We all know that a director is not regarded as an employee of a company UNLESS and UNTIL they sign a director’s service contract with the company (Click here to read our article on this decision by the Court of Appeal decision).
A director’s service contract is basically an employment contract specifically meant for directors engaged with the company on a full-time basis. It dictates the terms of engagement; the rights, duties and obligations of anyone appointed as a director in a company.
Legal framework
Director’s service contracts are provided for under Section 190 and 191 of the Companies Act 2015 [The Act] which makes it mandatory for companies to have a written director’s service contract for every director at the company’s office. Records of these contracts must be maintained and kept available for inspection throughout the director’s employment with the company and for at least one year from the date of expiry of the contract. It is important to note that failure to provide a director’s service contract for inspection is an offence under the Act and anyone found guilty is liable to payment of a fine.
In the alternative, where there is no written director’s service contract, the company must maintain a written memorandum setting out the terms of contract of the directors. The memorandum must therefore clearly state the services and duties of all the directors in the company.
Section 193 of the Act mandates that where a director is also the sole member of the company, then the terms of their contract must be either set out in a written memorandum or recorded in the minutes of the first meeting of the directors.
The Act also mandates that every director’s service contract for a period exceeding two years must be approved by the shareholders of the company; and in case of a director of a holding company, by a resolution of members of the company. The Act further allows shareholders of the company to access a copy of director’s service contract on request and upon payment of a fee. When requested, the contract must be provided within seven (7) days.
Terms of a director’s service contract
A director’s service contract should include:
- The terms of employment;
- Duties and responsibilities of the director;
- Rights and privileges of the director;
- Payment terms;
- Warranties – company expectations of a director and stipulations relating to compliance with company policies;
- The company policies and procedures;
- Confidential information;
- Restrictive covenants – in order to protect the company’s business interests;
- Termination procedures;
- Dispute resolution; and
- Bonus or reward schemes.
These terms are drafted in line with existing employment laws and other relevant legislation, and in accordance with the company business and policies. It is therefore important to consult your lawyer to ensure compliance with all relevant laws.
Why do you need a director’s service contract?
Your business requires this contract:
- To ensure compliance with the Companies Act.
As stated above, these contracts are mandated under the Companies Act, and failure to have them and keep them available for inspection is an offence attracting hefty fines if found guilty.
Further, the Act has codified statutory and fiduciary duties and responsibilities of directors. Spelling out these duties and responsibilities in a contract mitigates ambiguities, specifies the extent of a director’s authority, and avoids disputes.
- To ensure proper corporate governance
Since a director’s service contract provides for the duties and responsibilities of a director, it sets out a clear and certain form of governance while capturing an aligning these roles to company policies.
- To provide a clear termination strategy
A director’s service contract prevents unnecessary hostility and disruption of company business by ensuring that the termination procedure is well set out, especially because most directors are also shareholders of companies.
- To protect the company during and after the life of the contract
A well-drafted director’s service contract must set out the need to maintain the company’s confidentiality, prevention of solicitation, non-compete clauses and other disruptive trade practices. These contracts therefore safeguard the company’s business and prevent any information circulation that could be detrimental to the business.
At Alakonya Law LLP, our team of Corporate and Commercial lawyers is ready to advise on the most appropriate provisions to be included in your director’s service contracts and all matters relating to these contracts.
