New Director’s Service Agreement

Although we anonymise our case studies, we aim to highlight common examples of issues we have dealt with and that you may encounter.

The client

A small company that is thinking of appointing a new director. They have their standard contract of employment and an old director’s service agreement that they last used seven years ago on the appointment of the now outgoing director. That director was not a shareholder. The new director will be a shareholder and an employee as well as a director.

The issues

The issue surrounds whether the company needs a director’s service agreement at all and whether the old agreement they used before is still fit for purpose. The existing director’s service agreement includes “catch all” restrictive covenant and confidentiality clauses which they are keen to preserve.

Our approach

Our advice in this situation is that the company should always have a director’s service agreement in place and that the standard agreement is unlikely to be suitable. In particular, the new director will have different rights and responsibilities from the outgoing director and confidentiality clauses and restrictive covenants that are too widely drafted are likely to be unenforceable.

A new agreement will be needed to accurately reflect the new director’s relationship with the company and the shareholders, and this new agreement itself should be regularly reviewed in the future.

As part of the process, it can be helpful to go through the Companies Act and the legal responsibilities of a director with the incoming director so that they fully understand these. It will also be necessary to identify the right type of agreement for the situation such as whether an ordinary service agreement, consultancy agreement or executive service agreement is required.

We would recommend that the agreement itself is drafted by lawyers and it will need to cover everything from the director’s role and responsibilities to remuneration (including salary, bonuses, and other benefits), conduct (such as conflicts of interest and non-compete clauses), indemnity (including the extent to which they are liable for any losses incurred), a mechanism for resolving disputes and the circumstances in which the agreement can be terminated. By going through our own checklist, it is not uncommon to uncover areas that the parties have not considered and then clarify and agree these areas.

The outcome

A thorough and well drafted director’s service agreement is the best way to ensure a successful appointment and relationship between the director and the company. It should alleviate the risk of any misunderstandings, set expectations and in the event that there is a disagreement, provide a clear way to resolving it, thereby saving time and money.

If you would like to discuss a director’s service agreement or any of the issues raised in this post, please get in touch.