Many businesses of all sizes employ key people who also act as a director within the business. One aspect of appointing a director is that the legal relationship between the company and the individual as a director is often overlooked. In practice whilst many businesses issue employment contracts to these key staff, it can be the case that these documents are not fit for purpose and do not protect the business should the relationship between the business and the director come to an end.
Whilst a director’s service agreement is not a legal requirement, it is a crucial document – it sets out rights and obligations that arise as a consequence of being appointed as a director, and provides clarity and protection for the company if the relationship breaks down.
Directors will generally be employees of the business, directors of the company and may also be shareholders. A directors service agreement can separate out these roles and specify how they are dealt with if the relationship breaks down.
For example, if a director’s employment terminates, in the absence of any agreement to the contrary, their shareholding will be unaffected, and their office as a director of the company may also continue. This can cause significant disruption and risk to the business and can make it difficult and costly to completely remove the individual from the business in the event of disagreement.
It is important to have an appropriately worded service agreement which determines what happens if there are disagreements, for example ensuring that if the employment relationship is terminated that the office as a director is also terminated and that the director has no right to continue holding shares in the company.
Service agreements should also include suitably drafted notice periods, and include tight restrictive covenants in cases where the director is to leave the business, thereby offering protection to the company against unfair competition and safeguarding its commercial relationships with clients and contacts.
If you would like to discuss any of the issues raised in this article, click here.