Nominees, which can either be Director or Shareholders (and in a Foundation also Supervisors to its Board) are widely used when setting up companies.
ChatGPT does quite a good job when asked about Nominees:
and specifically on Nominee Directors:
These four functions above are indeed at the core of using Nominee Directors.
Nominee Shareholders then meet the first need, that of masking the identity of an entity’s Ultimate Beneficial Owner on a company’s record.
One way of thinking about Nominees is that they act like a VPN by not revealing in official records who the owners and directors of a company are, the same way that a VPN doesn’t reveal your IP address.
Common use cases
The use of Nominees can be useful in a number of legitimate scenarios:
- Faceless entities
By using Nominees, entities can be made “faceless” in a sense that there is no mention of the principals on any company record.
In a tradfin context, Nominees are often used when an acquirer in a hostile buy-out is silently building a stake in its target by buying shares through a number of seemingly unrelated entities, each with appointed Nominees.
Regulatory filings which are required above a threshold holding then show a number of faceless entities accumulating shares in the target, without revealing who is behind them.
Bernard Arnault of LVMH for instance has used this on various occasions to silently build stakes in luxury good companies he wanted to acquire, presenting them with a very French fait-à-complet if they resisted his charms by revealing the shares he already held in them through Nominee entities of which he was the Ultimate Beneficial Owner.
A less aggressive use case for Nominees is to mask the identity of the actual controllers of companies for reasons of personal security, especially when such personal information would be made publicly available (more on visibility of corporate data below).
Some clients e.g. from Latin America are particularly wary to share personal address details and other identifying information for fear of ransom, kidnapping or extortion.
This risk also and perhaps even more so exists in crypto: In our minds, Nominees should consistently be used to avoid controllers of companies with large crypto holdings from appearing on any public record.
In doing so, filings (if accessible) will only show the names of the Nominees, making it difficult to trace back the ownership of the company to an individual, unless disclosure of the UBO is forced (which is typically only as part of a litigation or prosecution).
Knowing that individual controllers (UBOs) of crypto holding companies are also likely to control the private keys to the company’s wallets, it is arguably easier to extort them than owners of traditional companies. Having their name out there presents a clear security risk.
A less alarming use case for Nominees in crypto include their use in token issuance vehicles in which typically none of the project leads wants to appear as the Director so as not to be directly and visibly associated with the project.
Finally, Nominees are widely used as Directors of decentralized Foundations, which represent a special use case we will talk about later (see “Director liabilities” below) .
- Minimum director requirement
As ChatGPT correctly indicates, Nominee Directors are also often used to fill Board seats. Some jurisdictions, e.g. Panama, require three directors to validly constitute a limited company. Nominees can be used to meet this requirement even though ultimately, the “mind and control” will be by a single principal.
There of course always has to be minimum of one shareholder in a company hence using a single Nominee Shareholder will meet this requirement.
- Local director requirement
Some jurisdictions also require a local presence by way of a resident Director.
Switzerland for instance does so, in which case the Nominee will need to be a Swiss resident or Swiss company.
Singapore is a special case: perhaps because Singapore likes the idea of control, its corporate law prohibits the use of Nominees for the company’s first Director, who needs to be a physical person with Singaporean residency (so it can be a foreigner who is resident there).
However this local Director is for all intents and purposes an actual Director and not a Nominee, with clear fiduciary duties towards the Singapore company. This explains why it is rather difficult (and expensive) to find local Directors in Singapore, as they have extensive duties and obligations beyond what would normally be found in a typical Nominee Director agreement.
Investment funds too may have a local Director requirement for instance in Cayman, where some Nominees ask a solid six figures in annual fees to act as Nominee Director in dozens of hedge funds (whilst laying on the beach…).
In the BVI, which has an attractive regime for smaller funds, there is a requirement for a “local representative” which is not quite a Director (although it can be one) but rather a go-to person for local authorities in case they need to make contact with the fund.
- Transferability of control
A last use case (which we didn’t think ChatGPT would pick up on!) is the ease with which a company can change hands when Nominee Directors and Nominee Shareholders have been appointed from day one.
Basically, there is no need to file anything if the ownership and board of a company with Nominees changes: all that needs done is to put a new Nominee Director and new Nominee Shareholder agreement in place with the new controllers/owners.
It is a legal trick that underpins most of how listed stock changes hands in the U.S., where there is a Nominee holder of a corporate stock at the Depository Trust Company, and only the “underlying” changes, i.e. the agreement with the DTC as to who is the actual beneficial owner of the stock.
In an offshore context, a company with only Nominees can be particularly useful for “off the shelf” companies. These can then be purchased without any changes on the surface: whilst the underlying beneficial owner and controllers changes, at Registry the record remains the same, showing the names of only the Nominee Directors and Nominee Shareholder.
However this does not mean that the corporate services provider who looks after such company does not do Client Due Diligence (we use CDD rather than KYC) on the new owners and controllers.
This brings us to some of the misconceptions about the use of Nominees which lead some people to believe that companies with Nominees can be anonymous in a sense that nobody knows who is behind them. This is not the case as we will see below.
Common misconceptions about Nominees
As indicated above, there are a number of misconceptions around the use of Nominees which need clarification.
1. Ultimate Beneficial Ownership
Many users of companies still struggle with the concept of Ultimate Beneficial Ownership (UBO). In simple terms, an UBO is the ultimate actual economic beneficiary of an entity’s assets.
ChatGPT defines a UBO as follows:
Some people think that by appointing a Nominee Shareholder, you nominated a UBO, but this is not the case: economic benefit and legal title remains with the UBO, and the Nominee Shareholder is just a placeholder name on record to mask the name of the UBO if and when so desired (see above for use cases).
Put differently, you cannot put a Nominee UBO in place. Well, you could, but doing so would mean you misrepresent who actually owns the company, which is known as a “straw man” setup.
A straw man is somebody who is willing to represent to and pass CDD with a corporate service provider that they are the UBO of an entity, whilst in reality they hold the shares on somebody’s behalf using a bilateral agreement between the actual controller and the straw man.
Typically this is done in a relationship of trust (or economic imbalance), as the straw man is legally the UBO and hence enjoys all economic benefits.
Straw men undoubtedly are used in criminal enterprises. In a different (or perhaps same) context, Putin has been known to use a cello player friend of his as the UBO on record whilst maintaining control, probably via a mix of legal agreements and extortion (in a “if you talk, we’ll kill your family” sort of way).
The cello player declared billions of dollars in assets in his name - arguably the best paid cello player in the world!
Straw men have also been used to acquire Cuban property. Currently, foreigners are restricted from buying property in Cuba. With few exceptions, only Cubans can buy private property there.
However, some Americans who wish to buy a beachfront plot in what is arguably the Caribbean’s crown jewel have used a seemingly friendly Cuban they met on Calle Ocho in Miami to purchase property registered in the name of the Cuban.
The Cuban happily signs an agreement documenting that though he’ll put his name down on the land registry in Cuba, it’s the gringo who is the actual owner, knowing that no Cuban court will recognize the agreement, letting the Cuban live happy days on a beautiful beachfront property purchased with American money.
In the context of company formation, there is little a corporate service provider can do if a client is willing to misrepresent who is the actual UBO of an entity they are looking after. Somebody can perfectly pass CDD by submitting proof of ID and address and all ancillary KYC dox as a pretend-UBO but sign a private agreement with the actual controller.
UBO declarations are made at risk of perjury and the new U.S. UBO regime imposes possible jail time if somebody does not truthfully declare that they are the actual UBO of an entity (Note that this declaration will need to be made to FinCen and not to the State Registries).
Service providers too when they incorporate a new company for clients get a sense of who is behind the company from the extra declarations they ask from them e.g. regarding source of income and wealth.
Otonomos for instance no doubt would have questioned the UBO declaration from a Russian cellist who subsequently capitalizes his new company with 2 billion dollars!
The broader point is: even though Nominees can be used as stand-in Directors and Shareholders on record when a company is filed for, a formation agent will always ascertain itself of the identity and do CDD on the new entity’s UBO, who can only be a physical person who ultimately controls whatever entity stack is put in place.
The same applies when a shelf company (see above) with Nominees gets acquired by a new UBO: CDD will be performed on the new controller, and the corporate service provider will hold an internal record of who the UBO is.
In some jurisdictions, this UBO information has to be shared with registries and authorities. It is to this “visibility” of company information that we turn next.
2. Visibility of company information
Does the use of Nominees make sense if the information on who is a Director and/or Shareholder in an entity is not even publicly visible?
Visibility of corporate information very much depends on where an entity is formed.
There is a matrix of visibility settings across the world’s main jurisdictions, going from de facto anonymity (e.g. U.S. LLCs for now) to full visibility of all records (e.g. Singapore).
Here is a broad categorization, bearing in mind it does not cover edge cases:
In a few jurisdictions, most prominently the U.S., there is currently no filing with the corporate registry of who are the Directors and Shareholders. As a result, there’s no info to be gained from looking at the Registry, since the Registry itself does not hold any records. It only issues company’s “birth certificates” and shows who is the person of contact on file, but this can be anyone.
In other jurisdictions, mainly the offshores, the registries do hold a record of who is Director (BVI and Bahamas), or Director and Shareholder (Cayman). However:
UBO information is only held by the corporate service provider, who can be audited by their regulator and have to be able to show that they have done CDD on UBOs.
Panama in a way achieves the same result when filing is done by way of a notary who is instructed by a lawyer acting under attorney-client privilege: in such case, the registry only records the person filing on behalf of the new entity’s owners, and the identity of the owners remains unknown to the Registry. Directors however will be known.
The registries do not publicly share the Director/Shareholder information they hold on file (except for Bahamas which shows who is a Director on its Registry’s website) but they typically do allow licensed corporate services in their territory (and we suspect also government agencies) a peak into their records.
A final crop of jurisdictions reveals all, however even in such transparent regimes there are differences:
When forming a company in the U.K., its Registry wants to know who is a person with significant control, but it does not verify any of the information provided. As a result “John Doe” and “John Smith” seem to control thousands of U.K companies!
Singapore not only asks for information on Directors and Shareholders, it also asks if any of these are Nominees and if so, it wants to know a company’s UBO. Unlike the U.K., the Singapore registry itself verifies the information provided (if Singaporeans are Directors/Shareholders they need to provide their Singapore ID, foreigners their passport) and as mentioned above, a company’s first Director has to be a Singapore resident. All this information is subsequently made publicly available (against a small payment) in what is known as a BizFile, essentially an extract of the Registry’s company record that shows all information on Directors and Shareholders, including personal address details.
The push to include UBO information in the records registries hold and for the public visibility of all info held by such corporate registries, including UBO info, is now meeting resistance from privacy advocates and has been countered by a December 2022 European Court of Justice ruling declaring such public UBO info an infringement of basic rights.
As a result, even though the U.K. Crown Dominions such as the BVI and Cayman are not subject to the ECJ’s jurisdiction, we expect that in light of the ruling, few offshore countries will push forward with previously announced plans to require UBO information or share such data publicly.
3. Nominee Director ‘s Latitude to Act and Potential Liabilities
A final commonly held misconception is that by appointing Nominee Directors and/or Nominee Shareholders, owners of companies would be giving up a degree of control.
In a properly worded Nominee agreement, the Nominee itself specifically limits its responsibilities and narrows any margin for action outside of written instructions received from the company’s UBO’s or the persons authorized by the UBO to give such instructions.
Such limitation directly impacts the potential liabilities for Nominees: since they can’t do anything without being instructed to do so, they can’t really do anything wrong, except if they’d act fraudulently. However such fraudulent actions would pierce through the Nominee’s indemnity provisions anyhow and possibly trigger personal liability.
In the context of crypto, Foundations are a special use case. Decentralized projects often set up Foundations with granting powers subject to a community vote, typically with a Nominee Director and Nominee Supervisors.
Otonomos has engineered this setup such that its Nominee Director can only act after a valid onchain vote by the DAO according to the DAO’s governance protocol.
Such onchain vote then replaces the “written instructions” under a traditional Nominee Director Agreement and assures that there is no element of central control in the Foundation in matters for which instructions could be given to its Nominee Director outside of a validly organized onchain vote.
Otonomos’ Nominee Director is therefore only the “handmaiden” of the DAO, taking note of the DAO’s decisions and putting a document trail in place.
Most frequently, the DAO votes to extend a grant to a grantee under a grant agreement. In such scenario, Otonomos as Nominee e-signs the grant agreement as the Foundation’s Director, however the actual transaction (which requires access to the Foundation’s crypto wallet) is not initiated by the Director but delegated to internally appointed Treasurers who (typically under a multi-sig arrangement) send the crypto specified in the grant agreement to the grantee.
That way the grant vote is formalized but the Nominee Director does not have access (and actually does not want to have access!) to the Foundation’s wallets, which at all times remain under the control of the project’s leads or whomever the DAO delegated access to.
CONCLUSION
Nominees are a privacy tool and especially in crypto should be used as such, even in jurisdictions that do not have a public register of company information that would otherwise show the names of the company’s actual Directors and/or Shareholders.
In addition, Nominees can be used to achieve decentralization goals, specifically when used in decentralized Foundations to reduce any scope for “centralization creep”. Otonomos, when acting as Nominee Director in such Foundations, engineered a setup using a Special Resolution that limits its Nominee Director to only act upon a valid DAO vote, eliminating the need for “written instructions” by anybody outside of the DAO.
Finally, appointing Nominees does not in any way reduce the principals’ control over their project or entity, but it also does not mean they can remain entirely anonymous, at least not to corporate service providers such as Otonomos who are obliged to perform Client Due Diligence when forming a new entity on their clients’ behalf.
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