Nominee Directors – their role and importance to investors and the company [Demystifying Termsheets]

Every agreement to invest in a company comes with a clause entitling the investor to a seat on the board of the Company. In many cases, along with the seat on the board of directors of the Company, the investor will also ask for the ability to appoint a “nominee” to the board.

In law, there are two significant kinds of directors, executive and non-executive directors. A nominee director belongs to the second category, and is appointed on behalf of an interested party (in the case of start-ups, it is most usually an equity investor).

Does a nominee director hold shares in the Company?

Typically, the member whom the investor appoints to the board is both an executive director and a shareholder. A nominee director is almost always a non-executive director and is not a shareholder of the company.

Can a Company be a nominee director?

In some countries, it is possible for a Company (or an LLP) to be appointed as a nominee director in your Company. But in India, it is the practice for an individual to be the nominee and typically a company or a fund is not appointed as a nominee.

It would also be illogical, since the point of having a nominee is to have a supervisory entity and an inanimate entity like a company cannot be in a supervisory position.

What powers and responsibilities does a nominee have?

The main reason why a nominee is appointed is to have the power to supervise and sit-in on the proceedings of the board, and to be present at the meetings of the board.

A nominee being a representative of the investor or the third party getting involved in the Company, has a dual, almost conflicting position. On on the one hand, as the director of the company, he has to serve the company and take actions which are in the best interest of the company. At the same time, since he has been appointed to protect the interests of the investor investing in the company, he has to also make sure that the investor’s interests are safeguarded, even if that in some cases means going against the interest of the company.

Can a start-up get a say in who its nominee directors shall be?

A start-up typically can voice an opinion as to who the representative of the investor sitting on its board shall be (i.e. the main board member), but the start-up does not have a voice as to who the nominee director shall be. This is because the nominee is purely the investor’s representative, and the investor would be quite keen on appointing a certain person as its nominee.

Having said that, if a middle ground can be found in terms of appointing a mutually agreeable person as the nominee, most investors should not have any problem with that. This is very rare, if it happens at all.

- Read more on understanding termsheets.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more).]