The majority of businesses, large or small employ key people to act as Directors.

Such individuals are entrusted to run the business and they have access to the business’s most valuable and often confidential information, which can extend to technical information, business strategy, staff, customers, suppliers and business contacts.

Despite this, surprisingly many businesses do not put in place appropriate documentation to protect them should the relationship between the business and Director change and perhaps not for the best.

In practice, we continue to see many Director clients that do not have any written contracts of employment and those who do that have a document that is not fit for purpose.  This has included Directors who are on basic written contracts suitable for an office junior or even template documents that were never finalised.

Directors are firstly an employee of the business, secondly they may also be shareholders and thirdly their office as a Director should be considered separately.

Without any clear documentation setting out how such situations will be dealt with, it can be very difficult to separate these roles in the event that the relationship between the Director and the business breaks down.

By way of example:

  • If a Director’s employment terminates, in the absence of an agreement to the contrary, their shareholding will continue unaffected. Their office as a Director may also continue. The consequence of this, is that it can cause disruption to the business if the discontented former Director decides to veto shareholders’ resolutions or fails to fulfil any statutory duties as a Director.
  • If a Director is removed from their office as a Director, their employment may continue (or vice versa) depending on the contractual position. In the absence of an agreement, it may therefore be difficult to remove the Director from the business and as efficiently and smoothly as the business would like.

It is imperative therefore to have an appropriately drafted Director’s service agreement which would contain clear provisions determining what happens in the above situations.

Service Agreements should also include suitably drafted notice periods. If there is no written agreement setting out a longer period of notice, employees of a business will only be required to give the statutory minimum notice should they decide to leave. The consequence of this is that even a Managing Director would only be required to provide a week’s notice for every complete year of his/her employment. This would be wholly inadequate for most businesses.

Without clear and well drafted obligations in a Director’s service agreement, former Directors will be free to leave the business and work for a competitor. This can include poaching any key customers or employees away from the business. A former Director’s obligation not to disclose confidential information will also be limited. This can have a huge detrimental impact on a business.

It is vital for a business to have a Director’s service agreement in place to protect the business.

Restrictive covenants can be included in the agreement to restrict the former Director’s actions after they leave the business. These will enable the business to protect itself against unfair competition and give it an opportunity to safeguard relationships with key customers, business contacts, and employees.

Farleys Employment Law & HR team can assist you to protect your business by producing bespoke Director’s service agreements. Farleys will work with you to understand the unique issues affecting your business and to identify the protections you will need to include within the agreements.

If you need assistance with Director’s service agreements, contact Farleys Employment Law & HR team on 0845 287 0939 or contact us through our online contact form.

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