Nominee Directors is a concept that is fraught with difficulties and often used incorrectly. Here we look at some of the issues, risks and important lessons when considering a nominee director.
Within international corporate groups, it is common to have ‘nominee’ directors appointed to the subsidiary companies. This may be a local representative individual or it may be a senior member of the parent company, who is a director of every company within the group. We have seen many examples where this type of arrangement is put in place without any real consideration of the impact either to the group or the individual who is acting as a director.
When the term nominee is used, it generally means a person whose name appears on the public register but has no real power and merely signs as they are instructed to. This is the case with our nominee shareholder service.
However, this is not the case with a nominee director. UK law is very clear that there is no such concept as a nominee director and that all directors owe the same director duties as any other director and these cannot be abdicated by the director.
UK law does not define or recognise nominee directors. In the eyes of the law, nominee directors are the same as any other director and owe the same duties to the company.
However, we will use the term nominee director in this guide as a shorthand to refer to directors who are appointed to a subsidiary company, as a representative of the parent company. The UK government has acknowledged that this is perfectly legitimate where “the nominee director is genuinely taking part in the running of the business and fulfilling their responsibilities.”
The simple answer to this is that a nominee director owes the same duties as any other director. This is broadly the fiduciary duty to act in the best interests of the company. For further information on the duties owed by a UK director, please see our guide to director duties.
However, these duties need to be considered in light of the specific circumstances of nominee directors. Nominee directors often feel a conflict between the wishes of their appointing shareholder and their duties as a director. Lord Denning has famously said that there is nothing wrong with a director being nominated by a shareholder to represent his interests “so long as the director is left free to exercise his best judgment in the interests of the company which he serves. But if he is put upon terms that he is bound to act in the affairs of the company in accordance with the directions of his patron, it is beyond doubt unlawful.”
It is also worth noting that there is a general principle that a director “who acts without exercising any discretion, at the direction of a stranger to the company is fixed with the stranger’s knowledge of the transaction”.
This is relatively simple to set down in principle, but it can be difficult to follow in practice. This is particularly true if the director is also an employee/director of the shareholder, as they have to put the interests of the shareholder to one side and purely consider their obligations as a director.
The failure of the director to exercise independent judgment can lead to some serious consequences for both the director and the controlling shareholder, especially as they will as otherwise they will be potentially fixed with the knowledge of their controlling shareholder. We would always recommend that any nominee director is experienced enough to carry out their role and clearly understands their obligations and responsibilities as a director.
One of the leading cases in this area is the recent Privy Council decision Central Bank of Ecuador and ors v Conticorp SA and ors. This case shows some of the clear risks that are present if a nominee director arrangement is not managed properly. In this instance, the nominee director (Mr Taylor) of a Bahamian company (Interamerican Asset Management Fund Limited (IAMF)) was found to act solely in accordance with the instructions of the ultimate parent company (Conticorp) and failed to exercise sufficient discretion or independent judgment.
Mr Taylor, under the direction of Conticorp was found to have orchestrated a transaction to illegally extract value from IAMF with a face value of $192 million. After the Central Bank of Ecuador became the owner of IAMF, they investigated the historical transactions and sued Mr Taylor for breach of his duties as a director.
As Mr Taylor had failed to exercise independent judgment when performing his duties as a director, the Privy Council found that he was liable for the full amount of the unlawful transaction. This would have presumably bankrupted Mr Taylor who was only paid $2,500 per year for his services.
However, the Privy Council then went on to say that Conticorp had dishonestly assisted in the breach of Mr Taylor’s fiduciary duty and were therefore also liable to repay the full amount of the unlawful transaction. Lord Mance summarised this position at paragraph 50 of his judgment as follows:
Acting as an officer of one company, a person may dishonestly procure or assist a breach of duty by the director of another company, in which case such person may make liable for dishonest assistance both himself personally and the company of which he is an officer. Otherwise, individuals acting as officers of a company could never commit any wrong tortious or equitable. What matters in the present context are, in short, the factual questions whether the Respondents procured or assisted Mr Taylor’s breaches of duty, what knowledge they had when giving such assistance, and whether any honest person(s) in their position giving such assistance with that knowledge could have believed that the relevant transaction was in IAMF’s interest.
Finally, the Privy Council went on to find that Conticorp would be liable for interest by way of equitable compensation, which amounted to an extra $382 million, plus costs.
As the case of Conticorp shows, if nominee directors are used in the wrong way there can be considerable risks to both the nominee director and the appointing shareholder. Although, the risks will always depend on specifics of the structure, these risks can include:
- personal liability of the nominee director for any loss to the company flowing from the breach of duties;
- criminal liability of the nominee director for breach of their director duties and/or insolvency law;
- civil and criminal liability for the controlling shareholder, for procuring the breach of duty;
- decisions considered unlawful and ineffective;
- effective management and control not properly undertaken in the UK (particularly relevant for tax);
- disqualification of the nominee director from future directorships; and
- civil and criminal liability for breaching other regulatory requirements (eg anti-bribery or financial regulation.
Using nominee directors is a perfectly reasonable approach to managing an international structure, but companies need to take particular care when structuring such an arrangement to ensure that the director(s) are able to fulfil their duties properly.
Here are some key points to consider when setting up such an arrangement:
- remember that the subsidiary company is a separate legal entity and the director(s) are required to act in the best interests of the specific company, not just the group;
- robust processes need to be in place to manage the conflict of interest when the interests of a parent company conflict with that of the subsidiary. This is best managed by having different directors of each company that are experienced enough and able to exercise independent judgment;
- ensure that the nominee director has sufficient knowledge of local law (or access to expert advice) so that they understand their duties as a director;
- ensure that the nominee director has the requisite skills and expertise to fulfil their role as a director;
- review the articles of association, the appointment letter and any other relevant documentation to ensure that the director is able and encouraged to carry out their duties as a director;
- ensure that the director is provided with sufficient information about the business, activities and financial position of the company and sufficient resources to make an informed decision regarding any proposed resolution;
- properly minute and record the reasons for any decision, the information provided and any particular conflict;
- be particularly careful with any transaction that does not have an obvious commercial benefit to the company; and
- if in doubt, seek expert advice.
Some offshore jurisdictions have specific legislation to protect nominee directors, but this generally only applies to local nominee directors
Department for Business Innovation & Skills, Transparency & Trust: Enhancing the transparency of UK company ownership and increasing trust in UK business: Discussion Paper, July 2013, para 4.2
Ibid, para 4.6
Boulting v Association of Cinematograph Technicians
Ungoed-Thomas J in Selangor United Rubber Estates v Cradock