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. Please do get in contact.