Nominee shareholders are a means of protecting a true shareholder’s identity. Here we explore the benefits and drawbacks of appointing a nominee shareholder and consider where they sit in the wider legislative context.
What is a nominee shareholder?
A nominee shareholder is a shareholder only in name. They are the registered owner of shares in that their name appears on the public register of members. But they do not stand to benefit from it. Only the real shareholder can dispose of the shares, draw dividends on them, exercise voting rights and gain any other benefits associated with their ownership.
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Nominee shareholders should not be confused with proxy shareholders. A proxy shareholder stands in for a shareholder in their absence and has all the voting powers of the actual shareholder. As we shall see, that is not the case with nominee shareholders.
There is no way of knowing from the records themselves that a member on the public register is a nominee shareholder.
The main purposes of a nominee shareholder are to:
- hide the real owner’s name from public view, or
- ease the administrative burden in cases where there are numerous shareholders.
The following are examples of genuine practical uses of nominee shareholders.
- A large company may choose to use a nominee shareholder company to consolidate multiple diverse shareholders into one registered member. This nominee company can engage in corporate actions and otherwise act on behalf of the actual shareholders. This works in cases where the shareholders are willing to hand over some or all of their decision-making ability to the nominee.
- An overseas investor may choose to use a nominee for simplicity and to reduce costs.
- A financial institution or stockbroker buys and holds shares for a client. They act as nominee shareholder because it would be costly and time-consuming to register the client as the shareholder for every share transaction that takes place. Strong bonds of trust, usually codified and documented, ensure that the beneficial owner has full access to and control over their shares.
- Confidentiality rather than obfuscation. For example, a politician or other public figure may wish to conceal their interest in a company or their wealth in general, to avoid possible reputational damage.
- In addition to protecting identity, using a nominee will keep personal details such as month and year of birth and address off the public register.
How much anonymity do nominee shareholders give?
There is no way of knowing from the records themselves that a member on the public register is a nominee shareholder. The name will appear on the register of members without annotation or comment, just as that of the beneficial owner would. It therefore gives the beneficial owner complete anonymity as far as the public record is concerned.
A nominee shareholder can be an individual or a company. Commercial providers of nominee services will quite often use the same nominee names for thousands of different beneficial owners. These may become known as obvious nominee names. It is therefore worth considering any reputational implications resulting from being associated with ‘known’ nominee accounts.
The declaration of trust
The nominee holds the shares on behalf of the shareholder in a ‘bare trust’. The relationship is defined by a declaration of trust signed by both parties.
Share certificates are issued in the nominee’s name, since only they are registered as a member. But the declaration of trust limits what the nominee can do with the shares to practically nothing. It obliges the nominee to exercise voting rights attached to the shares in accordance with the beneficial owner’s instructions. In addition to these safety measures, the beneficial owner is usually able to transfer the shares into their own name whenever they wish. Some providers or nominee shareholder services give the beneficial owner an undated share transfer form for this purpose.
Nominee shareholder vs PSC
The nominee shareholder arrangement breaks down when a beneficial owner owns more than 25% of a company’s shares and therefore becomes a PSC (person with significant control). They must then be declared as a PSC or, if a body corporate, as a relevant legal entity (RLE) to Companies House and it is a criminal offence to fail to do so.
Nominee shareholders and corporate transparency
Why aren’t nominee shareholders banned? Considering the government’s ongoing efforts to improve corporate transparency, it might be surprising that substituting names under nominee arrangements is still permitted. It seems to run against the current push to clarify multiple layers of ownership and control to reveal the true beneficial owners of a company.
Nominee shareholders can be used as fronts for criminal activity in much the same way nominee directors can, especially corporate directors. This type of abuse is being tackled in the Economic Crime and Corporate Transparency Bill by forcing directors and PSCs to have their identities verified. But what of nominee shareholders?
There are still legitimate uses of nominee shareholders (see above), and a blanket ban would be highly disruptive. Efforts to shed light on chains of corporate ownership are therefore being focused on where they are needed most: tackling the abuse of the UK’s open economy by overseas actors. That means unexplained wealth in the UK and money laundering operations carried out by criminals, terrorists and Russian oligarchs.
“A share held by a person as nominee for another is to be treated … as held by the other (and not by the nominee).”
– Companies Act 2006, Schedule 1A, Part 1, paragraph 19 and Economic Crime (Transparency and Enforcement) Act 2022, Schedule 2, Part 5, paragraph 19
The Economic Crime (Transparency and Enforcement) Act 2022 has given law enforcement ‘X-ray specs’ when it comes to overseas nominee arrangements. Like the rules on PSCs, it treats an overseas entity as a beneficial owner of a UK company or property if it holds more than 25% of the shares or voting rights. But like the PSC rules it also states that they will be treated as a beneficial owner if they have the right to exercise, or actually exercise, significant influence or control over the UK company. If the nominee shareholder is simply acting on instructions from a third party, the third party is treated as if exercising significant influence or control.
This brings beneficial ownership in line with PSC rules. It effectively ‘looks through’ any nominee arrangement that could be used to obfuscate ownership and circumvent transparency laws. It also aims to thwart attempts to sidestep the rules on beneficial ownership by playing with the figures. One example has been having five people or entities each own 20% of a company. This way none owns 25% and none are therefore registrable as beneficial owners.
Section 793 notices
A nominee shareholder arrangement only assures anonymity to the beneficial owner on the public record held at Companies House. It is possible under certain conditions for a company to require a beneficial owner’s identity to be revealed. Section 793 of the 2006 Companies Act allows a public company to issue a notice requiring anybody it thinks may have an interest in the company to state whether they do or not. Section 793 notices can only be issued by public companies, for example to protect themselves from suspected takeovers or other outside attempts to influence their boards.
How to register a nominee shareholder
If you are considering using a nominee shareholder in order not to have a shareholder’s name appear on the public record, you can approach one of the corporate service providers who offer this service on a commercial basis. They usually charge a setup fee and an ongoing annual fee. If you do not pay to continue the service they will resign as a shareholder and pass the shares to the beneficial owner.
You may register a nominee yourself, but a professional nominee service provider can guide you through legal steps such as the declaration of trust. They will also be better equipped to manage any issues that may arise either around the time of nominee appointment or further down the line.
A nominee can be appointed at the time of incorporation or at a later time. Bear in mind that when appointing one at a later time, the beneficial owner’s name, if previously registered, will remain on historic confirmation statements.
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