An Executive Director has rights and obligations arising as an employee as well as a director of the company. It is important to remember that these two roles are separate but related. A director’s Service Agreement is a more complex contract than the basic contract of employment. It can comprise one or more documents but generally the main terms will be contained in the Service Agreement. The trouble is that most directors don’t have one. This article covers some of the issues involved.
Special Clauses and Provisions to include in a Service Agreement
Although in most cases the Director’s Service Agreement will be drawn up after consultation with a lawyer, it’s useful to know some of the important issues that should be covered. I haven’t included basic things here such as Pay, Hours of Work, Place of Work, Expenses Policy, Benefits Policy, Sickness Policy, Retirement Arrangements, Holiday Pay, Board Meeting Policy and Pension Arrangements and so on. I have listed some of the most important clauses below but if you want to delve deeper, please email me at mpollins@bizezia.com to ask for the publication I mention at the end of this article.
Important issues:
- Payment in lieu of notice: In the case of directors, it is particularly important for the company to reserve the right to give pay in lieu of part of or the whole of the notice period. If the company does not have this right, it will be in breach of contract should it proceed to do so. A party that is in breach of a contract can no longer rely on its terms, which means that the company will be unable to enforce any post termination provisions, such as restrictive covenants.
- Restrictions: It is usual to prohibit a director from engaging in business or professional activities outside the employment other than holding a minimum number of shares (generally 3%) in a publicly quoted company.
- Restrictive Covenants: Most Service Agreements will contain restrictions that will apply both during and after termination of employment. In order to be enforceable post termination restrictions must be carefully drafted, be considered to be in the public interest and restrict no more than what the courts refer to as a company’s legitimate business interest. Restrictive covenants should be tailored to each specific company and often to each specific director depending on the circumstances of the business and the individual. Any period of restriction after termination of employment must be reasonable and the Agreement should state that time spent on garden leave will be set off against the period of restriction after the employment has come to an end.
- Best Interests Clause: It is implied in every director’s contract that the director will act in the best interests of the company at all times and in good faith but it is usual to include this in the contract as a specific term.
- Duties: A director should understand and abide by the duties incumbent on him/her as laid down by the Companies Act. See more on this at the end of the article.
- Directors’ and Officers’ Insurance: If the company is to maintain directors’ and officers’ insurance, the director will usually want the comfort of including this obligation on the company in the Service Agreement.
- Protecting the company’s confidential information: It is common practice to provide that the director shall not disclose confidential information of the company or its clients, nor make copies of such information, or retain after leaving the company such information or copies of it. It is also common practice to provide that all inventions made during, or in connection with the employment are the property of the company.
- Termination: The agreement should cover the circumstances under which the company can terminate the agreement without notice or payment in lieu of notice (otherwise known as summary dismissal).
Garden Leave: It is useful for a company to have the right to require a director to serve part of or the whole of the notice period on “garden leave” meaning that the director is prohibited from entering company premises, having access to the company’s computer systems or having contact with company clients, suppliers and employees. If a company wants to proceed in this way it must have the right in the Service Agreement and it is important to state the terms of the garden leave in writing to the director at the time that it commences, for example, that the director is prohibited from working for others during the period and that apart from the duty to work, the terms of the contract of employment will continue, including payment of basic salary. Some companies retain the right to appoint a replacement for a director on garden leave.
Directors Duties
It’s worth mentioning, and reminding readers that as part of the Companies Act 2006 the Government has codified the duties of directors so that directors are expected to:
- act within the framework of the company’s constitution as well as avoiding conflicts of interest;
- act in a way that promotes the success of the company for the benefit of all the shareholders;
- take account of the company’s need to foster relationships with its employees, customers and suppliers, its need to maintain its business reputation and its need to consider the company’s impact on the community and the working environment;
- to exercise the care, skill and diligence of a reasonably diligent person with both the knowledge, skill and experience which may reasonably be expected of a director in his/her position and with any additional knowledge, skill and experience which the particular director has;
- exercise his/her powers for their proper purpose, use independent judgement when exercising those powers and will not be able to delegate powers unless authorised by the company’s constitution;
- not to be able to transact with the company or allow the company to enter into transactions if he/her has an interest therein which he/her is required to disclose but has not disclosed; and
not to accept any benefit conferred by a third party because of his/her powers or by way of reward for the exercise of those powers unless (a) the benefit is conferred by the company, or (b) the company has consented to it by ordinary resolution, or (c) the benefit is necessarily incidental to the proper performance of the director’s functions.
Further information
The Bizezia Online Library includes a PDF publication covering this subject. If you would like a copy, please email me at: mpollins@bizezia.com
Managing Director at One Smart Place
Martin Pollins is a Chartered Accountant and MBA with wide experience in corporate finance and business management. He has served on the boards of several companies, including those listed on the London Stock Exchange, AIM and OFEX. He is Chairman and Founder of OneSmartPlace and was a Council member of the Institute of Chartered Accountants in England and Wales from 1988 to 1996. He was managing partner of PRB Martin Pollins, based in Sussex, the first Accountancy firm to advertise on British television.He went on to create and launch the CharterGroup Partnership (the UK’s first Accountancy network) and then LawGroup UK (at the time, one of the largest networks of lawyers in the UK). In recent years, he helped to raise several £millions to fund British films such as The Da Vinci Code, Bridge of San Luis Rey, Head in the Clouds and Merchant of Venice with actors such as Charlize Theron, Robert De Niro, Al Pacino, F. Murray Abraham. Kathy Bates, Gabriel Byrne, Geraldine Chaplin, Tom Hanks, Ian McKellen, Audrey Tautou, Penélope Cruz, Steven Berkoff, Lynn Collins, Jeremy Irons, Joseph Fiennes and many more.
He has written over 700 business publications (see Glossaries at http://onesmartplace.com/resources/glossaries/) and is editor of Better Business Focus (see http://onesmartplace.com/resources/better-business-focus-magazine). His Blog, on a wide range of subjects can be found at: http://onesmartplace.com/blog/
He has written over 700 business publications (see Glossaries at http://onesmartplace.com/resources/glossaries/) and is editor of Better Business Focus (see http://onesmartplace.com/resources/better-business-focus-magazine). His Blog, on a wide range of subjects can be found at: http://onesmartplace.com/blog/
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