Director Service Agreements

It's important to ensure that the legal relationship between directors and the company is clear and unambiguous in the interests of legal compliance and good corporate governance.

What is a Director Service Agreement? 

A service agreement is an employment contract that may be given to an executive director of the company. The contract must contain the essential legal requirement under the Employment Rights Act covering matters such as pay and hours to working abroad and training issues. Such contracts may also address problems, including post-termination restrictions to protect legitimate business interests such as trade connections and business relationships. Furthermore, the nature and consequences of any shareholding on termination can be set out in clear terms.

A failure to provide the essential information may result in a sanction from the Employment Tribunal by way of (up to) an additional four weeks' pay if any other claim subsists.

There are specific regulatory requirements for directors' service agreements (referred to in the Companies Act 2006 as 'service contracts'), some of which depend on whether the business is a private or listed company. Most service agreements will be in writing and should always be approved by the board unless the board has an appointments committee, or the managing director has been delegated power for such purposes.

The service agreement must be executed as a deed as powers of attorney and are generally granted within the contract. Execution must be independently witnessed, with the necessary legal requirements met to ensure validity.

A company must ensure such contracts are available for inspection by the shareholders, along with any subsequent changes since the date of the original contract was executed. Shareholder Agreements must be kept for inspection at the company's registered office or an alternative inspection location, which must be notified to the registrar of companies.

Directors are subject to duties at common law and under statute, and in the case of directors of listed companies (and Alternative Investment Market (AIM) companies where they have adopted it as their governance standard), the UK Corporate Governance Code (2018 Code).

A director may not necessarily be an employee; hence, the agreement must reflect the true nature of the relationship. A non-executive director's position should also be carefully documented to ensure clarity of the role and avoid ambiguity.

Get in touch

For further information on directors' service agreements and the key legal issues to consider relating to directors' duties, please get in touch with our Employment Legal team on 023 8063 9311 or email enquiries@warnergoodman.co.uk.