Dancing a Fine Line: Nominee Directors and Conflicts of Interest

Nominee directorships involve inherent conflict issues. Nominee directors share the same fiduciary obligations as any other director, but their loyalty to their appointor creates an intrinsic conflict between the interests of the company and those of their appointer. This intrinsic conflict creates a fine line in considering one’s competing interests and what effect they may have on a director’s continued involvement on a company’s board.

Nominee Directors

A nominee director is a person who, independent of the method of their appointment, but in the performance of their office, acts in accordance with some understanding, arrangement or status which gives rise to an obligation (in the wide sense) to the appointor.[1] In Berlei Hestia (NZ) Ltd v Fernyhough,[2] Mahon J applied the approach adopted by Jacobs J in Re Broadcasting Station 2GB Pty Ltd,[3] and observed that:

“when articles are agreed upon whereby a specified shareholder or group of shareholders is empowered to nominate its own directors, then there may be grounds for saying that in addition to the responsibility which such directors have to all shareholders as represented by the corporate entity, they may have a special responsibility towards those who nominate them”.

A nominee director is not permitted to disregard the interests the company to which they are a director,[4] but in certain circumstances, their fiduciary obligations to their nominee may be attenuated and narrowed by agreement to allow the director to act in the interest of the nominee.

A director's duty to avoid conflicts can be attenuated by unanimous agreement of shareholders or by a provision in the company's constitution, subject to the limitation imposed by s 199A of the Corporations Act 2001. Jacobs J said in Levin v Clark,[5] that it was possible for a director who was particularly appointed for the purpose of representing the interests of a third party to lawfully act solely in the interests of that third party, where the breadth of the fiduciary duty has been narrowed, by agreement amongst the body of the shareholders.[6]

Further, a nominee director may, in limited circumstances, be entitled to take into account the interest of their appointor even if the position of nominee director is not expressly recognised in the company's constituent documents. In Re Broadcasting Station 2GB,[7] several directors were appointed by a controlling shareholder by general meeting. Jacobs J held that it was permissible for those directors to comply with the wishes of the controlling shareholder, providing that they do so in the genuine belief that they are also acting consistently with the interests of the company as a whole.

Practical Implication

Collectively, the above decisions appear to allow nominee directors to consider a third party’s interests in the course of their decision making without contravening their duties, if:

  1. the company's constituent documents so authorise; or
  2. the company’s shareholders agree; or
  3. those interest align with the interests of the company as a whole; or
  4. those interests are compatible with the interests of the company as a whole; or

Despite this, a nominee director is still a director and bound by the requirements of directors, including to act in the interest of the company as a whole. If there exists an actual conflict between the duty of a nominee director to their appointor and their duty to the company, the director must comply with their duty to the company to the exclusion of their duty to the appointor, or resign from their position as a director.[8]

The potential for conflict of interest issues to arise are heightened in instances of nominee director appointments and it is critical that directors of this kind are aware of their obligations and the potential risks these appointments pose.

For information as to how such an appointment may affect you or your company, please contact Iain Freeman and the Litigation team at Lavan.


[1] 'Nominee Directors and Alternate Directors', Companies and Securities Law Review Committee, Discussion Paper No 7 (1987), [101].

[2] Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150, [164] – [165].

[3] Re Broadcasting Station 2GB Pty Ltd [1964–65] NSWR 1648.

[4] SGH Ltd v Commissioner of Taxation (2002) 210 CLR 51; [2002] HCA 18 at [30].

[5] Levin v Clark [1962] NSWR 686, at 700.

[6] See also Re Broadcasting Station 2GB Pty Ltd [1964–5] NSWR 1648 Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150 and Japan Abrasive Materials Pty Ltd v Australian Fused Materials Pty Ltd (1998) 16 ACLC 1172.

[7] Re Broadcasting Station 2GB Pty Ltd [1964–65] NSWR 1648, at [1663].

[8] See Re News Corp Ltd (1987) 15 FCR 227; 70 ALR 419; Bennetts v Board of Fire Cmrs (NSW) (1967) 87 WN (Pt 1) (NSW) 307.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.