A Comprehensive Guide on Director’s Service Contract.
Essentials of a Director’s Service Contract
The Employment Act, 2007 obligates every employer to issue an employee with a contract of service within 60 days of commencement of employment. Moreover, where the employment is for a duration of more than 3 months, the employer is responsible for procuring the contract to be drawn up stating particulars of employment and ensuring that the contract is signed off by the employee. Under the employment Act, such contract must be in place within 60 days from the commencement of the employment.
As alluded to above, employers should provide their employees with a written statement of their main terms and conditions of employment, which are specified under section 10 of the Employment Act.
These said statement should inter alia provide for: the name and particulars or the employees; the name of the employer; the job description; the place of work; the hours of work; the form and duration of the contract; entitlement to leave; the remuneration package plus benefits including any pension; provisions on sick pay; and the length of notice which the employee is obliged to give and entitled to receive to terminate his contract of employment.
Is a director’s service agreement akin to an employment contract?
A director’s service agreement is very similar to a contract of employment and both provide for the responsibilities that a person should perform and the rules under which they should operate. Nevertheless, since a director has greater responsibilities and some statutory duties and obligations, a service contract contain more particulars or provisions than a simple contract of employment.
Under the Companies Act, 2015, the directors have at least seven (7) statutory obligations. Therefore, in addition to standard terms and conditions that are to be found in a normal contract of employment, a director’s service agreement also, inter alia, encompasses these duties as well as provide for company’s expectations on a director.
In terms of remuneration, unlike employees, directors, and particularly non-executive directors, do not have to pay themselves a salary- though many companies have sitting allowances for their directors as well as a reimbursement of costs incurred in performance of their directorship duties. Nevertheless, unlike ordinary employees (but akin to senior management employees) directors may be entitle to additional benefits like car allowance, share options etc.
What is a director’s Service Contract?
Employment contracts for executive directors are commonly known as service contracts. Like employees, executive directors are engaged by their company on a full –time basis. A directors’ service contract is an important document that is required by law and which setting out the rights, obligations, and responsibilities arising as a result of being appointed as a director in a private and public company.
What is a director’s letter of appointment?
Directors can be engaged on a full time basis or on a part time basis. An executive director is akin to an employee of the company and their contract will provide for their employee obligations as well as their directorship duties and responsibilities. In most cases, the company will also have a separate contract for a managing director (MD) who is an executive director to whom the board has delegated the executive duties in relation to the day-to-day management of the company. This may be separate from a chief executive officer (CEO), who may be senior most employee – though the MD and CEO roles may be occupied by the same person.
A non-executive director (who provides their services on a part-time and offers objective and independent advice to the company’s board) can be hired under a directors’ service agreement which will cover their non-executive duties and other terms of their engagement. Nevertheless, in most cases non-executive directors will agree on the terms of their engagement with the company within their letter of appointment. For purposes of this article, any reference to a director’s contract of services shall also include such letter of appointment.
What are the legal requirements on directors’ service contract?
Sections 190 and 191 of the Companies Act, 2015 requires a company to keep and maintain, and make available for inspection at the company registered office, written service contract of every director, or if the contract is not in writing—a written memorandum setting out the terms of the contract. These must clearly set out the services and duties of all the directors of the company and must be maintained for a period of at least one year from the date of termination or expiry of the contracts (regardless of the length of the term of the contracts or whether they are terminable within 12 months). In addition, shareholders have the right, on payment of a fee, to request a copy of a director’s service contract (or a memorandum of its terms where the contract is not in writing). The copy must be provided within seven (7) days of the company receiving the request.
Under section 193 of the Companies Act, where a director is also the sole member, the company must, unless the contract is in writing, ensure that the terms of the contract are either set out in a written memorandum as aforesaid or recorded in the minutes of the first meeting of the directors. Under section 210 of the Companies Act, a company must ensure that minutes of all minutes of directors’ proceedings at meetings of its directors are recorded. The company is also required to keep the minutes of each meeting of its directors for at least ten (10) years from the date of the meeting.
In addition to the foregoing, please note that under section 157 of the Companies Act, every director’s service contract for a period exceeding, or that could exceed, two (2) years must be approved by shareholders of the company, in the case of a director of a holding company, by a resolution of the members of that company. Service contract for these purposes includes consultancy as well as employment arrangements involving directors, and also includes non-executive directors’ letters of appointment. There is an elaborate procedure of obtaining approval, which includes a requirement for a memorandum setting out the proposed contract to be made available before and at the relevant shareholder meeting.
Under the Companies Act 2015, failure to provide a director’s service contract is an offence and a person guilty under this offence is liable on summary conviction to a fine.
Why is a Director’s Service Contract Important?
By accepting the terms of the agreement, both director and company are deemed to have entered into a legally binding and enforceable contract. Therefore, it is paramount for each party to appreciate its obligations and seek prior legal advice on the contract and the legal implications thereunder.
For the company, the director’s service contract is intended to ensure that a director’s copy with their statutory duties as defined in the Companies Act, 2015 as well as other stipulations of the contract and to ensure that company’s business and commercial interest as well secured.
Other types of director in a company may include:
- A de facto director acts as a director without being validly appointed by the company to the role.
- A shadow director usually gives directions and instructions that registered directors follow and act upon though he is not held out as a director. This is common for beneficial owners.
Unfortunately, both types of director may not have formal director’s service contract, which invariably result in confusion on the scope of their powers, duties and responsibilities. To avoid this, all directors should be issued with service contracts and scopes of their powers, duties, responsibilities as well as limitation thereof well documented, and here is why.
Reasons why your business needs a director’s service contract or letter of appointment
Compliance with the Companies Act
The position of director has various accompanying implied fiduciary duties and responsibilities (See article on Why you need a Director’s Service Contract?), the Companies Act, 2015 has now codified the erstwhile common law fiduciary duties of directors. In order to avoid disputes or mitigate ambiguities, it is critical for a director’s service contract or letter of appointment spell out these statutory duties as well as specific role, responsibilities and limits on authority regarding a director’s position.
In addition, the Companies Act requires a director’s service contract for at least 2 years to be approved by shareholders and for a copy thereof to be maintained and made available for inspection at the company’s registered office.
Protection of Confidential Information
To enable them discharge their mandate, most directors are invariably allowed access to privileged or confidential business information including trade secrets, intellectual property, technical information, supplier list and customer lists. To safeguard such information guard against potential breach of confidentiality, it is important for directors to sign service contract and letter of appointment with suitable confidentiality clauses that will ensure that this information or data is protected or otherwise not disclosed in a way that would be detrimental to the business.
Non- Compete, Anti- Raiding, Non- Solicitation and Restrictive covenants
If a director decides to leave your company (or group of companies) it may be critical to ensure that their ability to engage on disruptive trade practices like soliciting your clients, poaching your employees, working for competition or revealing trade secret or confidential trade information to competitors is restricted permanently or at least for some reasonable duration. Such provisions are usually subject to competition laws and therefore it is important to consult yours lawyer in order to ensure compliance with competition and restrictive trade practices laws.
Clear exit strategy
Invariably, directors may wear different hats: as shareholders; directors; or employees. Therefore, it is important to agree beforehand and expressly in the director’s service contract what will happen if such a director for instance decides to leave the directorship, shareholder or employee position. If this is not proper addressed in the contract of services, exit can cause unwarranted acrimony and even disruptions in the company’s business or operations.
Good corporate governance
The director’s service contract must provide for what is expected of a director including his or her role within the board as well as the statutory duties to exercise independent judgement and act in the best interest of the company at all times. In addition, as part of good corporate governance framework, a director’s remuneration package must be clear and transparent and aligned to the company’s policy on directors and senior management remuneration.
What provisions should be included in a director’s service contract?
A professionally drafted director’s service contract or letter of appointment should, inter alia, include the following particulars:
- Terms of Appointment and basic provisions – These should include the particulars and address of the parties, date the director started work and the date of their appointment as a director (if different), place of work, hours of work, the tenure of office (whether it is rolling or fixed-term), remuneration, holiday entitlement, incapacity, and sick leave, maternity and any other types of paid or unpaid leave etc. If necessary, you may also wish to insert provisions relating to the right to request the director to undergo a medical examination and duty to share any results with the company.
- Bonus or Reward Schemes- Provisions will usually specify whether a director will be entitled to share options, bonus payments based on performance targets, medical insurance or expenses, life and disability insurance or pension options, company car, and any other benefits, including provision for withdrawal in the case of poor performance or other stated reason.
- Duties and responsibilities – This cover the duties, responsibilities, and obligations both as a director and or employees of the company (for executive directors). This can also highlight the legal duties under the Companies Act, 2015. For public and or listed companies, this may also include industry standards/regulations such as the listing requirements and codes of practice and principles of corporate governance. Moreover, in accordance with the requirements of section 195 of the Companies Act, this may include entitlement to a director and office (D&O) insurance cover.
- Warranties – These covers the company’s expectations of a director and include stipulations relating to compliance with company and other industry specific policies, e.g., competition and consumer protection policy, anti-bribery and corruption, money laundering, non-compete, non-solicitation sexual harassment/ misconduct, conflict of interest, anti-discrimination, data protection and privacy policies. This should also cover averments that the director is not debarred from performing his duties or taking up the appointment by any antecedent contractual obligation or under the Companies Act or any other applicable laws.
- Multi-directorship or external appointment: a director’s service contract or appointment letter should clarify whether a director is permitted to work with other companies and if so, the applicable caveats, for example, a non-compete provisions prohibiting the director from serving as employees or directors of the company’s or associated company’s competitors. It may also be desirable to set out the approval procedure for this and highlight some grounds, if any, on which approval may be denied.
- Termination, Suspension and Resignation: the director’s service contract or letter of appointment should specify the process of resignation/suspension/termination of directors. These procedures should be different for executive directors who may be both employees and directors of the company. In many cases, the company’s disciplinary and grievance procedures will set out in the company handbook. Where this is the case, this can be incorporated into the director’s service contract or letter of appointment by reference. Suspension may be important to allow the company t time to investigate any wrongdoing on the part of a director before the decision to terminate or require a director to resign is made. Such procedure should be well detailed including the person how has the authority to suspend a director and whether or not such director will be allowed to contact employee or use or access the company’s property or offices during the period of suspension. The possible grounds for suspension or termination e.g. conflict of interest, scandal, fraud and gross misconduct should also be provided for. In case of resignation or termination (except for cases of gross misconduct where termination may be immediate), the notice period should strike a balance between allowing the company sufficient time to find a new or replacement director while at the same time allowing a director to be released within a reasonable period to take up a new position or pursue other opportunities.
- Payment in Lieu of Notice and Post Termination Procedures – Termination may also provide for payment in lieu of notice as well as post –termination processes. Post-termination processes include the obligations following termination such as returning company property, corporate responsibilities in relation to registration of notice of change of a director at the Companies Registry, media or listing notifications (where applicable) as well as what happens to the director’s shareholding or other benefits like share options. In some cases, it may also be critical to consider what happens to the director’s social media accounts on termination of their appointment. Moreover, the inclusion of garden leave provisions -which act as a protective measure intended to ensure that key employees or executive director exiting a business have a minimal impact on its reputation and ongoing success can also be considered.
- Company policies and procedures – As in the case of separation procedure (discussed above) these are usually incorporated in the company handbook. Where applicable, these can be incorporated into the director’s service contract or letter of appointment by reference- though it is important for hard or soft copies to be furnished to the director beforehand.
- Dispute Resolution- The director’s service contract or letter of appointment should also detail the dispute resolution mechanism. For confidentiality reasons, as far as possible, the preferred dispute resolution mechanism should be mediation and or arbitration.
- Severability Clause- This is a contract provision that keeps the remaining portions of the contract in force should a court or an arbitral tribunal declare one or more of its provisions unconstitutional, void, or unenforceable.
- Restrictive Covenants – In order to protect the company’s business interest, it is important to have restrictions on the director regarding activities outside their role (as highlighted above) and restrictions on ‘poaching’ or soliciting other members of staff or customers to join them. Nevertheless, to be enforceable, these should comply with anti-competitive limitations.
- Confidential information – In some cases a director may be required to sign a separate NDA imposing the duty on confidentiality of company’s sensitive and proprietary information. Confidential provisions can also be included in a director’s services contract or letter of information. These may cover protection or monitoring of emails and duty to keep the company’s confidential information secure, including while travelling and using company equipment such as laptops or mobile phones.
At CM Advocates, our team of expert Corporate and Employment lawyers will advise on the most appropriate and important provisions to be included in your director’s service contract or letter of appointment and provide a comprehensively drafted contract bespoke to your particular circumstances. These contract can also be accessed at our portal here
For directors, if you require review of an executive or director’s service contract or letter of appointment, or require help negotiating the specific terms of an agreement, please contact us on +254 20 2210978 or +254 716 209673 or firstname.lastname@example.org or fill out our (online contract form).
Related Services: Corporate Law
Written By: Cyrus Maina.