Stock Nominee Agreement

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What is a Stock Nominee Agreement?

A stock nominee agreement is a form of nominee agreement where one person, the nominee, agrees to act on behalf of another person in legal matters involving shares of company stock. It can be compared to a power of attorney, but it has a wider scope. For example, in some cases, the nominee is paid for holding shares, but in others, they may not.

A nominee can be a third-party person or a firm certified in securities and given specific parameters outlined in the stock nominee agreement necessary to fulfill the agreement. It is common in real estate dealings for a stockholder agreement like this to temporarily transfer legal ownership of a property to someone else.

In a nominee account situation with a firm, a stockbroker typically holds shares belonging to clients, which makes buying and selling investments easier and holds the stock for safekeeping. In this arrangement, the shares of stock are said to be held in street name.

Here is an article about nominees.

What’s Included in a Stock Nominee Agreement?

The basic sections included in a stock nominee agreement should be:

  • Definitions of terms used in agreement
  • Business contracts involved, if any
  • Term of contract and/or termination reasons
  • General obligations of the nominee and standard of care, which sets the parameters of action by the nominee
  • Indemnification to protect the nominee
  • Miscellaneous details

Here is an article outlining a sample stock nominee agreement.

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What Does It Mean to be a Nominee Shareholder?

A nominee shareholder means you hold shares of stock in a company on behalf of another person or company. While you hold investments under your name and would be considered the legal owner, the original owner of the stock still controls the shares and investments.

Depending on the shareholders agreement, a nominee shareholder would have certain access to buy or sell stocks on behalf of the owner. In contrast, the owner remains protected against the possibility of fraud.

Being appointed as a nominee shareholder does not mean you own part of the company or that you will benefit at all from the shares. It only refers to a custodial arrangement where you have access but no legal claim over the shares.

You would not have access to bank accounts or any other assets owned by the company, nor would you be able to sign documents related to stock ownership. This arrangement could come with a stipulation for financial compensation, but that is not always the case.

Here is an article about what a nominee shareholder is.

What is the Structure of a Stock Nominee Agreement?

A stock nominee agreement follows the structure outlined below:

  • First, the nominee will declare a trust over the shares, for the other party's benefit, by filling out and signing a Declaration of Trust. Using a call option or loan agreement is feasible to accomplish the same thing, but those arrangements tend to be more complex.
  • The Declaration of Trust outlines the guarantee for the nominee to act only under the owner's instruction and that funds will be transferred back to the owner when requested. An excellent way to ensure this part of the arrangement is honored is to fill out a share transfer form without a date and keep it on hand.
  • You should also obtain a signed document from the nominee director, if one has been appointed, to ensure that they will only act on your instructions.
  • At this point, obtaining a Power of Attorney is recommended, as it will allow you to access contracts and gives you authority to open bank accounts in the company’s name.
  • If the shareholder passes away, the shares are automatically transferred to the nominee shareholder, who acts as trustee for the legal heirs of the deceased.
  • The only way the nominee shareholder would obtain full ownership of shares is if it is written in the will by the original shareholder.

Here is an article about being a stock nominee.

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How Long Does a Stock Nominee Agreement Last?

How long a stock nominee agreement lasts is really up to the parties involved. This detail is part of the nominee agreement. It should be defined along with the inclusion of an effective date and an expiration date.

A stock nominee agreement also includes a portion that outlines what should happen if there is a breach or how to handle a situation where one or both parties want to rescind the agreement.

Here is an article about what it means to be a nominee shareholder.

Benefits of a Stock Nominee Agreement

Depending on the exact arrangement, there are many benefits of a stock nominee agreement, including:

  • Dispute Protection: This agreement is beneficial to avoid heirs disputing legal entitlement to shares from a deceased shareholder.
  • Personal Convenience: one of the more common situations behind a stock nominee agreement is personal convenience. Brokers overseas use nominee companies to help facilitate quicker transactions while still maintaining ownership.
  • Administrative Convenience: appointing a nominee shareholder is also a way to compartmentalize separate from operational activities like shareholding.
  • Place-Holding: A group of companies may find it easier to create a nominee shareholder to provide intermediary support as trustee of shares. At the same time, a more permanent solution is agreed upon.
  • Confidentiality: There are many legitimate reasons a company or individual would want to keep their investments in whole or part, private from public scrutiny. Using a nominee helps accomplish this.
  • Concealing Buyout: If a company may be leveraging stock ownership for a take-over, they could use a nominee shareholder to mask their intent.
  • A Benefit to Brokers : It is common for investment firms to use nominee relationships to safeguard their assets on behalf of their clients. These accounts are a popular method to hold stocks in the industry, as they reduce costs and improve trading efficiency for the broker.
  • Employee Incentive: An employee stock option agreement can be used as part of an employee incentive or bonus program. The stock option agreement would be active if an employee remains employed. However, the ESO does not give the employee voting rights, nor does it include a financial benefit like a dividend.

Here is an article about employee stock options (ESO).

Who Writes a Stock Nominee Agreement?

A stock nominee agreement has many implications and, as such, should be handled with care. It’s best practice to have someone be a nominee that is known to you, so keep this in mind if considering an agreement of this sort.

As with anything you sign that constitutes a legal agreement, it is best to consult the advice of a lawyer, who can draft a stock nominee agreement for you.

Lawyers with extensive backgrounds in nominee agreements are best, as they already know the ins and outs of the process and will likely save you time and aggravation in setting it up.

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