Do directors need service contracts?
A director usually has the power to make all the important decisions that could ultimately determine the success of a company. They also have access to all the sensitive information that relates to the company. Given these responsibilities, it is important that both the company and the director are fully aware of their obligations and that the director acts in the best interests of the company. Therefore, having a Director Service Agreement (DSA) is highly recommended.
What is a DSA?
A director’s service agreement is a type of employment contract that includes the usual terms and conditions that you would expect to see in any employment contract. However, standard employment contracts are usually too basic for company directors as directors require more detailed information to fulfil their duties. Therefore, a DSA will also contain additional duties and responsibilities that are specific to directors.
Why does your company need a Directors Service Agreement?
The directors at your company will likely have a greater responsibility than the other employees at the company because they are responsible for the company’s finances, strategy, and day-to-day management. Also, directors have specific legal responsibilities under the Companies Act 2006, which is what makes their role different from the roles of senior employees who are not directors.
To ensure that the director is aware of their obligations and can perform their role properly, it is important to have their obligations written down in a contract. This will reduce the likelihood of the director failing to comply with their obligations and reduce potential issues between your company and the director in the future.
Good Corporate Governance
The directors at your company will be appointed by the shareholders. Therefore, it is important to ensure that the shareholders are happy that the directors are fulfilling their responsibilities and duties properly. The DSA will help with this as it sets out these responsibilities and duties clearly in writing, and makes everything transparent. When writing the DSA, it is therefore important to consider the expectations of the shareholders and stakeholders, as they will want it to align with their goals and vision for your company.
Confidential Information
Your company’s directors will have access to a lot of sensitive information about your company, such as information about your company’s business plans and strategies, information about your company’s customers, or information on how you develop your services or products. It is very important that this information remains confidential, even after a director leaves your company, in order to protect your company’s interests. To ensure this, you can add a clause to the DSA that requires the directors not to share any confidential information with your competitors.
Restricting the Director
If one of your directors decides to leave your company, you may want to prevent them from taking your customers and staff with them or working for your competitors. To achieve this, you can add a clause to their DSA. However, it is important to get legal advice when adding these clauses as there are there are certain laws that limit the way you can restrict the directors in this way. Also, you should keep in mind that these restrictions can be a disadvantage for a director as it may limit their ability to compete with your company for 12 months or more after they leave. This could be a problem for your company as it could discourage the best directors from working for you – they may choose to work for a company where they are not restricted in this way.
It is important to have a clear agreement in place for when a director leaves your company. If the director’s employment contract is not detailed enough, they may still remain a director even after the contract ends. Also, if the director is a shareholder of the company, they may still be able to attend shareholder meetings, even if their employment has ended. To ensure that the director and your company are completely separated when the director leaves, it’s important that the agreement is written in a way that achieves this goal.
Directors with Shares
If you are giving a director some shares in the business, it is essential that you also have a well-drafted Shareholders agreement and articles of association, linked with the DSA, to ensure that if there employment was terminated, you can still control the shares.
If you are thinking about using DSA’s and are looking for advice on what terms to use in the agreements, please get in touch, and I’d be happy to give you some advice.