Nominee Director: Commercially Recognised, Legally Ignored
What is a Nominee Director?
A nominee director is a director appointed by a holding company or a particular group or class of shareholders in accordance with the articles of the company.
Harold Arthur John Ford put forward the notion in his book (Ford's Principles of Corporations Law) that a director is a nominee director if he is not merely appointed, but if he has also has an extraneous loyalty to the nominator or some interest other than the interests of the company.
Why are they used?
A nomine director is appointed to the board of a company with the intention to represent the interests of his appointor. In some commercial situations, he may be appointed by a shareholder as previously stated, a creditor or another stakeholder.
They are used as a genuine business mean, to further or protect some interests that the appointer has. A nominee director can be an employee of the appointer, which can lead to an awkward predicament for the nominee director as he will aim to put the interests of his appointer before that of the company he is directing, something which is not permitted under UK law.
Does a Nominee Director Have a Fiduciary Duty to their Appointer?
To put it simply, no. It is a confusing concept as it completely defeats the rationale of his appointment. This puts such a director on a collision course with the duties he owes as a director to the company and those he believes to his appointer.
A nominee director has no distinction at law in the UK, all directors are under a small umbrella, that umbrella being section 250 of the Companies Act 2006 (with the exception of section 251, which is a shadow director).
In the case of Hawkes v Cuddy & Others [2009] 2 BCLC 427 the Court of Appeal made it abundantly clear that a director nominated by a shareholder does not by virtue of that fact alone owe any duty to his nominator.
Lord Denning the situation of a nominee director in the case of explained Scottish Co-operative Wholesale Society Ltd v. Meyer [1959] AC 324. The case involved three directors of a holding company who were nominated to the board of one of its subsidiaries. Lord Denning explained the following:
‘So long as the interests of all concerned were in harmony, there was no difficulty. The nominee directors could do their duty by both companies without embarrassment. But, so soon as the interests of the two companies were in conflict, the nominee directors were placed in an impossible position. It is plain that, in the circumstances, these three gentlemen could not do their duty by both companies, and they did not do so. They put their duty to the co-operative society above their duty to the textile company...’’
An Explanation of the Situation
Establishing the reality that a nominee director owes the same duties and loyalty to a company as an ordinary director nominated, we must explore why this makes for such a difficult situation.
A director owes his fiduciary duties to the company to which he is controlling, those duties have now been incorporated into statute. A brief selection of the duties a director owes are as follows: duty to promote the success of the company (s 172); duty to exercise independent judgement (s 173); duty to exercise reasonable care, skill and diligence (s 174); duty to avoid conflicts of interest (s 175).
Where there are conflicts of interests (s 175), the company may waive (presumably by the board of directors) its interest by implementing a clause in the articles of association (s 180). This was made clear in the case of Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606 per Upjohn LJ.
However, this precedent does not permit the waiver of the section 172 duty, this is an inexorable duty. Section 172 is an important feature because it upholds the “enlightened shareholder value” approach which embraces the stakeholder approach without sacrificing the interests of the shareholders.
A nominee director is authorised to take into consideration the interests of his or her appointer, but only under the condition that they coincide with that of the company and that his decision as a director is made in what he bona fide considers to be in the best interests of the company.
In any event that the interests collide and one must prevail, the duty to the company trumps that of to the nominator. There may some slight pliability in a small “close” company, but, customarily directors’ duties are sacrosanct.
Fraudulent Use of Nominee Directors
It has been frequently picked up on that the use of nominee directors has been used by disqualified directors. Online services offer the ability to acquire a fictitious nominee director to be added to the documentation of a company, all at the click of a button and a small nominal fee. There is no public register for the nominators, the only name is that of the nominee, thus adding a level fraudulent protection for the wrongdoers.
Concluding Thoughts
It is evident that a nominee director is placed in unfavourable position. The desire to uphold and implement his appointers interests will always be key concern of the nominee, but the current position at law tends to ignore the commercial reality aspect of a nominee director. The law as it stands persists to hold its ground in that the nominee director must put forward the interests of the company, before that of the nominator, and only if they coincide can they be taken into consideration.
There is always space for reform, especially with the history of company law in the UK. A considerable approach would be that of New Zealand Companies Act 1993(section 131(2)(3)(4)). They have incorporated legislation to facilitate and recognise the position of the nominee director. They list a few instances where a company may waive their interests for that of the holding company, part of the act reads:
‘A director of a company that is a wholly-owned subsidiary may, when exercising powers or performing duties as a director, if expressly permitted to do so by the constitution of the company, act in a manner which he or she believes is in the best interests of that company’s holding company even though it may not be in the best interests of the company.’
Enacting legislation such as the New Zealand approach would help alleviate the problems that nominee directors are currently facing in the UK today.