What things should be covered by a director's service contract?
'Should' is rather a strong word but the following might well be considered:
Remuneration - This should be considered in its widest sense to include bonuses, incentives, share options, etc.
Notice period - This should cover notice by the director to the company and notice by the company to the director.
Duties of the director.
The director's rights in the event of ill health.
The company's rights in respect of misconduct or inadequate performance by the director.
Confidentiality - The obligation of the director to keep the company's affairs confidential, both during the course of the directorship and after its termination.
(j) Exclusive services - Whether or not the director is allowed to take other directorships and employments, or to work on a self- employed basis.
(k) Non-competition - It is often specified that a director cannot work for a competitor for a specified period after the termination of the directorship.
(l) Expenses - The basis on which expenses will be reimbursed by the company.
(m) The company's rights to the exclusive benefit of the director's endeavors - It is sometimes specified that the benefits of any inventions, development work, etc made by the director in his own time shall belong to the company.
I have heard that long periods of notice are frowned upon. Is this correct?
Yes it is, though perhaps it would be better to say that long periods of notice for directors of listed companies are frowned upon. Two year rolling contracts used to be quite common but they are now very much the exception. The Combined Code calls for maximum notice periods of not more than a year, but with an exception for directors recruited from outside so long as they reduce to one year or less after the initial period.
Is there a maximum period for which a director's service contract can run?
Directors may, subject to any restrictions imposed by the articles, commit the company to a director's service contract, so long as it may be ended without compensation by the company giving not more than two years notice. There is of course no problem if it is capable of running for more than two years at the option of the company rather than at the option of the director. If a contract is capable of running for more than two years as described above, it is invalid unless it has been approved by the members in a general meeting.
This of course does not mean that a director's contract automatically ends after two years. It can run indefinitely so long as it can be ended by the company giving not more than two years notice.
Who can inspect directors' service contracts?
Every member of the company is entitled to inspect directors' service contracts without charge. This applies to a contract with the company or a subsidiary company. If the contract is not in writing, members are entitled to inspect a memorandum of its terms.
The Act does not extend this privilege to non-members but the Listing Rules require that the service contracts of directors of listed companies be made available to non-members for inspection. Furthermore, the Listing Rules require that certain contracts be made available that do not fall within the definitions given in the Act.
Can I get a copy of a director's service contract?
Members can require a copy on payment of a prescribed charge plus reasonable costs.
Where must a director's service contract be kept?
It must be kept at the registered office or at a single alternative inspection location that has been notified to Companies House.