Validity of Share Nominee Trust Agreements for Startups
What is a Share Nominee Trust Agreement?
A share nominee trust agreement is a contract between the actual shareholder (trustor) and the nominal shareholder (trustee), where the external shareholding structure differs from the internal shareholding arrangement.
Why Are Share Nominee Trust Agreements Created?
- Legal Restrictions: When ownership of shares is prohibited by law or other regulations.
- Privacy Reasons: To conceal share ownership for practical purposes.
- Industry Practices: To avoid potential management disputes by consolidating shares under one name while actual ownership is divided among multiple stakeholders.
Are Share Nominee Trust Agreements Illegal?
No, such agreements are not inherently illegal. Contracts are governed by the principle of freedom of contract, and there are no specific provisions penalizing share nominee trust agreements under the law.
Are Share Nominee Trust Agreements Valid?
The answer depends on the perspective:
- Internal Relationship (Trustor vs. Trustee): The agreement is valid. The trustee is bound by the contractual obligations outlined in the agreement, and the trustor can hold the trustee accountable for breaches.
- External Relationship (Trustee vs. Company): According to the Supreme Court, only the shareholder listed in the company’s shareholder registry is considered the legitimate shareholder. This means the nominee is recognized as the official shareholder in dealings with the company.
Importance of a Well-Drafted Share Nominee Trust Agreement
For startups, situations may arise where equity is divided among stakeholders but listed under the name of the founder or another nominee. In such cases, the drafting of the share nominee trust agreement is critical. The agreement must clearly define the rights and responsibilities of each party to avoid potential disputes.
Key Provisions to Include in a Share Nominee Trust Agreement
- Clear Identification of Parties: Clearly define the trustor and trustee.
- Transfer Restrictions: Specify limitations on the transfer of shares.
- Shareholder Registry: Include clauses regarding the nominee’s entry in the shareholder registry.
- Liability and Damages: Outline provisions for compensation in the event of a breach.
- Termination of Agreement: Define the conditions and procedures for contract termination.
Practical Note: The effectiveness of the agreement depends on its substantive content rather than its title or formal structure. Each provision must be carefully reviewed for legal enforceability.
Relevant Case Law
- Supreme Court Decision 2013. 2. 14. (2011Da109708)
- Supreme Court En Banc Decision 2017. 3. 23. (2015Da248342)
These rulings underscore the importance of properly drafted agreements and the distinction between internal and external validity in share nominee trust arrangements.
