Do I need a Directors Service Agreement?

September 14, 2021

A Directors Service Agreement is like an employment contract, but for directors. It documents the duties and rights of directors who have significant power and responsibility in a business. 

What is a Directors Service Agreement?

The director's service agreement has many things in common with an employment contract. 

Both documents address duties, responsibilities and the rules under which he or she operates. While standard employment contracts or template agreements work well for employees, they tend not to provide the level of detail needed for a company director to fulfil their duties.

The director may be an employee of the company and a shareholder, and he/she performs management functions as a director. These elements of the director's job can be more easily outlined in written documentation that clearly defines director duties, rights, and boundaries. The DSA enables future disagreements to be resolved more efficiently.

Pros and Cons of the Director Service Agreement

A service agreement for a director details the director's duties, responsibilities, and expectations from the company and stakeholders. When directors and companies accept the terms of the agreement, they enter a legally binding contract. Thus, they must know what they agree to and how it will affect them in future.

The Pros

For directors to be effective, they must have service agreements to reflect the nature of directors’ job responsibilities. Companies may need to disclose the key terms of these agreements to industry regulators, shareholders, and possibly the public.

Better governance 

An agreement between a company and its directors must clearly describe the scope and limitations of the director's duties. The DSA can help directors make sound decisions in the best interests of the company.

Protection of sensitive data 

Data breaches can be serious for businesses. Directors often have access to your business' data, customer lists, intellectual property, financial details, and human resource information. A DSA ensures that this information is safeguarded and that such data or information is less likely to be seen by competitors.

Contract restrictions

It's possible to use a DSA so that directors cannot move from your company and compete with you. Generally, service contracts include covenants like these. However, there are limitations to how severe these restrictions can be. If you want to include covenants of this type in your director's contracts, seek legal advice.

Exit plan

Director’s roles within your company may vary, such as director, shareholder, and employee. If the director leaves, separating yourself from the relationship can be difficult and disruptive if you do not agree upfront on how they should exit. A DSA can address some of these issues.

The cons

Contractual liability can be a burden for a company - however many businesses may be happy to accept this in order to secure the best talent.

Any restrictive covenants included in the agreement can be a real con for the Director who may be restricted from competing with a company for 12 months or more.

Basic Provisions

A director's service contract will often include some of the following points::

Terms of appointment

  • Starting date
  • Appointment date
  • Terms of their appointment as directors. Depending on whether a company is public or private, it will have different options.

Bonus and reward schemes

As part of a director's compensation package, a director may receive shares, performance bonuses, medical insurance, life insurance, and retirement plans. The DSA lays it down in clear terms.

Defined duties

It is crucial to identify the executive director's responsibilities and authority to forestall future disputes or complications. A director's service agreement can include several fiduciary responsibilities. 

In addition, under the Companies Act, directors have additional responsibilities and general principles to follow. We recommend defining implied terms and statutory responsibilities in the Director Service Agreement to reduce ambiguity and enhance security.

External appointments

Whether directors can work for other businesses should be stated in service agreement, including whether there are any restrictions. 

In addition, it should specify if non-compete clauses can revoke a director's authority. 

Finally, it should provide ground for overriding shareholder agreements and outline what the process for that should be.

Notice period

The director's contract must include a notice period upon which termination can be affected. Directors must also be allowed to resign within a reasonable time if they wish to take on a new role or pursue other interests. 

Senior directors typically serve a notice period of 6 to 12 months, depending on their circumstances. 

Termination and resignation

The service agreement should outline resignation and termination procedures, as well as grounds for dismissal. 

Termination and resignation clauses help define the process, procedures, and grounds for director termination.

Restrictive covenants and confidentiality

A service agreement can contain restrictive covenants to prevent former directors from acting inappropriately and pursuing future business ventures that compete directly with the business they are leaving. 

Businesses can use this method to prevent unfair competition and the misuse of their privileged information.

Do I need a Director's Service Agreement?

Yes. Director Service Agreements are vital contracts that shape boardrooms in companies across the UK. They ensure the continuity of senior management, as well as good corporate governance for senior directors.

How can we help?

If you’re unsure about how a Director’s Service Agreement can help your business, or whether you even need one, get in touch with us here