The law is deficient in the regulation of directors. But, directors possess powers which needs regulating to channel the business in the way shareholders expect. With the right director service agreement many problems do not arise.
Please do call us to discuss the director service agreement. We are always happy to provide suggestions for resolving problems and an estimate of costs.
Reasons for picking us to deal with your director service agreement
Years of working with employers, directors and companies gives us the experience to quickly grasp the issues. Time is money.
- We are a team that can handle all aspects from drafting and review of the agreement through to dealing with shareholdings, options, risk and avoiding litigation.
- We work directors across the board from private companies to directors from quoted companies who call upon us when they need support in dealing with sensitive matters they do not want to discuss with the company’s lawyers.
What to include in a Director Service Contract
The best director service contracts are those that stick to the basics and do not get carried away. Similar issues arise for non-executive directors. Mistakes in not having a directors service agreement or a deficient out of date version is among the most common errors made by managing directors.
The board’s demographic and voting rights can change the course of the business without your control. Unless specifically stated in the articles or shareholders agreement, all directors have one vote. There are alternatives. It is possible to confer a director with a casting vote. The use of a casting vote prevents a deadlock at board meetings.
The articles should deal with the position on voting where there is a conflict. Votes can be valid if there is a conflict providing it is disclosed.
Pay and bonuses
The service agreement should deal with pay and bonus provisions. The permutations are wide. Based on our experience key areas to consider are:
The director does have various fiduciary duties which are implied into any director or non-executive director’s service agreement. The problem is that any implied terms are limited. There are duties set out under the Companies Act but they are often difficult to enforce in practice.
Our solution is to bolster the implied terms and statutory responsibilities in the director contract. Our aim is to avoid disputes.
The duty of confidentiality is not implied by law. Special protection is usually required under the directors service agreement. Where the director’s role is terminated, company’s will usually ask for the return of all company property, including the delivery of passwords, devices and evidence that home devices have been cleared of sensitive information relating to the company.
The intellectual property used in the business
To protect the company’s brand reputation, designs, know-how, copyright, databases and client lists, specific contractual agreements are necessary. This is increasingly important for all businesses but particularly necessary for technology businesses, franchises, platforms and emerging technology production companies.
The directors of a company who do not adequately protect the intellectual property of the business will be criticised. The company’s exit will be jeopardised if directors do not have suitably drafted agreements with IP ownership or licence clauses.
There is a balance to be drawn between the right of a director to earn a living, industry competition and the right of the employer to protect itself from unfair competition when the director leaves. Restrictive covenants which do not meet this fine balance may be unenforceable. Trade secrets always need protecting at director level.
The general rule is: the longer the notice period, the longer the director can be kept out of the market following termination. However, this increases dismissal costs.
Depending upon seniority, notice periods of 6-12 months are not uncommon. The risk is the director claims a breach of contract, which would make the post termination restrictions unenforceable.
A solution worth considering is the use of ‘garden leave’ clauses – these enable the employer company to keep the director out of the office, without running the risk of breaching the director’s service contract.
Power of attorney
We recommend the company reserves a power to sign on behalf of a director, where that director fails to take actions required under the company’s constitutional documents. A power of attorney is particularly helpful in cases where there is a forced transfer of shares following resignation.
In practice, the person who controls the finances controls the company. Most businesses do not consider this issue when everything is going well. However, after relationships have deteriorated, the company may find that the hostile director controls the bank mandate. This scenario can be provided for in the director services agreement.
The director service agreement should be supported by the staff handbook. Policies on matters such as jollies, investigations and other compliance but still important matters need to be dealt with in the background.
Shares for directors
In private companies there is a wide range of choice in how to provide shares to directors. For quoted companies the choices are more limited. In all cases tax plays a role as the benefit the directors will receive by being a shareholder is taxable. Working out the tax for unquoted shares can be particularly tricky and the system operated by HMRC is far from ideal.
Another tax consideration that is popular amongst directors is the benefits afforded by entrepreneurs’ relief.