What Is a Dummy Shareholder?

A dummy shareholder is an entity that holds shares in a public company on behalf of an individual or firm, the latter being the real or true owner of these shares. A dummy shareholder will, therefore, have no beneficial interest in the account where these shares are being held. Decisions with regard to the disposition or tendering of these shares may also be made by the real owner, rather than the dummy shareholder.

Key Takeaways

  • A dummy shareholder acts on behalf of a real owner.
  • Dummy shareholders may exist for legitimate reasons, but may also be used for illegal or unethical activities.
  • Dummy shareholders typically act under a nominee agreement, accepting a fee for their services.

Understanding Dummy Shareholder

The subject of dummy shareholders is a gray area in most jurisdictions, given the possibility that they may be used to circumvent securities legislation or perpetrate fraud. Dummy shareholders with large blocks of shares can also pose a particular problem when a company's management is trying to fend off a hostile takeover bid since there is little indication of whether these shares are being held in friendly or hostile hands.

A dummy shareholder is an option for offshore companies when an investor located many miles away may not be able to comply with local rules such as a requirement for a minimum amount of shareholders or directors, which may not be available in the investor's team. The offshore jurisdiction may also have corporate residency requirements, even though the company operations do not require local staff. In addition, local banks may require that one or more persons act as signatories on the bank account.

Nominee Agreements and Dummy Shareholders

The typical industry standard to remedy this issue is to use a dummy shareholder, a dummy director and/or a dummy bank account signatory. Such straw persons are provided by so-called "nominee services" for a yearly fee.

Nominees promise an additional layer of distance and privacy. Typically the service providers assure that the nominee's role will only be to maintain the company's finances and handle interactions with the local government, but the business will not be managed by the nominee.

Under a nominee agreement, an individual agrees to hold shares or to act as an appointed director without having the burden and benefit from this legal position; this person lacks voting power and earns a service fee. However, under certain local laws, it might be illegal to act as a nominee. The laws might require to register the true decision-maker as director and the beneficial shareholder in the company register. These rules may invalidate the nominee agreement; the dummy shareholder arrangement might be considered to be a criminal act.

Real-World Example of a Dummy Shareholder

Dummy shareholder accounts and nominee directors became front page news in 2016 when the Panama Papers were released. The documents outlined information on more than 214,000 offshore entities, bringing to light multiple politicians, celebrities, athletes, and criminal's illegal and unethical activities.

Focus on the scandal was revived with the release of docufilm, The Laundromat, in 2019.

Following the release of the documents, more than $1.2 billion was recovered by governments made of aware of fraud and tax evasion going on in their own backyard.

In many cases, shell companies were set up offshore—which in itself isn't illegal—and then used to launder money or avoid taxes, among other criminal activities.