Nominee Director for Hong Kong businesses

8-minute read

During the registration process, all Hong Kong companies need to have at least one director on its board at all times. Since some board members may prefer to remain anonymous, they hire nominee services to provide them with a nominee director for the company.

This nominee director is used as a type of replacement for the true director of the company, who continues to remain anonymous, but can still take forms of direct involvement and risks. Nominee directors have strictly non-executive roles and they are usually used to hide the identity of the true director from records.

Overview:

• What is a Nominee Director
• What is a Shadow Director
• What are the Nominee Director’s Duties
• How to appoint a Nominee Director

What is a Nominee Director in Hong Kong?

A nominee director in Hong Kong companies refers to a non-executive director who was appointed to protect the identity of the real company director. This director can replace another person, financial institution, or an investor. There are some cases where the position of the nominee director can also be held by a separate company.

Investors in Hong Kong who choose to keep all of their investments confidential will typically hire a nominee company that can provide them with nominee shareholder services at the same time. Nominee shareholders represent real shareholders and keep their personal information private.
As the law in Hong Kong states that directors and shareholders of a company need to disclose their identities, those who wish to remain anonymous appoint nominee directors and shareholders.

Since these individuals represent the company, they always need to exercise professionalism. Their role is to do what’s best for the company to achieve its end goals. They need to be a Hong Kong citizen, a permanent resident of Hong Kong, or at least hold the Entrepass work visa that allows them to work there legally.

What is a Shadow Director?

A shadow director is a person who can give directions and instructions within the entire company or at least some areas of it. Shadow directors aren’t technically directors and don’t participate in the firm’s governance openly, but employees still comply with their instructions.

Even though they’re not technically a real director of the company, they are still treated as one in many different ways. Therefore, they are bound by the same obligations and duties. However, not many shadow directors are aware of those obligations.

Since they’re not aware of those obligations and they need to comply with all the same laws as acting directors, they don’t take any protective actions. And since shadow directors usually aren’t covered by the same liability insurance as the company’s other directors, a lot of problems could arise.

In short, the shadow director is a position that comes with multiple risks. They don’t have the authority to bind the company they work for and none of the protecting statutory directors enjoy. All of this can result in personal liability if they make any sort of mistake within the organization.

Reasons for Choosing a Nominee Director

Company directors in Hong Kong may have many reasons why they choose to not want to disclose their identity. However, this wouldn’t be legal as a certain level of transparency and disclosure is necessary in Hong Kong for a company to form form.

• One of the main reasons why nominee director services are so popular is due to the high degree of privacy and confidentiality it allows to board members.

• Another big reason why someone would choose a nominee director is taxation, and this is especially true for foreign investors. Depending on their home country’s laws, they might lose a big part of their income due to taxation. This can all be avoided with a nominee director.

Disadvantages of Using a Nominee Director

One of the main downsides of hiring a nominee director is that the shadow director may have difficulties proving they’re actually the ones who actually run the company. However, there are other disadvantages as well.

Some nominee directors may not want to sign certain documents if they believe it could have serious consequences. If a company engages in some risky or speculative ventures, the nominee director’s company formation agent won’t allow them to sign any documents.

For these reasons, it’s best to check with your potential nominee director’s agent to see if they will be willing to undertake all necessary transactions before hiring them.

What are the Nominee Director’s Duties?

A nominee director usually performs only the activities they have been empowered or specifically instructed to do by the Hong Kong company owner. These activities are all necessary business instructions such as:

• Managing business issues
• Bank account opening and operating
• Entering into agreements
• Collecting debt

As stated, one of the biggest responsibilities of a nominee director is to provide a certain degree of privacy to the company director and make sure their personal information isn’t leaked. However, it’s important to distinguish that this isn’t done to avoid liability and it only hides the true identity of the director from public records and not governmental authorities.

This appointed third-party director doesn’t make any active business decisions alone and never acts on his or her own terms. Before making any type of a decision, the nominee director must consult with the beneficial owner to see how they can act next and what they’re allowed to do.

In some cases, the nominee director can allow the true director to sign all the important company documents and agreements and make all active business decisions. In these situations, the nominee director becomes an agent or representative of the company.

Most Hong Kong companies that hire nominee directors typically allow them to have an involved role in the company’s management. By giving them this kind of role, the nominee directors fulfil most, and sometimes even all, of the tasks the company director usually performs.

When taking this approach, companies usually appoint at least one third party to sign contracts, make important business decisions, and open and manage the company’s bank accounts. However, this third party doesn’t handle dividends, as the dividend income is directly transferred to the beneficial owner.

How to Appoint a Nominee Director?

A company in Hong Kong that wants to hire a nominee director needs to draw up a special document that will state that the nominee can only act based on the beneficial owner’s instructions. When the document is signed, the transfer of power between the two of them is made.

Once the services of the nominee director are no longer needed, they will hand back the control of the company to the owner through a general power of attorney. This type of appointment requires several types of agreements and documents that need to be drawn out beforehand.

They include:

• Nominee director statement. This statement is a service agreement between the company’s beneficial owner and the nominee director that’s being hired. It states that the nominee has the right to represent the company and acts on behalf of the true director under their instructions.

• Power of attorney. This is a legal document without which the actual transfer of power wouldn’t be possible. It clearly states all the rights the nominee director has, such as the right to perform management activities, open a corporate bank account, and perform transactions.

• Resignation letter. The company owner needs to have a guarantee that they can re-transfer the rights back to themselves or another director if the nominee services are no longer needed. That is why most companies ask their nominee directors to sign a resignation letter that’s filled out but not dated.

• Declaration of trust. As the biggest reason for hiring a nominee director is to protect someone’s identity, the declaration of trust needs to be signed. It states that the beneficial owner’s/director’s identity won’t be exposed by the nominee director hired by the Hong Kong company.

Bank Account Opening with Nominee Structure

It’s becoming increasingly more difficult to open a bank account with nominee structure as banks revise their strategies and look for new ways to avoid such risks. This causes many bank compliance officers to reject bank account openings to companies that use nominee directors.

Some banks in Hong Kong refuse their services to companies that hire nominees in accordance with the recommendations of the Hong Kong Monetary Authority. The argument for refusing their services is that the compliance costs are too high.

Banks believe it’s too risky to open accounts with companies that use nominees as the director’s request for privacy and business confidentiality can be seen as suspicious for many reasons. The biggest concern for banks is that some companies use nominee services for tax evasion and money laundering activities.

Wrap Up

Very often and for many different reasons, Hong Kong company directors want to protect their privacy and keep their identity hidden from the public record. To do this while still respecting the country’s laws, they company may choose to hire a nominee director.

This representative works with dedication to present the Hong Kong company in its best light while also protecting the director’s personal information as obligated by the declaration of trust. Ultimately, this role is strictly non-executive, as the nominee director needs to wait for the board’s approval before making any type of decision.

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