Directors’ Service Agreements (DSA’s) are not just a formality - they set out the rules and obligations which govern the appointment of a director. This ensures smooth corporate governance and clearly sets out the rights of your business and the director.
In this article, we'll explore the ins and outs of DSAs and why you should issue a DSA when appointing a director.
What is a directors’ service agreement?
A directors’ service agreement or directors’ service contract is a comprehensive legal agreement that outlines the terms and conditions of a director's employment with a company.
Unlike a standard employment contract, DSA’s are specifically tailored for directors, who hold key positions within a company and are responsible for making critical decisions that impact the business's success.
The relationship between the director and the company
A DSA establishes a clear and mutually beneficial relationship between the director and the company. It defines the director's role, expectations and entitlements, plus sets out the company's obligations and clauses that protect the company. This clarity is important for maintaining a harmonious and productive working relationship.
Do I need a directors’ service agreement?
It’s recommended you issue a DSA when you appoint a new director. DSA’s are important for several reasons:
While it's not a legal requirement for all companies to have DSA, it is a legal requirement to set out the employment rights of an employee. If the director is also an employee then we recommend that you issue a DSA rather than a standard employment contract to highlight the terms of appointment.
DSA’s safeguard for your business (they detail the director's duties and responsibilities, protecting your interests by setting clear expectations and guidelines).
3. Conflicts of interest
DSA’s can include clauses addressing conflicts of interest to ensure that directors act in the company's best interests and don’t engage in activities that may compromise the company's success.
DSA’s routinely contain post-termination restrictive covenants, such as non-compete clauses, which prevent directors from poaching staff and clients, joining competitors or starting a competing venture (this helps protect your company's confidential information and intellectual property).
5. Bonus and incentive provisions
DSA’s often include detailed bonus provisions that link remuneration to both personal and company performance, aligning the director's interests with the company's success.
6. Company share options
If your director is entitled to share options, a DSA can define the terms of this entitlement, providing transparency and preventing potential disputes. Alternatively, you may set these rules out in a separate share option agreement.
7. Company car and benefits
For directors entitled to a company car or other benefits, DSAs can stipulate the terms of such benefits, ensuring clarity.
Directors’ service agreement and the Companies Act 2006
The Companies Act 2006 is the primary legislation that governs company law in the UK. While the Act doesn't expressly state that DSA’s are required, it emphasises the importance of clear and transparent corporate governance. A well-drafted DSA helps a company adhere to these principles by defining the terms of a director's appointment and responsibilities, aligning with the Act's core principles.
What should a directors’ service agreement contain?
A well-drafted DSA should contain the following key elements:
- Term of appointment – whether the agreement is for a fixed duration or ongoing
- Company car or car allowance – the terms of the company car or car allowance
- Bonus provisions – detailed provisions outlining bonuses and incentives
- Company share options – clarify if share options are included
- Authority limits – sets out the director's authority limits around decision-making
- Garden leave provisions – the arrangements for any period of notice.
- Post-termination restrictive covenants – e.g. poaching staff or joining competitors
Directors' service agreements and term of appointment
As previously mentioned, the "Term of appointment" clause defines the duration of the director's engagement with the company. DSAs can come in two primary forms:
1. Fixed duration
In this case, the DSA specifies a set period for the director's service, which can be, for instance, a one-year term (fixed-term agreements provide both the company and the director with a clear understanding of the commitment)
Alternatively, and perhaps more commonly, DSAs are open-ended, indicating that the director's engagement is continuous until either party decides to terminate the agreement (a notice clause for a director is normally longer than for a standard employee contract - some notice provisions could be 6-12 months as it can take longer to find a replacement director than to recruit a member of staff)
Can an EMI option deed be part of the directors service agreement?
EMI (Enterprise Management Incentive) Option Deeds are often separate agreements used to grant share options to employees, including directors. While they can be separate documents, it is possible to incorporate EMI Option Deeds into DSA’s, ensuring that the terms and conditions of share options are clearly defined. If the share option terms are not set out in the DSA, they should be set out in writing in a separate agreement to ensure that the parties are clear on all the terms relating to the granting of the options..
Get legal assistance from LawBite
DSA’s are important documents that protect both your business and the directors who lead it.
To ensure your DSA is tailored to your specific needs and compliant with the law, it's essential to seek expert legal advice in drafting this agreement. LawBite can assist you in preparing and reviewing DSA’s to ensure that they are tailored for directors and encompass the unique obligations and responsibilities they have.LawBite can also assist in preparing and reviewing share option schemes and EMI Option deeds..
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