Company directors play a large part in steering a growing business. Directors are given access to valuable business information, whether that’s your intellectual property, commercial contracts, or supplier and customer information, they are often responsible for supporting your wider strategy and guiding it through to success. With so much resting on a director’s shoulders, you need to be sure that they have your best interests in mind at all times and that you’re covered if they don’t. Do you have a director’s service agreement in place that’s fit for purpose and compliant with corporate and employment law? Are they really necessary and what are the consequences of not having a comprehensive Director’s Service Agreement in place?
In this guide we answer:
What does the role of a company director cover?
The term ‘Company Director’ can cover a multitude of roles. A company director in the most common legal sense of the term is an individual that holds the office of director by virtue of being legally appointed to that statutory role and have statutory and common law responsibilities.
In practice, there are different types of directors, with the most common being the directors who are involved in the day to day running of the business and are often called ‘executive directors’. Executive directors are usually also employees of the company for whom they work and as such, they are entitled to have a written contract of employment, just like other team members.
There are other types of directors, such as: a non-executive director who is generally not an employee of the business, usually works part-time and whose job it is to provide objective independent advice to the company’s board; a de facto director who acts as a director without being validly appointed by the company to that role.; and a shadow director who is often thought of as someone who gives direction and instruction that directors follow and act upon without being held out as a director themselves. All of these will still be included in the term ‘director’.
What is a director’s service agreement?
As company directors have specific duties and responsibilities, both in general and under specific legislation such as the Companies Act 2006, the director’s terms of service are generally best covered in an agreement, known as a director’s service agreement.
As well as including the basics you’d expect in an employment contract, a director’s service agreement is a more detailed and extensive agreement, which also covers the director’s specialist role, and sets out their obligations (both statutory and otherwise) owed to the company.
Even if a director is not a company employee, they could enter into a more limited director’s service agreement to cover their non-executive duties, but more frequently a non-executive director will agree terms with the company in a letter of appointment.
De facto and shadow directors may not have formal service agreements which can create more confusion as to the scope of their remit and responsibilities, particularly for the other directors, the company’s employees and any third parties that the company is contracting with (such as customers and suppliers). This is why it is important to make sure that all directors have been validly appointed and the remit of their powers has been documented, which is what a director’s service agreement can do.
Director’s service agreement vs employment contract
A director’s service agreement is very similar to an employment contract. Both will often include the responsibilities that the director should carry out and the rules under which they should operate. However, it’s important to recognise that a basic employment contract that you would use for a junior employee, or a template agreement may not go into the detail that is required for the complex role and duties of a company director and so caution should be exercised before issuing a contract to more senior employees if they have not been specially drafted or recently updated by an employment solicitor.
There are often different strands to a director’s relationship with your business. A director might be: an employee of your business; a shareholder in your business, and finally their role as director is separate in and of itself as an officer of the company with additional obligations and responsibilities. By clearly separating these elements of a director’s role, in the contract governing the relationship between your business and the director, it makes it much easier to establish boundaries. This means that, if further down the line, a disagreement occurs, a comprehensive service agreement clearly sets out how the disagreement should be handled and disagreements are less likely due to more clarity and detail being provided in that document. When drafting an employment contract for a senior employee or a director’s service agreement, seeking bespoke advice from an employment solicitor will best protect your business.
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Why does your business need a director’s service agreement?
It is likely that at least some of your company’s directors are employees of the company, just like the other members of your team. So, it makes sense that they should have a contract of employment setting out the scope of their services while they are an officer of the company. A director’s service agreement can go further and can be useful to your business by including clauses relating to the following:
Compliance: The Companies Act and common law place specific responsibilities on company directors that will need to be applied in the context of the services for which they have been appointed. It is important that each director has a service agreement with terms that are in line with company policies and that’s tailored to the specific job they do. This is particularly important if your company is listed or has securities that are admitted to trading on a regulated exchange, as the key terms of these contracts will more than likely need to be disclosed to shareholders and potentially publicly.
Good corporate governance: Your director’s service agreement should spell out exactly what’s expected of the director, and in particular your expectations around decision-making, and the need for the director to act in the best interests of the company at all times. A director’s remuneration is likely to be more complicated than just a salary and may involve benefits, share options, bonus entitlement and payments on joining and leaving the company. Advice should be taken on how best to document these elements whilst being transparent and in line with company policies on management remuneration and with any remuneration reports that may need to be made by the company or agreed with the shareholders.
Protection of sensitive commercial information: Since your directors are given privileged access to your business’ confidential information, intellectual property, customer lists and technical information, as well as to personal data, you’ll want to make sure that this information is protected and that they do not use or disclose any such data or information in a way that could be detrimental to your business.
Restrictive covenants: You may also want to ensure that should a director leave your business, their ability to go to work for a competitor, or poach customers or staff is limited, at least for a period of time. Although these clauses are commonly placed in service contracts, there are competition law limitations on the extent to which you can impose these restrictions and you should take legal advice before incorporating these types of restrictive covenants into your directors’ service contracts. For more information read our restrictive covenants guide.
Clear exit strategy: There’s another good reason why you need a service agreement for your directors and that’s because your directors may have multiple roles within the company, as directors, shareholders, and employees. Unless you agree upfront your expectations about how the director would be treated if they leave, it can be difficult and disruptive to separate yourselves from the relationship if it turns sour.
- Your director may decide they no longer want to be an employee, but still want to hang onto their shareholding and continue as a director. This may not be acceptable, as they no longer have a role in the company, and you may not want them to be able to have an input into or prevent strategic decision-making that may be necessary for the growth of the business.
- You may want to keep an employee on-board but remove their directorship. For the sake of the smooth running of the company, you’d want this process to be as smooth as possible to avoid disputes. As a minimum, it’s important you have the contractual right to do this in the service agreement
- Directors are likely to be senior members of staff, performing key business and management roles. You may want specific provisions that cover key performance indicators that they have to reach regardless of their other roles, and a longer notice period if they decide to leave.
- You’ll want to limit your director’s ability to go to work for a competitor, or to approach your clients if they set up a competing business (provided these restrictions work within the permitted framework established by competition law) specific wording in the service agreement and any settlement agreement on termination should be included.
Director’s service agreements can best protect your business by setting out in clear detail the relationship between the director and your business. If you are looking to ensure that there is less likelihood of dispute during the director’s directorship and more protection for your business when a director exits your business, seeking advice from a employment solicitor is recommended to draft a bespoke, comprehensive and relevant director’s service agreement, before a director is appointed.