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Director's Service Agreement

Director's Service Agreement Solicitors

When it comes to corporate governance, a well-crafted Director's Service Agreement can ensure directors always put the company's interests first and mitigate risks by setting out consequences for breaches or negligence.

Without a comprehensive Director's Service Agreement, you could be left vulnerable to disputes, legal complications, and uncertainties around directorial roles and obligations.

At Lawhive, our network of corporate lawyers is here to advise on and draft a personalised director's service agreement that protects your business and reduces the likelihood of disputes.

Contact our legal assessment team today for further information and a free fixed-fee quote.

• What is the role of a company director?

• What is a director's service agreement?

• Do I need a directors' service agreement?

• What are the benefits of a director's service agreement for a company?

• Directors' service agreement vs. employment contract

• What should be included in a director's service agreement?

• What should a director’s service agreement say about intellectual property?

• How do directors' service agreements manage conflicts of interest?

• Can I protect my business from a director competing with me after they leave?

• Can an EMI option deed be part of the directors' service agreement?

• How do you terminate a director's service agreement?

• What are the advantages of a good director's service agreement?

• What common mistakes are made in a director's service agreement?

What is the role of a company director?

A company director generally holds the legal position of director and has certain statutory and common law duties. Their role can vary depending on the type of director and their specific responsibilities.

Types of directors include:

What is a directors' service agreement?

A Directors' Service Agreement (DSA) is a specialised employment contract designed specifically for directors within a company.

Unlike standard employment contracts, DSAs cover basic employment terms and the unique responsibilities, rights, and obligations associated with the directorial role.

They typically include details such as:

• The duration of the appointment

• The director's duties and responsibilities

• Salary and benefits

• Termination conditions

• Confidentiality requirements.

DSAs also often address conflicts of interest and post-termination activities to protect the company's interests, like non-compete and non-solicitation clauses.

Do I need a director's service agreement?

While a Director's Service Agreement isn't a legal requirement for all companies, we strongly recommend having one for every director to serve as a protective measure and provide clear guidelines and security for the director. Even if a director isn't formally an employee, they might still have a director's service agreement to cover their non-executive duties.

However, non-executive directors commonly agree to terms through a simpler document like a letter of appointment.

What are the benefits of a director's service agreement for a company?

A Director's Service Agreement offers several benefits that can strengthen a company's structure and governance.

Clear role definition

DSAs clarify the duties and responsibilities of directors, ensuring they understand their roles within the company. This helps align their actions with the company's goals.

Legal compliance

DSAs define the legal obligations under the Companies Act and other regulations, ensuring directors comply with their statutory duties. This is important for listed companies where regulatory compliance is closely monitored.

Protection of sensitive information

DSAs typically include confidentiality clauses to protect the company's confidential data, safeguarding business strategies and customer information.

Conflict of interest management

DSAs prevent conflicts of interest, making sure directors prioritise the company's interests over personal gains in line with their fiduciary duties.

Dispute resolutions

Including arbitration and mediation clauses helps manage disputes preemptively, saving the company from expensive litigation if disputes arise.

Director's service agreement vs. employment contract

A director's service agreement and a standard employment contract share some similarities but also have key differences.

Both:

• Are legally binding contracts

• Outline basic terms of employment

• Include provisions for leave, such as sick leave and holiday entitlement.

However, DSAs are more comprehensive and detailed, not to mention tailored to the specific roles and responsibilities of directors, like corporate governance, fiduciary duties, and strategic decision-making.

DSAs also explicitly reference statutory duties under laws like the UK Companies Act 2006, making sure directors understand and fulfill their legal obligations.

They also may have more rigorous clauses related to compliance, conflicts of interest, and confidentiality compared to standard contracts. They also have complex provisions regarding bonuses, stock options, and other forms of incentive compensation linked to the company's performance, reflecting the director's influence on company success.

What should be included in a director's service agreement?

A director's service agreement should cover the terms under which directors operate within the company.

A DSA should:

• Clarify key terms used throughout the agreement for clear interpretation.

• Detail the start date and duration of the agreement, whether it’s for a fixed term or ongoing, and any conditions related to renewal or extension.

• Outline the director’s specific roles, including governance responsibilities, strategic oversight, compliance with company policies, and any other duties specific to the role. This section should reference compliance with relevant laws like the Companies Act 2006.

• State the expected time commitments, addressing expectations regarding availability and participation in meetings and other activities.

• Detail salary, bonuses, benefits (like health insurance, pension plans, or car allowances), and any equity-based compensation like stock options. This section should align compensation with company performance and the director's responsibilities.

• Specify how expenses related to the director’s duties will be handled, including travel and accommodation expenses.

• Include clauses that obligate the director to maintain the confidentiality of sensitive information both during and after their tenure.

• Address the ownership of intellectual property created during the director’s tenure.

• Include clauses that prevent the director from competing with the company or soliciting its employees or customers for a specified period after leaving the company.

• Define the terms under which the agreement can be terminated, including notice periods and any entitlements or obligations upon termination.

• Specify any conditions under which the director might be required to not attend the workplace or engage with the business during the notice period.

• Outline any indemnities provided to the director and details about the director’s and officers’ insurance coverage.

• Provide mechanisms for resolving any disputes that arise from the agreement, potentially including mediation or arbitration.

Importantly, each director's service agreement (DSA) should be customised to meet the unique needs of the company and the director's role, considering industry norms, and regulatory standards.

How do directors' service agreements manage intellectual property?

Intellectual property sections in a Director's Service Agreement should outline who owns what regarding ideas and creations made by the director while they're on the job.

The agreement should say that anything the director comes up with while working for the company belongs to the company, including inventions, designs, software, and documents.

The agreement should also cover what happens to the company's IP after the director leaves. Often, there are rules in place to stop them from using company secrets or knowledge in their next job, especially if it could compete with the company. If the director already had some ideas or creations before they joined the company, the agreement should say who owns those and how they can be used. This stops any arguments later on about who owns what. And if the director's job involves working with other companies or people, the agreement should say what happens to any IP that's created through those partnerships.

How do directors' service agreements manage conflicts of interest?

To handle conflicts of interest in a director's service agreement, it's important to make sure directors are upfront about potential conflicts. This means telling the company about any personal or financial interests that might affect how they make decisions. When there's a conflict of interest, the agreement usually says that the decision has to be approved by the directors who aren't conflicted, or sometimes by the shareholders. This makes sure decisions are fair and in the company's best interests. Directors with a conflict might not be allowed to take part in discussions or vote on decisions related to that conflict. This stops them from having too much influence. The agreement might also stop directors from doing other business that could get in the way of their job at the company. This keeps them from competing with the company or using ideas that belong to the company. Some agreements also check up on what directors are doing to make sure they're following the rules about conflicts of interest. And if a director breaks these rules, the agreement usually spells out what happens next. It could mean getting in trouble or even losing their job if it's serious.

Can I protect my business from a director competing with me after they leave?

You can safeguard your business from a director competing with you after they leave by adding special rules and terms in the director's service agreement about what they can and can't do once they're no longer working for you.

You can include the following:

• Non-compete clause

• Non-solicitation clause

• Confidentiality agreement

• Garden leave

• Return of property

It's important to make sure that these clauses strike a balance between protecting your business interests and allowing the individual to pursue their career.

Clauses that are too restrictive might not hold up in court if they're seen as unfairly limiting someone's ability to work elsewhere.

We recommend seeking guidance from a legal expert specialising in employment and corporate law to ensure these clauses are legally sound and personalised to your business's requirements and potential risks.

Can an EMI option deed be part of the directors' service agreement?

An Enterprise Management Incentive (EMI) option deed is a document that outlines the terms and conditions of stock options granted to employees, typically directors, as part of a company's incentive scheme. These options give employees the right to purchase company shares at a predetermined price in the future.

An EMI option deed can be included as part of the directors' service agreement to consolidate the terms of employment and incentives into a single document.

Including the EMI option deed in the directors' service agreement simplifies the overall contractual framework, ensuring that the director's compensation and performance incentives are closely aligned with their roles and expectations.

However, it's important to ensure that the incorporation complies with tax regulations and legal requirements to take advantage of potential tax benefits.

How do you terminate a directors' service agreement?

To end a directors' service agreement, you should follow the terms laid out in the agreement.

Start by reviewing the agreement to understand how termination is handled. Look for details on termination by mutual agreement, for cause (like breach of contract), or without cause. The agreement should specify the notice period required for termination, which can vary based on the role's seniority and agreement terms. If termination is for cause, document the reasons clearly, possibly with legal and HR assistance to ensure compliance with the law. Determine any final compensation owed to the director, including salary, bonuses, and benefits up to the termination date. Also, clarify any severance package conditions. Ensure the director returns all company property and confidential information. Once all terms are met, finalise the termination, often formalised with a termination letter outlining post-termination obligations. Check for compliance with relevant laws, like those on unfair dismissal or discrimination. Keep detailed records of the termination process for legal protection. Consider how to communicate the departure internally and possibly externally, depending on the director's role and circumstances.

What are the advantages of a good directors' service agreement?

A well-structured DSA provides clarity and certainty, clearly defining roles, responsibilities, and expectations for both the directors and the company. This clarity helps to prevent misunderstandings and conflicts, ensuring that both parties are aware of their obligations.

Legally, DSAs serve to protect both parties. For directors, it secures rights to fair treatment and appropriate compensation, while for companies, it establishes a legal framework to address any potential misconduct or underperformance by a director. This agreement is essential for resolving disputes effectively, either amicably or through legal channels.

Furthermore, they contribute to better corporate governance by ensuring compliance with relevant laws, such as the Companies Act 2006. This compliance is crucial for avoiding legal issues and enhancing the company’s reputation among stakeholders. The agreements also motivate directors by clearly outlining their compensation, benefits, and the conditions of their service, which helps in attracting and retaining top leadership talent.

Additionally, DSAs often contain confidentiality and non-compete clauses that protect sensitive company information and competitive advantages. They also facilitate smoother transitions during changes in leadership by setting out predefined terms for exits and handovers, thereby maintaining stability within the company.

What common mistakes are made in a directors' service agreement?

When drafting DSAs several common mistakes can occur that may lead to complications or legal issues down the line.

They include:

• Vague or ambiguous language

• Non-compliance with laws

• Overly restrictive covenants

• Inadequate provisions for termination and severance

• Failing to outline dispute resolution mechanisms

• Omitting performance metrics and reviews

• Neglecting confidentiality and intellectual property rights

• Inadequate indemnification provisions

To avoid these errors, engage with legal professionals who specialise in corporate and employment law to review and draft the Director's Service Agreements.

Get help with your directors' service agreement from Lawhive

Our network of expert employment solicitors can help you by drafting tailored DSAs that meet the specific needs of your business and comply with current laws and regulations.

Get in touch today for a free case assessment.