Why use a nominee company structure?
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When New Zealand or Australian companies raise capital, they may choose to use a nominee company structure rather than manage the shares themselves.
What is a nominee company?
A nominee is a company that is nominated to hold assets on behalf of another entity. In early stage investing, the nominee’s role is to hold shares in a company on behalf of the underlying investors in the business. These types of structures are designed to reduce complexity and make the investment process and ongoing relationships easier and simpler for both issuers and investors. This can all be managed on an online share register for ease of the company.
What is the purpose of a nominee company?
The nominee acts as directed by the underlying investors in relation to their shares. The terms and conditions on which the nominee acts are set out in a nominee deed poll and the nominee manages a range of activities according to the instructions of the investors, including:
- Voting at investors' meetings and keeping a record of voting directions and other instructions
- Signing written resolutions or “entitled persons” agreements
- Delivering notices, reports, offers, agreements and other communications
- Distributing any proceeds such as dividends
- Exercising rights attaching to the shares
- Giving consents, approvals, or waivers
- Acquiring further shares or securities
What are the benefits of using a nominee company?
The nominee simplifies some parts of the capital raising process and ongoing investor relations. In some countries there are legal rules that apply to companies based on the number of recorded investors they have. For New Zealand companies, this includes enhanced financial reporting obligations for those companies with 10 or more shareholders. Additionally, the Takeovers Code also applies to New Zealand companies with more than 50 (voting) shareholders and 50 share parcels.
As a nominee company only counts as one investor, these extra requirements can be reduced by using a nominee structure.
Using a nominee company can also reduce the administration requirements from investor voting and consents, while simplifying the company's share register and cap table. The nominee structure also provides a level of confidentiality as shares are held in the name of a nominee rather than that of the beneficial investor.
A nominee company can save time and minimise the risk of lost opportunities arising from time delays. For example, sharebrokers often use a nominee company to help facilitate transactions while leaving their clients as the real owner of shares.
What are the limitations of nominee companies?
A nominee does not guarantee the investment or provide investment advice. The nominee company only has the discretion to act on behalf of an investor where that investor has failed to validly respond to a request for direction in respect of their shares.
How to set up a nominee company?
For New Zealand companies, The Snowball Effect provides a Nominee Management Service. This includes the undertaking of Anti-Money Laundering (AML) and compliance checks, and the ongoing monthly management of the nominee company.
The nominee structures used are consistent with best practice around the world for early-stage investing and online private equity investments including the Seedrs Nominee structure in the UK and the SeedInvest Special Purpose Vehicles in the USA.
Common nominee structures
In New Zealand, there are several common nominee structures, including:
- Bare trust nominee: This is a structure where the nominee company holds legal title to assets on behalf of the beneficial owner, who retains the right to the income and benefits generated by those assets.
- Shareholder nominee: In this structure, the nominee company holds shares in a company on behalf of the beneficial owner. This is commonly used in situations where the beneficial owner wants to remain anonymous or keep their shareholding private.
- Director nominee: A nominee company can also act as a director of a company on behalf of the beneficial owner. This can be useful when the beneficial owner wants to distance themselves from the day-to-day management of the company.
- Limited partnership nominee: In this structure, the nominee company is a limited partner in a limited partnership. This can be useful in situations where the beneficial owner wants to invest in a partnership but does not want to be personally liable for any losses.
It's important to note that the use of nominee company structures can have legal and tax implications, and it's recommended that you seek professional advice before setting up a nominee company.
Who should use a nominee company?
It's important to note that the use of a nominee company can have legal and tax implications, and it's recommended that you seek professional advice before setting up a nominee company.
- To protect their privacy: Nominee companies can be used to keep the identity of the beneficial owner confidential, as the nominee company's name will be listed on public records instead of the beneficial owner's name.
- To limit liability: In some cases, a nominee company can be used to limit the personal liability of the beneficial owner, as the company will assume legal responsibility for any obligations or liabilities associated with the assets or investments held in the company.
- To facilitate transactions: Nominee companies can be used to facilitate transactions, such as the sale of shares or assets, as the nominee company can hold legal title to the assets or shares until the transaction is complete.
- To manage assets: Nominee companies can also be used to manage assets, such as property or investments, on behalf of the beneficial owner, allowing them to focus on other aspects of their business or personal life.
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DISCLAIMER: This article is for informational purposes only, and contains general information only. Orchestra is not, by means of this information, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This information is not intended as a recommendation, offer or solicitation for the purchase or sale of any options or shares.
