A nominee director is a person appointed to sit on a company’s board on behalf of another party who cannot or prefers not to appear on the register directly, and is commonplace in Malaysian corporate structures.
Under Malaysian law, a nominee director is treated as a full director with independent legal duties, and the agreement that governs the arrangement is what determines how those duties and risks are allocated between the parties.
This guide sets out what each side needs to consider before an arrangement is set.
Legitimate uses for nominee directors
There are several legitimate reasons a company may bring in a nominee director.
- Foreign-owned companies operating in regulated sectors may need a local director to satisfy licensing or ownership requirements.
- In other cases, an investor or holding entity may appoint a nominee to represent their interests on the board without taking on a direct operational role.
These arrangements are not inherently problematic. What creates risk is when it is put in place informally, without a clear agreement between the parties.
Illegal uses for nominee directors
Nominee arrangements should not be used as a mechanism to obscure actual ownership or avoid accountability.
Regulatory focus on beneficial ownership disclosure in Malaysia has increased in recent years, and structures that are not properly documented and transparent carry their own compliance risk.
Nominee director vs nominee shareholder
It is also worth distinguishing a nominee director from a nominee shareholder, who holds shares on behalf of another party, and which we cover in our guide to Nominee Shareholders’ Agreements In Malaysia.
The two structures serve different purposes and are sometimes used together in more complex arrangements.
Nominee director default duties
Under the Companies Act 2016, a director’s duties apply regardless of how they came to hold the position.
A nominee director carries the same obligations as any other director:
- to act in good faith in the best interests of the company
- to exercise reasonable care and diligence, and
- to avoid conflicts of interest
Importantly, acting on the appointing party’s instructions does not override these duties. If the principal instructs the nominee to vote in a way that harms the company or its other shareholders, the nominee remains personally exposed. The CA 2016 does not recognise “I was following instructions” as a defence to a breach of directors’ duties.
For example: If an appointing shareholder instructs a nominee director to approve a related-party transaction that benefits the shareholder at the company’s expense, the nominee faces a direct conflict. Approving the transaction may expose the nominee to personal liability under the CA 2016, while refusing risks straining the arrangement with the principal.
Key terms
A nominee director arrangement should clearly set out how the relationship operates and what each party can expect from the other.
| Key term | Why it matters |
|---|---|
| Scope of instructions | Clarifies which matters the nominee is expected to follow instructions on and where they must exercise independent judgment. |
| Information rights | Sets out how the appointing party receives updates on board matters and company affairs. |
| Removal and replacement mechanism | Provides a clear process for replacing the nominee when the arrangement is no longer suitable. |
| Confidentiality obligations | Regulates the disclosure of the appointing party’s involvement, the arrangement itself, and confidential company information. |
| Fees and expenses | Specifies the nominee’s remuneration and how out-of-pocket expenses will be reimbursed. |
| Indemnity | Addresses liability, legal costs, and claims arising from the nominee’s proper performance of their role. |
A well-drafted agreement gives both parties clarity on how the arrangement operates and helps reduce misunderstandings.
How nominees can protect themselves
Even where a nominee director agreement is in place, the nominee remains subject to the same statutory duties as any other director. For that reason, nominees should look beyond the agreement itself and consider how they will manage their personal exposure.
Remember that directors’ duties come first
A nominee may be appointed to represent the interests of a particular shareholder or principal, but their legal duties are owed to the company. If a conflict arises between the principal’s instructions and the company’s interests, the nominee’s obligations as a director take priority.
Assess the value of any indemnity
An indemnity may provide important protection, but it is only as valuable as the financial standing of the party providing it. Before accepting an appointment, nominees should consider whether the appointing party is realistically able to meet its indemnity obligations if a claim arises.
Ensure there is a practical exit route
If circumstances change or a conflict emerges, the nominee should be able to resign without facing unreasonable restrictions or penalties. A clear exit mechanism helps prevent situations where a nominee remains tied to an arrangement that has become problematic.
Understand the company before accepting the role
Nominees should carry out their own due diligence before accepting an appointment. This includes understanding the company’s business activities, financial position, ownership structure, and any regulatory risks. Taking on a directorship without understanding the company can expose a nominee to risks that no contractual indemnity can fully eliminate.
Ultimately, a nominee director agreement can allocate responsibilities between the parties, but it cannot remove the nominee’s statutory duties under the Companies Act 2016.
Let ELP structure your nominee director arrangement
Whether you are appointing a nominee director or being asked to serve as one, the agreement that governs the arrangement is where your protection sits. We can assist with drafting and reviewing Nominee Director Agreements and advise on the appropriate structure for your specific arrangement. Contact us for an initial consultation.
