For many UK businesses, success hinges on the expertise and dedication of their directors. Yet, surprisingly, many operate without a formal a director’s service agreement. This lack of clarity can expose both the company and the director to unnecessary risk.
Why it’s worth getting a Director Service Contract in place
Under English law, a director is not automatically an employee with an employment contract. While company law outlines basic director duties, specifics are not covered and so a Director Service Contract is an opportunity to include detail and clarity, protecting both the company and the director by establishing :-
- Clarity and certainty: by clearly defining the director’s duties, responsibilities, remuneration, and termination arrangements.
- Reducing the chance of disputes: Clear terms minimise ambiguity and the potential for future disagreements.
- Fiduciary duties: a well drafted and comprehensive agreement will reinforce directors’ fiduciary duties to the company.
- Investor confidence: Investors often look for good corporate governance structures. Having a director contract in place reassures investors.
Key Elements of a Directors Service Agreement
While specific details vary based on the company and the director’s role, typical inclusions are:
- Appointment and term: Details the director’s appointment, duration, and termination provisions.
- Duties and responsibilities: Clearly outlines the director’s expected work, commitment, and adherence to company policies.
- Remuneration and benefits: Specifies salary, bonuses, share options, expenses, and other benefits.
- Confidentiality and intellectual property: Ensures protection of sensitive company information and intellectual property.
- Restrictive covenants: May include non-compete clauses and restrictions on post-employment conduct, balanced with legitimate interests of both parties.
- Dispute resolution: Outlines procedures for resolving any disagreements.
- Exit provisions: Will typically include the requirement for the director to formally resign his/her position at Companies House, good leaver and bad leavers provisions, what will happen if the director is also a shareholder. Garden leave clauses are also common.
Shareholder Directors
Shareholder directors are both owners and directors, adding a layer of complexity, they are frequently seen as not having employee rights as a result. Key considerations include:
- Transparency: Be transparent with other shareholders about the director’s remuneration and service contract terms.
- Market rates: Ensure remuneration aligns with market rates for similar roles and company size.
- Tax implications: Be mindful of potential tax implications like “disguised employment” rules.
- What happens to directors shares: Wil the director be required to sell his/her shares, what’s the process, what’s the valuation, will pre-emption rights apply for existing shareholders?
How we can help
Crafting a clear, practical and robust Agreement usually means you need legal expertise and experience. Our lawyers are a sound choice. We also advise on and draft employment contracts generally. Please do get in contact.
