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.
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; he or she lacks voting power and earns a service fee. However, under certain local laws, it might be simply 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, ie. the dummy shareholder, with all its restrictions, or the whole arrangements might be considered to be a criminal act.