A nominee director is a director nominated by an appointor to represent the interest of the appointor. The appointor can be a shareholder, creditor, or separate institution that has an interest in the company.
Under the Australia Corporations Act 2001, a nominee director in Australia is only allowed to further the interest of the appointor if it is allowed by the company’s constitution and the action taken by the nominee director is in the best interest of the company.
Although a nominee director represents the interest of his/her appointor and has a dual responsibility to both the company and his/her appointer, a nominee director in Australia is still expected to act in the best interest of the company at all times.
This means that in the case that there is a conflict of interest between the appointor and the company, the nominee director must choose to either protect the company’s interest or resign from the company’s Board of Directors. While nominee directors are often appointed to satisfy statutory obligations, there are many other reasons why a company or a separate institution may wish to appoint a nominee director.
Here are some of the reasons why –
Fulfill company incorporation requirements
The most common reason why a company may choose to appoint a nominee director is to satisfy the statutory compliance requirements for company incorporation. In Australia, all companies must have at least 1 local resident director to be registered on the Registrar during the incorporation process.
A director is considered to have local residence if the director is an ordinarily resident of Australia. Foreign business owners that are seeking to set up a subsidiary company in Australia may not have an Australian resident in their Board of Directors. Hence, they can choose to employ a nominee director who is a local resident to fulfill the incorporation requirements instead.
The nominee resident director will not participate in the company’s daily operations and does not have any executive power in the company. Moreover, the appointor can restrict the nominee director’s access to bank accounts and certain confidential information.
Since the nominee director will only act in the interest of the appointor unless there is a conflict of interest between the company and the appointor, appointors do not have to worry that the nominee directors will take an opposing stance from them during Board meetings.
Thus, it is ideal for foreign companies setting up in Australia to appoint a nominee resident director because it allows them to fulfill incorporation requirements in Australia without diluting their power in the company.
Safeguard the interest of the appointor
Although nominee directors are not involved in the operations of the company, they do assist in making sure that the company’s policies and strategies are sound, rational, and beneficial, without jeopardizing the interest of the appointor.
The nominee director will also provide non-sensitive information to the appointor with the consent of other Board members and vote in the Board meetings in accordance with the appointor’s interest. A company with nominee directors must have rules that dictate the company’s expectations of conduct of the nominee directors.
These include expectations about the extent of the company’s information that the nominee director is allowed to disclose to his/her appointor, specific information that can only be disclosed with the consent of other Board members, the mandatory requirement for the nominee director to disclose potential clashes of interest between the appointor and the company, and the measures taken in the event of a clash of interest.
This allows the nominee directors to safeguard and further the interest of the appointor as long as the interest of the appointor abides by the rules in place for nominee directors in the company.
The appointor of a nominee director does not necessarily have to be a member of the company. The appointor can be an investor in the company, who wishes to have a presence in the company to further its economic interest. Hence, employing a nominee director can ensure that the investor’s interest in the company is protected.
While the nominee director does not participate in the execution of corporate strategies and business policies, the nominee director does have a say in some of the decision-making processes of the company.
This allows appointors to provide sound advice to the company’s policies and management so as to ensure that their investments in the company are secured and the risk of their investments is minimized.
Protect the privacy of the appointor
There may be instances where an individual wishes to buy over a company while remaining anonymous. In other words, the individual may not wish for his/her name or personal information to appear in the ASIC register or any other official records.
In such a case, appointing a nominee director would be useful because only the nominee director’s personal information will be disclosed in official records. Since the nominee director represents the individual’s interest in the company, the individual can control the company’s operations while remaining confidential.
Moreover, many nominee director services allow clients to appoint a nominee director in name only. This means that the nominee director will just be a name on the official record and will not have any control over the operations and activities of the company.
Hence, an individual can appoint a nominee director to protect his/her confidentiality without diminishing the control he/she has over the company. However, it is important to note that an appointor who exercises an excessive amount of control over a nominee director may be accorded the status of a director by other Board Members.
Act as the liaison between local institutions and company
A company may wish to employ a nominee director who is well-informed about local business and compliance laws and possesses knowledge about the constitution in Australia. By utilizing his/her expertise and past experience, the nominee director can help to ensure that the business activities carried out by the company are aligned with the regulations and requirements set by the Australian Securities & Investments Commission (ASIC).
Moreover, a nominee director, who is more familiar with local laws and policies, is in a more favorable position to liaise and negotiate with Australian regulatory authorities and financial institutions. A nominee director is expected to engage local authorities on license registrations, annual tax filing, and other finance-related paperwork.
Possess specialized skillset
Nominee directors are typically appointed because they have experience in a specialized field or possess key contacts in the industry. This allows nominee directors to assist the company in areas where other Board members may be less knowledgeable or skilled.
Nominee directors in Australia are usually equipped with the skills and experience needed to oversee compliance and regulatory affairs in the company. Hence, they tend to play a more active role in policymaking and ensuring that the company’s management complies with local rules and regulations.
Employing a nominee director in Australia allows companies to operate smoothly and conduct business activities in accordance with local rules and regulations while ensuring that there is no unwanted external interference in the way the company is run.
This is because the roles and responsibilities of the nominee directors will be stipulated in the company’s constitution and the contract between the nominee director and the appointor. The nominee director will not be allowed to exercise power beyond the duties stated in the constitution.
Provide impartial judgment about company management
A nominee director is also a non-executive director who is not part of the executive management team and not an employee of the company. This allows them to provide unbiased and independent opinions about the company’s business model, corporate strategy, and overall performance.
Although the appointed nominee director has a dual responsibility to both the appointor and the company, the nominee director in Australia is supposed to act in the interest of the company in the rare instance that the interest of the company and the interest of the appointor clash.
Under the Corporations Act 2001 in Australia, nominee directors are not allowed to utilize information attained during their appointment, to procure any form of advantage for their appointor. The nominee director in Australia is obliged to protect the confidentiality of sensitive company information and this obligation overruns any other duties the nominee director owes to the appointor who had appointed them to the board.
Hence, the nominee director can still provide somewhat objective suggestions to the company’s policies and operations that take the interest of the company into account, albeit holding some bias towards the appointor.
Easy to terminate
Most consultancy agencies that provide nominee director services in Australia will have their nominees sign an undated resignation form. This form allows the appointor to terminate the nominee director service any time they wish to stop using a nominee director.
Once the appointor chooses to cease the nominee director service or the nominee director chooses to resign, the rights and power held by the nominee director will be returned to the appointor. The updated resignation letter must be completed and signed by the nominee director, with the date of resignation left blank.
Thus, employing a nominee director is an attractive option for companies seeking to fulfill obligatory requirements or looking for experienced individuals with a specialized skillset. This is because it is a process that can be easily reversed with the correct precautionary measures in place.
Depending on the type of services required and the nominee director service employed, the cost to hire a nominee director in Australia can be relatively cheap. This is especially so if you only require the nominee director for company incorporation and documentation purpose.
The annual fees can start from a few thousand Australian dollars if you do not require much expertise and assistance from the nominee director. Employing a nominee director with specialized expertise in compliance affairs in Australia can also save you the cost of hiring another management team to provide tax and accounting advice.
While a nominee director in Australia is usually appointed to fulfill the requirement by the ASIC for an Australian company to have at least 1 local resident director, most companies will choose to employ a qualified and experienced nominee director who is able to communicate and negotiate with local financial and governmental institutions.
Even though an Australian company may wish to employ a nominee director solely for record purposes, a nominee director is still considered a director and hence he/she is expected to take part in the company’s corporate governance.
As such, companies tend to look for nominee directors who are knowledgeable about local regulatory and compliance requirements, have a clean criminal record and previous experience as a nominee director, are able to provide access to a network of valuable business contacts within the industry and provide additional services such as tax and accounting services and advice on compliance matters.