A director’s service agreement is a crucial document: It sets out various rights and obligations that arise as a result of appointing a director. While having such an agreement is not a legal requirement, it creates certainty for the director and the company, allowing both parties to be protected in situations of dispute or disagreements.
For many entrepreneurs, putting in place a service agreement between themselves and their own companies might appear to be an unfamiliar concept. But directors often have multiple roles. They are often depended on for the business to function and often have access to confidential information such as the state of finances, customer queries and employee issues. They may also be shareholders. In the absence of clear documentation setting out how such situations will be dealt with, it can be very difficult to separate these different roles in the event that the relationship between the Director and the business, or between two directors, breaks down.
Having this agreement enables the company to set its own rules regarding what should happen in the event of a dispute. For example, if the employment of a Director is terminated, without an agreement to the contrary, their shareholding is usually unaffected. The Director can then possibly disrupt the business by choosing to veto shareholders resolutions or choosing not to fulfil statutory duties of a director. Similarly, if a Director is removed from their office, their employment may continue. In the absence of an agreement, it may be difficult to remove the Director from the business as quickly and easily as the business would like.This can cause a great amount of time and resources being utilised in attempt to resolve the possible disputes.
Beyond these factors, having a director’s service agreement creates certainty of compensation. It allows the director to ensure that he/she is sufficiently renumerated and if the provisions are placed at the outset or early in the business, it would be difficult to alter if more shareholders need to brought in. At the same time, if something goes wrong and the director is pushed out of the business by the other business partners, the agreement can include termination payment to ensure that the directors is adequately compensated. Such an agreement can serve both the company and the directors, so everyone benefits from having one.
Set an example
It allows the directors, when recruiting their employees, to persuade candidates to sign employment contracts as they have signed one that is based on the same template. This assures the employees that the terms are fixed for all staff. This cuts down the amount of time spent negotiating terms, and therefore overall expenditure.
External investors would want to see the director’s service agreement as part of the due diligence exercise. The agreement would serve as an example of how the business is well organised and show how steps have been taken to ensure that the business is prepared for contingency situations.
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