the aggregation of the relevant shareholders’ parcels of shares, into the single nominee entity.  

Nominee Deed

This is a document that the company and the nominee entity enter into. It regulates the manner in which the nominee will acquire, hold and deal with each shareholder’s shares. 

Bare Trust Deed

This is a document each relevant shareholder enters into in respect of the nominee entity. It creates a bare trust, in which the nominee is the trustee and the shareholder is the beneficiary, in relation to the relevant shares. Under the bare trust, the nominee entity has no discretion to act in relation to the shares. Rather, it must only act according to the beneficiary’s instructions (including transferring any dividends or proceeds related to the shares directly to the beneficiary). 

Power of Attorney

This is a document each relevant shareholder enters into in favour of the company. Under this power of attorney, the shareholder generally appoints the directors of the company (or some other authorised individual) to execute certain documents on the shareholder’s behalf regarding the establishment and ongoing administration of the nominee structure.

Purpose and Benefits of the Nominee Structure

Regulation 

Pursuant to the Corporations Act 2001 (Cth) (the Act), one of the key characteristics of a proprietary limited company is that it cannot have more than 50 non-employee shareholders (with some specific exceptions). Therefore, if a company has more than 50 non-employee shareholders, it must convert into a public company. This can be listed or unlisted. Consequently, unlisted public companies are subject to additional regulatory requirements, including changes to minimum officeholders, and increased financial reporting requirements. Additionally, all companies which have more than 50 shareholders (employees or not), are now subject to the Act’s takeover provisions. 

Corporate Administration 

When a company has many shareholders, it can become increasingly difficult to effectively carry out its corporate governance. This includes administering the company’s affairs in accordance with the company’s constituent documents (such as a constitution and shareholders’ agreement). Thus, giving notice to, or seeking approval or consent from all shareholders, can become time consuming and complicated. Further, the Act requires the unanimous approval of all circular resolutions. Therefore, if any minority shareholders are unresponsive, the company will need to carry out all business by way of general meetings, adding to the administrative burden and increasing time delays and costs. 

Employee Incentive Schemes 

The increasing popularity of employee incentive schemes (employee share schemes, or ESOPs) is also increasing the utility of nominee structures. As companies grow and employ more staff, the number of ESOP participants who could become shareholders increases. Therefore, a nominee structure ensures that companies can continue offering equity to employees, beyond the shareholder limits imposed by the Act. 

Key Takeaways

Nominee structures are a useful tool to allow proprietary companies the flexibility to have a greater number of shareholders (in excess of the statutory limits provided in the Act), while avoiding the onerous additional obligations of becoming an unlisted (or listed) public company. Additionally, nominee structures also have the benefit of reducing the administrative burden of having large numbers of shareholders. A company should consider the cost, time and effort involved in setting up, and maintaining a nominee structure. However, generally for a company in this position, the benefits do outweigh the burdens.

If you need help with nominee structures, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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