First to be explored is the legal nature of the so called "nominee shareholder". Nominee shareholder is a shareholder of a company holding shares nominally only, that is, only in name. In such a way the identity of the ultimate beneficial owner ("UBO") of the shares is not disclosed. Such arrangements serve corporate and financial privacy and secure anonymity up to a certain extent. The nominee shareholder is said to hold the shares in trust for the UBO of the shares, thus the nominee shareholders are described as "trustees".

The nominee shareholder is considered to be a trustee holding the "numbered" shares in trust for the beneficiary who is the real owner (equitable) of the shares of the company. The nominee shareholder holds the legal title of the shares hence he is the registered shareholder appearing in the register of the company whereas the UBO holds the beneficial title of the shares. A declaration of trust is usually signed by the nominee shareholder indicating that he has no rights whatsoever on those shares. This Declaration of Trust (otherwise trust deed) is a private agreement between the nominee shareholder and the UBO and is not disclosed to the Cyprus Registrar of Companies. Of course because of the anti-money laundering regulations the identity of the UBO needs to be disclosed when opening a bank account and it is an absolute pre-requisite for the banks to open corporate accounts. It is the UBO who is entitled to income and capital gains on the shares. Nominee shareholders have no access to the company's bank account, cannot sign cheques or make payments and have no legal right to handle any of the company's assets. The actual owner of the shares still benefits from their ownership and receives their dividends as normal.

It is also customary for the nominee shareholder to issue and sign an undated Instrument of Transfer in favour of the UBO to be used at any moment to legally transfer the shares unto his name. This safeguards the rights of the UBO.

It is though quite often the case that such trust deeds are purely drafted and without any undated instrument of transfer in place there is no guarantee that the trustee-nominee shareholder will properly fulfill his obligations and apply the UBO's instructions as to an intended transfer of shares.

Unless, there is a mechanism to hold trustees to account, there is no trust, because the trustees' duties are devalued. For the rights' holder to be able to complain without a valid trust in force would turn the trust arrangement into a simple contract. Apart for the use of the "trust" label established in order to disguise ownership and control is questionable whether such arrangements constitute a valid trust or a mere façade.

The validity of such "trusts" not upheld as yet by a Court decision in Cyprus, our firm has recently launched legal proceedings against, among others, a nominee shareholder unwilling to co-operate with the beneficial owners of the shares. It should be noted that during proceedings at interim stage on an ex parte basis, the Cyprus Court issued prohibitory interim orders against such nominee shareholder and the officers of the company to prevent alienation of the shares in issue pending final adjudication of the dispute. This could be interpreted as a prima facie indication of the readiness of the Cyprus Court to protect the beneficiary's rights over the shares. The law of trusts will always find the path to operate in aid of the beneficiary.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.