The differences between shareholders, executive directors and non-executive directors can be confusing. Our focus here is largely on executive directors, hereafter referred to as directors.
Shareholders own companies via share capital. Directors are employees of the company (normally) in very senior roles. In SMEs, the shareholders and directors are often the same people. Sometimes a director may be allocated shares within the business, but this may be a minority stake.
Director’s service agreements are similar to employment contracts. Many of the provisions within the two legal documents may be similar. Usually, both documents will oblige the individual to comply with the policies and procedures outlined in the company staff handbook.
However, director’s service agreements typically contain a number of provisions that are specific to senior individuals. For example, the company may wish to restrict a resigning director from setting up a competing business or approaching the company’s existing clients for a period of time following the director’s resignation.
In addition, where a director has also been allocated shares, the company may wish to ensure that certain conditions attach to those shares, for example, when and to whom the shares can be sold and/or what value the shares are worth depending on how the director leaves the company.
You might be thinking you don’t need an agreement because;
- You’ve known the (fellow) director for some time and trust each other.
- As the director is also a shareholder, it’s in his / her best interests to perform well and contribute fully to the company’s success.
- If there were ever any issues, you would simply have a conversation.
- There is a shareholder agreement in place and company articles of association that protect the company.
But what if……………?
- Relationships change over time – sadly over 40% of UK marriages end in divorce. Why would business partnerships be different?
- Without a legal document setting out the role and responsibilities of a director, they may hugely underperform and yet still enjoy the benefits of their shareholding.
- There can be many pressures when a relationship is coming to an end and conversations that used to be easy often become very challenging.
- A shareholder agreement and articles of association can deal with the treatment of shares but that may only be in certain circumstances – for example on termination of service rather than underperformance. In addition some matters cannot be dealt with under articles of association – for example post termination restrictions.
A Director’s Service Agreement will help protect your business through;
- Clearly setting out the roles and responsibilities of the director.
- Giving clear guidelines to help conversations in the event of disputes relating to the performance and contribution of the director in line with the company’s policies and procedures.
- Having a legal binding document that can take the strain out of the discussion at a time when tensions may be running high.
- Providing a clear connection with the performance of the individual and any shareholding.
- Dovetailing with the company’s corporate legal structure contained within the shareholders agreement and articles of association.
Our Approach to Directors Service Agreements
Understanding
There are two aspects here. Firstly, we will take time to explain to you how the importance of the director’s service agreements and the key considerations you need to take into account. Secondly, we’ll ask you questions so we understand exactly the role of the director, any current or potential future shareholding that may be involved and all other relevant information pertaining to the company, its client and its competitors.
Agreeing
We’ll agree with you on the key concerns you have, what risks you and your business are exposed to and the potential solutions to minimise those risks. From this conversation, we will recommend the most appropriate legal documentation and structure to suit your circumstances and needs.
Drafting
Once we’ve discussed and agreed on the appropriate solution, we’ll then agree on a fixed fee for completing the work and the drafting process can begin. This may involve a more detailed conversation with one of our Associates. Following this, we’ll produce a first draft for your consideration.
Finalising
Once the first draft has been produced, we’ll take you through the document and make any amendments that are needed. There might be one or two cycles of this refining process. Once we concluded, we’ll produce a final draft and you’re good to go ahead and implement the agreement with your director(s).
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