The role of, and issues with, nominee directors

Directors of companies are appointed for various reasons.  Some are appointed as independent directors; others such as nominee directors could be appointed by a major shareholder, creditor or interest group.  Is the role of the nominee director any different to any other director?

What are nominee directors?

A nominee director is a director who is appointed by a shareholder, creditor or interest group (whether contractually or by resolution at a company meeting) and who has a continuing loyalty to the appointor or other interest in the company.

It is generally expected that nominee directors are appointed to represent the interests of the appointor at a board level.  

However this can involve, by its very nature, a conflict of interest between the loyalties owed by the nominee.  Issues arise because of the potential conflicting duties between the nominee directors and the company, and between the nominee directors and their appointors.

Conflict of interest

Much of the case law on issues with nominee directors focuses on whose interest the nominee should regard.

Nominee directors are expected, like all directors, to have the best interests of the company to which they are appointed at heart and also owe the same duties to the company as all other directors.

Yet, nominee directors are commonly expected to report on the performance of the company to their respective appointors, and at times, expected commercially to represent the interest of the appointors.  The appointor could be a major customer of the company or a competitor to the company.  In this regard, it is a commonly accepted view that all directors (including nominee directors) are entitled to all company information that will enable them to perform their duties, unless it is clear that the director will misuse that information.

If there is a conflict between a nominee director’s duties to either the company or their appointor, that director must consider how that conflict can be resolved, so as not to breach any duties at law.

Australian courts have held that nominee directors will not contravene their duties if they consider the interests of a person other than the company in the course of the board's deliberations in limited circumstances such as:

  • if it is in the best interest of the company as a whole that the nominee director considers the interests of the appointor; or

  • the director, acting reasonably and in good faith, concludes that the interests of the appointor are compatible with the company as a whole.

Lavan Legal note

Given the potential conflict of interests, we would recommend that companies look carefully at their protocols to manage the potential competing interest between nominee directors and the company.

The protocols may cover how conflict of interests are to be resolved and when information should and could be withheld from the nominee director if it is in the company’s best interest to do so.  The protocols will need to recognise the legal obligations of the nominee directors and the rights of the company and balance that against the reality that nominees are appointed by appointees to represent its interests.

For further information please contact Partner, Tony Chong on (08) 9288 6843 / tony.chong@lavanlegal.com.au.

Christmas notice

We hope that you have enjoyed the legal updates from our team throughout 2010 and that you have found these to be both informative and practical.

We will be taking a short break from the Corporate Update over Christmas and will return in February 2011 with more useful articles for you and your business.

If there are any areas of concern which you would like us to cover in future editions of these publications, please do not hesitate to contact our coordinator, Anna Zander on anna.zander@lavanlegal.com.au and we will do our best to ensure that these areas are covered in the relevant publication in early 2011.

With best wishes to you and your team for the festive season.

The Corporate and Tax Team