Nominee shareholder, the straw man shareholder - meaning

Nominee Shareholders: The Shadow Players of the Business World - A Verified Insight

What is a nominee shareholder? - A fact-based definition

A nominee shareholder, also known as a straw man shareholder, is a person or company that is officially registered as a shareholder of a company but acts on behalf of and in the interests of another (the beneficial owner). This structure is often used to disguise the identity of the actual owners or to remain in the background for strategic reasons.

According to the Financial Action Task Force (FATF), an intergovernmental anti-money laundering organization, nominee shareholders are "persons or entities acting on behalf of another person as the registered owner of shares" [1].

How does the nominee system work? - A detailed look behind the scenes

1. Contractual basis:
   • A contract is concluded between the nominee and the beneficial owner.
   • This agreement governs the rights and obligations of the nominee.
2. Exercise of shareholder rights:
   • The nominee exercises voting rights and other shareholder rights in accordance with the instructions of the beneficial owner.

The OECD (Organization for Economic Cooperation and Development) describes in its report "Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes" the functioning of nominee structures and their potential risks for the transparency of corporate structures [2].

Where are nominee shareholders used? - A global perspective

1. Offshore financial centers:
   • In jurisdictions such as the Cayman Islands or British Virgin Islands, which are known for their discretion.
   • A study by the International Monetary Fund (IMF) shows that nominee shareholders are frequently used in offshore centers [3].
2. Listed companies:
   • For strategic maneuvers or to circumvent reporting obligations.
   • The U.S. Securities and Exchange Commission (SEC) has issued guidelines on the disclosure of nominee structures at listed companies [4].
3. Start-up area:
   • To protect sensitive ownership structures in the early phase.
   • A Harvard Business Review analysis shows that some tech startups use nominee structures to protect early-stage investors [5].

The advantages and disadvantages of the nominee structure - a balanced analysis

Advantages:

1. AnonymityProtects the privacy of the real owners.
2. FlexibilityEnables complex corporate structures.
3. Tax optimizationCan support legal tax avoidance strategies.
4. Limitation of liabilityProvides additional protection against legal claims.
5. Simplified share transferFacilitates the process of changing ownership.

Disadvantages:

1. Legal risksIn the event of inadequate documentation or breaches of disclosure obligations.
2. Trust issuesPotential conflicts between nominee and true owner.
3. Transparency problemsIncreasing criticism and regulation due to lack of transparency.
4. Increased administrative expensesAdditional costs and complexity.
5. Reputational risksPossible negative public perception in the event of disclosure.

The Tax Justice Network, an independent international organization, has analyzed the advantages and disadvantages of nominee structures in a report and discussed their impact on global tax justice [6].

Legal aspects and future trends - a look at the regulatory landscape

• The EU Money Laundering Directive requires more transparency for beneficial owners [7].
• The Financial Action Task Force (FATF) has issued recommendations on the regulation of nominee structures [8].
• The OECD is working on international standards to combat tax avoidance through complex corporate structures [9].

Special application: Nominee Shareholders in Ireland - A case study

Ireland is an attractive location for nominee structures due to its EU membership and favorable tax regime. The Irish Companies Registration Office has issued specific guidelines for the use of nominee shareholders [10].

Important note:

Nominee shareholders cannot satisfy the requirement for an EU resident director for Irish Ltd. This is a separate legal requirement.

Conclusion

Nominee shareholders remain a complex and often controversial topic in the global business world. While they can serve legitimate business purposes, they are also the focus of regulators and transparency initiatives. Companies and investors should carefully consider the legal and ethical implications before deciding to use nominee structures.

Sources:

^[1] FATF. (2012-2021). International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation. FATF, Paris, France.

^[2] OECD. (2001). Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes. OECD Publishing, Paris.

^[3] IMF. (2019). The Rise of Phantom Investments. Finance & Development, Vol. 56, No. 3.

^[4] U.S. Securities and Exchange Commission. (2010). Beneficial Ownership Reporting Requirements and Security-Based Swaps.

^[5] Harvard Business Review. (2018). How Transparency into Start-up Cap Tables Empowers Investors and Founders.

^[6] Tax Justice Network. (2020). The State of Tax Justice 2020.

^[7] European Parliament. (2018). Directive (EU) 2018/843 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.

^[8] FATF. (2019). Best Practices on Beneficial Ownership for Legal Persons.

^[9] OECD. (2021). Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy.

^[10] Companies Registration Office Ireland. (2021). Guidance on Nominee Shareholders and Directors.

Important

However, it is important to note that the nominee shareholder is not eligible to fulfill the requirement of an EU resident director. It is necessary for at least one director to be resident in the EU in order to register an Irish Ltd. The Nominee Shareholder cannot assist with this. This regulation only applies to the directorship and not the shareholder status.

In summary, the Nominee Shareholder offers an excellent solution for Anonymization and to protect the privacy of shareholders, but it is not suitable for meeting the residency requirements for directors.

Do you need a nominee shareholder? Take a look here: Nominee Shareholder - Anonymization of the share owner (shareholder) for Irish Limited

FAQ: Nominee shareholder (straw man shareholder)

1 What is a nominee shareholder?

A nominee shareholder, also known as a straw man shareholder, is a person or company that is officially registered as a shareholder of a company but is acting on behalf of and in the interests of another.

2 Why do companies use nominee shareholders?

The main reasons are:

• Anonymity of the actual owners
• Tax optimization
• Limitation of liability
• Simplification of share transfers

3. is the use of nominee shareholders legal?

Yes, in many countries this is a legal practice. However, it is important to comply with local laws and regulations.

4 What are the advantages of nominee shareholders in Ireland?

In Ireland, nominee shareholders can be used to:

• Protect the identity of the actual investors
• Benefit from advantageous tax regulations
• Simplify the transfer of shares

5. are there situations in which the true identity must be disclosed?

Yes, in certain cases the identity of the beneficial owners must be disclosed, e.g:

• In the financial sector
• For real estate transactions
• For government tenders
• For tax audits

6. can a Nominee Shareholder act as an EU Resident Director?

No, a nominee shareholder cannot fulfill the requirement of an EU resident director. At least one EU resident director is required to register an Irish Ltd.

7. what risks are associated with the use of nominee shareholders?

Possible risks include:

• Legal complexity
• Potential conflicts between nominee and beneficial owner
• Possible negative perception upon discovery of the structure

8. how is the relationship between the nominee shareholder and the beneficial owner regulated?

Usually through contractual agreements such as:

• Nominee agreements
• Trust agreements
• Indemnity declarations

9. can nominee shareholders be used for any type of company?

While nominee shareholders can be used in many types of companies, there may be restrictions or additional disclosure requirements in certain regulated industries or for listed companies.

10. how to select a trustworthy nominee shareholder?

Pay attention to:

• Experience and reputation of the provider
• Clear contractual agreements
• Understanding of local laws and regulations
• Data protection and confidentiality guarantees