A director’s service agreement is essentially a contract that sets out the terms of a director’s role within a company. It is often a more detailed form of employment contract specifically tailored for directors, especially executive directors who have an operational role in the business. While not legally required, having such an agreement is highly recommended for companies of any size. Here’s why and what it includes:
- Director vs Employee: In many cases, executive directors (for example, a Managing Director or Operations Director who works full-time in the company) are also employees. They hold two positions: an office as a director and a job under a service contract. A director’s service agreement covers both aspects – it includes all the usual terms of an employment contract (job title, duties, salary, benefits, holidays, sick leave, etc.), and it addresses the additional responsibilities and fiduciary duties that directors owe to the company. For non-executive directors (who are not day-to-day employees), there might instead be a simpler letter of appointment outlining their duties, time commitment, and fees. But for any director who is actively involved, a comprehensive service agreement is ideal.
- Why It’s Important: Directors have special obligations under law (Companies Act 2006 outlines directors’ duties like acting in the company’s best interests, avoiding conflicts of interest, etc.), and they often have access to sensitive information and key relationships. A director’s service agreement is important to clearly define expectations and protect the company. For instance, it will usually include robust confidentiality clauses, given a director will know all the company’s trade secrets and strategies. It also often contains restrictive covenants (like non-compete, non-solicitation clauses) that apply during employment and for a period after the director leaves – to prevent them from immediately joining a competitor or poaching clients/employees if things part ways. These clauses need to be reasonable in scope to be enforceable, but they provide the company some security that a departing director can’t damage the business using knowledge or relationships gained while in office.
- Key Terms in a Director’s Service Agreement: In addition to standard employment terms (compensation, pension, share option entitlements, etc.), these agreements often cover: the director’s specific duties and reporting lines (e.g., requiring them to comply with board decisions, or devote their full working time to the company’s affairs unless otherwise permitted); an explicit statement of directors’ duties or an obligation to comply with company policies and the law; termination provisions that might be more detailed than for a normal employee (perhaps a longer notice period, or specific grounds for termination like gross misconduct, or automatic termination if the director is disqualified by law). They may also have clauses about the return of company property and documents when the director leaves, and assistance with any litigation or investigations that the company might need their cooperation with post-termination. If the director is also a shareholder, sometimes the service agreement ties into that (for instance, it might say they must resign as director and sell their shares if they’re dismissed for cause – ensuring someone ousted doesn’t hang around as a troublesome minority shareholder).
- Compliance and “Fit and Proper” Matters: For certain industries or certain senior roles, a director’s agreement might require the director to maintain qualifications or certifications (for example, FCA approval for a director in a financial services firm), and to notify the company if anything changes (like if they face bankruptcy or criminal charges that could affect their suitability). It can also set expectations about avoiding conflicts of interest – maybe requiring the director to declare any other directorships or business interests and get board approval for any that might conflict.
- Differences from a Standard Employment Contract: The director’s service contract typically is more comprehensive. It acknowledges that a director is not just a staff member but a steward of the company. For example, it might have clauses allowing the company to suspend (“garden leave”) the director or remove certain powers during a notice period (common when a high-level director resigns, to keep them out of sensitive dealings while they serve notice). It also usually contains an indemnity or insurance clause – companies often indemnify directors for costs they incur from legal proceedings brought against them in their capacity as director (to the extent allowed by law) and/or commit to providing Directors & Officers (D&O) liability insurance. These are protections to give the director confidence in performing their role without fear of personal liability (except in cases of wrongdoing).
- Non-Executive Directors: While non-executives might not have a full service agreement, don’t overlook having at least a letter of appointment. This will cover the term of their appointment (e.g., typically they might be appointed for a term of 3 years subject to reelection by shareholders), duties (like attending X number of meetings), and confidentiality. Non-execs generally won’t have restrictive covenants since they are often industry professionals who sit on multiple boards, but confidentiality and clearly outlining their fee and that they’re not an employee (i.e., no pension, no holiday, etc.) is useful to avoid misunderstandings.
Every company with more than one director should consider having formal agreements for each. It keeps management professional and sets a high standard of governance. From a small startup perspective, if you and your co-founder are both directors, you might think “we don’t need formal contracts between us,” but having them can help if down the road one of you leaves or if you bring in a new director. It’s much easier to on-board a new CEO or director if you have a template of terms ready to go. Moreover, investors performing due diligence will check that directors have service agreements – it’s seen as a sign of a well-run company.
In summary, a director’s service agreement is like an employment contract on steroids for those at the helm of the company. It ensures the director knows what is expected and that the company has the necessary protections in place if things go awry. British Contracts provides bespoke directors’ agreements at highly competitive prices through our Gold and Platinum packages. Given the pivotal role directors play, taking the time to put a proper agreement in place is a wise investment in your corporate governance.