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And the Nominee is . . .

August 9, 2011

Many businesses have nominee officers or directors, often for legitimate purposes.  Recently proposed legislation from the Wyoming Secretary of State would ban all nominee officers and directors from the state of Wyoming.  This is a knee-jerk reaction to the idea that if nominees are being used, something illicit must be going on.

 

The proposed Wyoming legislation fails to define nominees.  A nominee director is a person who acts as a non-executive director on the board of directors of a firm, on behalf of another person or firm, such as a bank,  investor, or lender.  A nominee can also be a resident in a tax haven who lends his or her name to a non-resident for use on the board of directors.  You can see from the definition that there may be many legitimate uses for nominee directors or officers.  Of course, there are also improper uses.

 

Nominees are often used when a controlling person wants to keep his name out of the public record.  There are many legitimate reasons for wanting this.  Among them: a simple desire for privacy, asset protection, not  wanting persons with ill intent to find you (such as police officers owning a home), a need for confidentiality in a small industry, etc.  And then there are the criminals – those who want to control a company, but don’t want law enforcement agencies to know about it, for purposes such as laundering money.  There is an excellent discussion of nominees here.

 

Clearly, there needs to be some well-defined parameters and conditions for the use of nominees.  But to ban them entirely limits commercial activity, particularly in high finance.  A 2009 case in the United Kingdom held that a nominee director still owes a fiduciary duty to the shareholders and the company, and must have some degree of independence in his decisions.  American law doesn’t often directly address the use of nominees, except where they have been used for illicit purposes.  But it makes sense that, regardless of how you become a director or officer, that so long as you hold that position, you must have the normal duties that position entails, and you must be liable for the performance of those duties.

 

As an attorney, I often act as a nominee director on a very limited basis.  When I purchase or organize a  corporation or LLC for a client, I may accept the position of director for a short period.  Normally, all I do is accept the position and then resign on behalf of the client.  My name may appear on the public record (or, since I work with Wyoming Corporate Services, who provides nominees, my name will be on WCS’s records), and the client’s name is only on the private company records.  My actions as a director are extremely limited.  But if I were to sign a contract, or make representations to someone in that capacity, I ought to be held responsible for my actions.

 

Nominee officers and directors have their place in commerce and business.  The idea of employing someone to act as your agent is neither new or nor controversial.  It happens all the time.  If we truly understand the  position and relationship that a nominee holds, it becomes less of a concern.  It should be a simple matter to create some simple safeguards for the use of nominees without eliminating a useful business tool.

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