Nominee Shareholding

INTRODUCTION

The Companies and Other Business Entities Act [Chapter 24:31] (the COBE Act) provides that shares in a company may be held by a nominee on behalf of a beneficial owner. This article considers the nature of nominee shareholding, the advantages and disadvantages of this phenomenon, and the mandatory disclosure of beneficial shareholding.

THE NATURE OF NOMINEE SHAREHOLDING

A nominee shareholder is the registered owner of shares, which are held for the benefit of another person, that is, the beneficial owner.

Section 2 of the COBE Act defines a beneficial owner as a natural person who ultimately owns or controls the rights to or benefits from property or a person who exercises ultimate effective control over a legal person and, more specifically, refers to a natural person who (a) directly or indirectly holds more than 20% of the company’s shares; or (b) directly or indirectly holds more than 20% of the company’s voting rights; or (c) directly or indirectly holds the right to appoint or remove a majority of the company’s directors; or (d) otherwise exercises or has the right to exercise significant influence or control.

In Zimbabwe, nominee shareholding is governed by a Nominee Shareholding Agreement in terms of which the nominee acts only upon instruction from the beneficial owner in exchange for renumeration. It is the nominee shareholder whose name appears on the incorporation documents of the company, and not those of the beneficial owner. Ownership of shares does not depend on registration thus a nominee shareholder holds the shares in name only and acts as an agent on behalf of the beneficial owner who is entitled to all gains, profits and benefits accruing through such shares.

In the Supreme Court case of SEC v Gwatidzo. N.O, First Transfer Secretaries (Pvt) Ltd & 2 Others (SC 26/17), the court explained the concept of nominee shareholders in great detail. It stated that a nomineeshareholder holds shares for the benefit and on behalf of another person. A nominee shareholder is therefore not the true owner of the shares. The nominee does not have the authority to transfer the shares he holds; for such authority he must refer to his principal, the beneficial owner. Where a nominee has stolen or misappropriated shares registered in his name and transferred them without authority of the beneficial owner, the courts have permitted the beneficial owner to vindicate the shares from a bona fide third party who purchased the shares from the nominee. It is therefore clear that a nominee shareholder holds shares on behalf of the beneficial owner who is the person who is the real, de jure owner of the shares, and entitled to all gains, profits and benefits accruing through such shares.

DISCLOSURE OF BENEFICIAL SHAREHOLDERS

Section 72 of the Act provides that every company must maintain an accurate and up-to-date register of the beneficial shareholders or beneficial owners of the company, to be known as the Register of Beneficial Owners. This information shall not be available for inspection by members of the public except with the consent of the nominee shareholder, or by virtue of a court order. Also, the company is mandated to avail the information of beneficial owners upon request by the Financial Intelligence Unit or any law enforcement agency referred to in the Money Laundering and Proceeds of Crime Act (Chapter 9:24). Section 72 empowers the Registrar of Companies or the Financial Intelligence Unit to seek beneficial ownership on its behalf or on behalf of a law enforcement agency from their foreign counterparts, and may also provide information to them. The Section states that these records must be kept for at least five years even after the company is dissolved or ceases to exist. Concealing beneficial ownership is prohibited and not filing the beneficial ownership register as required by the Act is an offence.

These provisions, albeit with limited access, are in line with the internationally accepted standards of the prevention of money laundering, financing of terrorism, bribery, corruption and tax evasion. Every company must keep in file information about its beneficial owners and directors, and submit this to the Registrar of Companies. The company must therefore have all details of all individual beneficial owners and directors, as well as the extent of their shareholding in the company.

Access to the Register of Beneficial Owners is limited to the Financial Intelligence Unit or any law enforcement agency referred to in the Money Laundering and Proceeds of Crime Act. The rationale for this is that the Financial Intelligence Unit is responsible for investigating allegations of money laundering, financing of terrorism, bribery, corruption and tax evasion, and may require information on the ultimate beneficial owners of companies during the course of their investigations. Further, the Financial Intelligence Unit cooperates with similar Units established in other countries, hence the provision of information sharing between it and its counterparts, as well as the Registrar of Companies and his counterparts, specifically for the purposes of combating money laundering, financing of terrorism, bribery, corruption and tax evasion, even across borders.

Various countries have however made registers accessible to the public, for example the United Kingdom’s Companies House.

One of the benefits of mandatory beneficial shareholding disclosure for the shareholders is that their shareholding is protected through registration and protected from rebuttal by nominees and minimises ownership disputes. Disclosure of beneficial owners also enables investors to see who owns or controls a company before injecting their funds into it. It also protects minority shareholders who may not be able to detect a change in the controlling stake. Mandatory beneficial shareholding disclosure further promotes market transparency and can be a mechanism used to protect management against hostile takeovers. The Register of Beneficial Owners also protects the nominee shareholder in circumstances where the beneficial owner fails to meet their financial obligations.

The COBE Act limits the percentage of shareholding that a nominee may hold. In terms of the Act, a nominee shareholder may only be such, for a beneficial owner who holds 20% or less in a company. Other exceptions of nominee shareholders are a manager or trustee of a collective investment scheme, an executor of a deceased estate, a guardian or curator of a person under a disability, a holder of a licence in terms of the Securities and Exchange Act (Chapter 24:25), a central securities depository, or any other prescribed persons. Companies are entitled to request a potential new shareholder to disclose if the shares they are about to issue will be held in nominee capacity. The purpose of this section is to enable companies to comply with the provision that prohibits nominee shareholding where the beneficial owner holds more than 20% of the shares.

ADVANTAGES OF NOMINEE SHAREHOLDING AGREEMENTS

Nominee shareholding agreements serve a myriad of purposes and these include but are not limited to keeping the details of the true owners and the management of the company private and to circumvent possible refusal of registration or acquisition due to some prejudice.

Personal and/or administrative convenience are major reasons for the use of nominee shareholding. Beneficial owners often experience the need for a local agent to take care of the day-to-day management of their shares. Appointing a nominee saves them time, costs and worry in dealing with the shares. It also eliminates the risk of loss of opportunities as the nominee will be present on the ground to embark upon any such opportunities that might arise.

Nominees can also be utilised to satisfy statutory requirements such as section 195(2) of the Act which posits that at least one of the directors of a company shall be ordinarily resident in Zimbabwe. Therefore in order to satisfy this requirement, a nominee director resident in Zimbabwe has to be appointed where the other directors are ordinarily resident outside Zimbabwe.

DISADVANTAGES OF NOMINEE SHAREHOLDING AGREEMENTS

Like several aspects of business, there are some risks associated with nominee shareholding. It is of paramount importance that people who wish to enter into nominee shareholding agreements provide proper documentation when setting up their arrangement and put the terms and conditions in writing as opposed to simple verbal agreements. Failure to do so can result in the nominee shareholder demanding an unreasonable large payment for the appointment or the subsequent death of the nominee and an assumption by their heirs that the shares form part of the estate of the deceased. There is also a risk that the nominee shareholder may reveal the arrangement to other people or they might use the shares as authority for actions such as selling them, act as a security for a loan or making company decisions without the beneficial owner’s approval.

In all of the examples above, the beneficial owner risks losing their anonymity and confidentiality to public or having to deal with undesired consequences of an unprofessional nominee shareholder.

However, there is some protection afforded to beneficial owners stated in the Supreme Court case above, for example, where a nominee has stolen or misappropriated shares registered in their name and transferred them without the authority of the beneficial owner. The beneficial owner is entitled to vindicate the shares from a bona fide third party who purchased the shares from the nominee shareholder.

CONCLUSION

Nominee shareholding is an arrangement which serves several purposes for both companies and shareholders. It is imperative for companies and shareholders who elect to make use of nominee services to comply with the provisions of the COBE Act, so as to benefit from the protections provided therein, and to avoid the civil penalties attached to contravention of the Act.