Company Directors And Legal Contracts: A Linkilaw Guide
Just like movie directors are in charge of the daily film production, company directors are in charge of the day-to-day running of a company.
However, when choosing, employing and dismissing a director there are strict rules in place as to what you can and cannot do.
So, how can you make sure your company directors make everything run smoothly?
(1) Know The Difference Between A Director And A Shareholder
Put simply, a director is a form of an employee which is held to a higher standard. Every private limited company is obliged to have at least one director, whilst a public company must have at least two. Due to this, the legal documents to hire a director are more detailed than an employment contract.
Although a shareholder owns a percentage of that company but is not in charge of daily decision-making. It is not uncommon to see startups have a shareholder also being the director. If an individual is both a shareholder and a director he both owns the company and is in charge of the running of it.
Jeff Bezos is a prime example of the shareholder-director combination as he is both Director of Amazon and the main shareholder with 79.9 Million shares. On the other hand, Michael Shearwood acts as director of Clarks but 85% of the company is held by Clarks family members.
(2) Know The Legal Requirements Of A Director
Legally, a director is obliged to comply with rules set out by the company house. These can also be detailed and reinforced in your agreement with the director to facilitate the relationship between the business and the director.
The Companies Act of 2006 spells out the duties of a director for companies incorporated after 2006. As future blog posts will explore, any company that has been incorporated prior to 2006 will need to make amendments to comply with the new act. Understanding the Companies act of 2006 clauses is fundamental as directors can be removed if they are found to be in breach of their legal or contractual responsibilities and duties.
The Directors duties are:
- Duty to act within powers
- Duty to promote the success of the company
- Duty to exercise independent judgement
- Duty to exercise reasonable care, skill and diligence
- Duty to avoid conflict of interest
- Duty not to accept benefits from third parties
- Duty to declare interest in proposed transaction or arrangement
(3) Why You Should Make A Director’s Service Agreement
Although not compulsory, director’s service agreements, make the process of hiring, dismissing and spelling out your expectations of a director a lot more straightforward. Things that should be included are:
1. Responsibility for the registering of company tax and preparing company tax returns
A company is legally obliged to register and comply with business tax laws. The director should be responsible for overseeing that the taxes are registered for and paid on time.
2. Responsibility for the health and safety of your employees
3. Responsibility to ensure the company is compliant with data protection laws
4. Terms and length of contract & the Effects of termination
A contract of more than two years must be approved by shareholders. Generally, a contract that provides a particular long term may be a risk as the director, by agreeing to the provision, fails to put the company interest first. Furthermore, they have larger cost implications as the longer the notice period the larger the potential pay-off if the company chooses to terminate the employment.
5. Terms of termination of contract
In 2012 Director General George Entwistle was entitled to £450,000 after resigning from BBC after having only been in the job for 54 days.
After the Grenfell Tower disaster Nicholas Holgate (chief executive of Kensington and Chelsea council) was forced to resign but compensated around £100,000.
So having strict clauses on contract length and director payoff are fundamental to the company expenses.
6. Confidential Information
This clause is fundamental as directors have a fiduciary duty to the company and the details of this must be spelt out. The company director is knowledgeable on the business’ intellectual property and including clauses for confidentiality can clarify that the director is not allowed to share this information once he leaves.
(4) Know The Difference Between Directors & Non-Executive Directors
A non-executive director is not classified as an employee and often not appointed full-time. They are usually the head of the company due to their specific area of expertise or mentoring.
These forms of seniors do not require a director’s service agreement but rather a non-executive director appointment letter. Aside from the things included in a director’s service agreement they detail:
- Expected time of commitment
- Who is responsible for paying taxes
- How can the relationship be ended
So, be sure not to skip out on any steps and ensure you have a contract which enables you to keep the company’s interests safeguarded!
Need A Director’s Service Terms Agreement?
Get in touch with our legal team! We’ll answer all the questions you may have and we’ll guide you through every stage of your legal needs.