Director Service Agreement — UK Drafting Reference

Last verified

Drafting reference for English-law director service agreements — Companies Act 2006 s.188, fiduciary duties (ss.171-177), removal s.168, D&O, restraints.

The Service Agreement is the executive-director variant of the employment contract — the document governing the contractual relationship between a UK company and the individuals who hold its principal executive offices. It is an employment contract for most purposes, but it sits inside a substantially denser regulatory matrix than an ordinary employment contract: the fiduciary duties of directors codified at sections 171-177 of the Companies Act 2006; the statutory restrictions on long-term terms in s.188; the inspection rights of members under ss.227-230; the corporate-governance overlay applicable to listed companies; and the remuneration-policy and reporting framework in ss.420-422 and s.439A. The drafting therefore performs a triple function — employment terms, corporate-officer terms, and (for quoted companies) compliance with the UK Corporate Governance Code and the binding shareholder vote on remuneration policy. This page is the drafting reference. Cross-reference the employment contract page for the underlying employment framework, the restrictive covenants page for post-termination restraints (more extensive for executives), the settlement agreement page for exit drafting, and the standard boilerplate clauses page for the recurring miscellaneous-provisions architecture.

Executive Director versus Non-Executive Director

A service agreement in English drafting practice refers to the employment contract of an executive director — a director who is also an employee of the company. The executive director combines two legal capacities: officer of the company (with attendant fiduciary duties and statutory obligations) and employee (with the protective overlay of employment legislation). The non-executive director (NED) is appointed under a letter of appointment, not a service agreement, and is typically not an employee — the NED is an officer for fiduciary purposes but the relationship is a contract for services, not a contract of employment. The drafting and the regulatory consequences are different. This page deals with the executive-director service agreement.

The dual-capacity nature of the executive director’s relationship has practical consequences. Removal from the office of director under Companies Act 2006 s.168 does not automatically terminate the underlying contract of employment; the contract continues subject to its own termination provisions. The implied term articulated by the House of Lords in Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 protects the contractual relationship: where the company exercises a corporate power to remove the director in a way that necessarily breaches the service agreement, the company is liable in damages for breach of contract, even though the removal itself is valid as a corporate-law matter. Modern drafting builds for this — the service agreement provides expressly for what happens to the contract on cessation of office, and the company calculates termination cost accordingly.

Section 188 — Long-Term Terms and Member Approval

Section 188 of the Companies Act 2006 is the most important corporate-law constraint on the structure of a director’s service agreement. Where the guaranteed term of a director’s employment with the company exceeds two years — that is, where the contract cannot be brought to an end by the company within two years by notice, or can be brought to an end only in specified circumstances — the contract requires ordinary-resolution member approval before it is entered into. A memorandum of the proposed contract must be made available for inspection at the company’s registered office (and at the meeting venue) for at least 15 days before the meeting and at the meeting itself. The same rule applies to renewal of a long-term term.

The consequence of non-compliance is set out in s.189: the long-term term is void and the contract is terminable on reasonable notice by the company. The rest of the contract may continue (the void provision is severed), but the executive’s bargained-for security is lost. The provision is robust: a contract that gives the company a right to terminate within two years is not within s.188, even where the company has agreed in commercial practice not to exercise that right. The drafting move is to ensure that the contract is either (a) for a fixed term of two years or less; (b) on indefinite terms terminable by the company on the contractual notice period (typically 6-12 months); or (c) on a longer term with the s.188 approval procedure followed before execution. The cost of getting this wrong is the loss of the long-term commitment that the executive negotiated.

Sections 227-230 (Companies Act 2006) impose related transparency obligations. The director’s service contract (or a written memorandum of its terms) must be made available for inspection by members at the registered office (and at a place specified under s.358) for at least one year after termination. The inspection is free for members and the company can charge a prescribed fee to others. The drafting move is to anticipate that the service agreement will be publicly inspected; commercially-sensitive terms (notably remuneration formulas in unlisted companies) are sometimes carried in side-letters or schedules that can be redacted.

Fiduciary Duties — The s.171-177 Codification

The Companies Act 2006 ss.171-177 codified the principal directors’ duties previously developed in equity and common law. Six general duties — the seventh, in s.177, is the duty to declare interest — apply to every director of every UK company.

Section 171 — duty to act within powers. The director must act in accordance with the company’s constitution and exercise powers only for the purposes for which they are conferred. This is the codification of the equitable doctrine in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 — improper exercise of a power for a collateral purpose is a breach even where the director honestly believed the exercise was in the company’s interest.

Section 172 — duty to promote the success of the company for the benefit of its members as a whole. The duty is to act in the way the director considers, in good faith, would be most likely to promote the success of the company, having regard to a non-exhaustive list of factors: long-term consequences; interests of employees; relationships with suppliers and customers; impact on the community and environment; reputation for high standards of business conduct; need to act fairly between members. From 2019 the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) require a Section 172 Statement in the strategic report of qualifying companies. The drafting consequence for the service agreement is limited (the duty cannot be excluded) but the duty exerts pressure on bonus and remuneration framing — bonus metrics should be capable of being characterised as serving s.172 success.

Section 173 — duty to exercise independent judgment. Section 174 — duty to exercise reasonable care, skill, and diligence, judged by both the objective standard (what a reasonable diligent person would be expected to do in that role) and the subjective standard (taking into account the individual’s actual knowledge and experience). Section 175 — duty to avoid conflicts of interest; the company’s articles, or for public companies a board authorisation under s.175(5), can permit conflict-laden activity. Section 176 — duty not to accept benefits from third parties (kickbacks, lavish hospitality outside the ordinary course). Section 177 — duty to declare an interest in a proposed transaction or arrangement with the company (extended by s.182 to existing transactions).

Section 232 (Companies Act 2006) provides that any provision purporting to exempt a director from liability for breach of duty in relation to the company is void. The fiduciary duties cannot be contracted out of. The service agreement therefore restates the duties (more as a matter of clarity than to add to them) and structures conduct around compliance. Conflict declarations under s.177 should be procedural — the executive undertakes to declare interests before transactions are entered into; the board’s authorisation procedure under s.175(5)-(6) is referenced.

Removal from Office under s.168

Companies Act 2006 s.168 gives shareholders the power to remove a director by ordinary resolution of the company, despite anything in the articles or any agreement between the director and the company. Special notice of 28 days is required (s.168(2)). The director has the right to make representations to the meeting (s.169).

The s.168 right is unaffected by the service agreement. The agreement cannot oust the shareholder power. What the agreement can do — and routinely does — is provide for contractual consequences of removal. Two structural moves matter. First, the agreement provides that on cessation of office the executive’s contract of employment continues until terminated in accordance with its own terms (the notice clause). Removal from office becomes a trigger for resignation from office but not for termination of employment — the company must then run the contract’s termination procedure (notice and PILON) to end the employment, with the financial consequences that the termination procedure prescribes. Second, the agreement may provide for change of office — appointment to a different role within the group — where the original office is removed.

Bushell v Faith [1970] AC 1099 confirms that the articles of association can validly include weighted voting provisions that protect a director against s.168 removal — the standard mechanism in small private companies (especially family-controlled or founder-led) where the director-shareholder’s vote is weighted on a removal resolution. The provision is a corporate-law device and sits in the articles, not in the service agreement, but the two should be drafted to operate consistently.

Remuneration — The Listed-Company Overlay

For quoted companies (a defined term in CA 2006 covering FCA-listed companies and certain others), the remuneration architecture is intensively regulated. Section 439A requires a binding member vote on the directors’ remuneration policy at least every three years. Payments to a director that are not in line with the approved policy are unlawful (s.226B) and recoverable from the director (s.226E). The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 Sch 8 prescribes the contents of the Directors’ Remuneration Report and the policy.

The UK Corporate Governance Code (FRC, 2024 edition) — the “comply-or-explain” code for premium-listed companies — imposes further structural expectations. Provision 38 addresses remuneration structure (alignment with strategy and long-term success; pension contributions in line with the workforce; significant proportion of executive remuneration deferred and tied to performance). Provision 39 addresses notice periods (should not exceed 12 months, with one year as the lower-side norm). Provision 40 addresses formulation of policy (clarity, simplicity, risk control, predictability, proportionality, alignment). Provision 41 addresses workforce engagement on executive remuneration.

The drafting consequence for the service agreement is that the remuneration package must be capable of being characterised as within the approved policy. Bonus formulas, LTIP grants, pension contribution rates, severance entitlements, change-of-control bonuses — each must align with the policy that members have approved. The service agreement typically incorporates the policy by reference and provides that variations require board (or remuneration committee) approval.

For private companies, the s.439A vote and the Code do not apply (though the s.188 long-term-term approval, the s.232 anti-exemption rule, and the inspection regime do). Private-company executives are free to negotiate remuneration without the policy overlay — which in practice means more bespoke packages and more contractual security for the executive.

The equity component of executive remuneration is governed by ITEPA 2003 Part 7 (employment-related securities). The four principal tax-advantaged schemes are:

  • Enterprise Management Incentive (EMI) under Part 7 Chapter 9 — available to small, independent trading companies (gross assets under £30m; fewer than 250 full-time-equivalent employees). Options up to £250,000 per employee and £3m total per company. Grant at market value generally avoids income tax on exercise; capital gains tax applies on disposal, often with Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) reducing the rate to 10% on the first £1m of lifetime gains.
  • Company Share Option Plan (CSOP) under Part 7 Chapter 8 — available to larger companies. Per-employee cap of £60,000 (raised from £30,000 with effect from 6 April 2023). Income tax/NIC favourable on exercise where conditions are met.
  • Save As You Earn (SAYE / Sharesave) under Chapter 7 — all-employee savings-related option plan.
  • Share Incentive Plan (SIP) under Chapter 6 — all-employee plan with free, partnership, matching, and dividend shares.

For executive directors of growing private companies (typically VC- or PE-backed), EMI is the dominant grant vehicle and the service agreement cross-references the EMI option agreement (rather than restating the option terms). For executive directors of listed companies, a mix of CSOP (within the £60,000 cap), unapproved options, restricted stock units (RSUs), and performance share plan (PSP) awards is conventional, with vesting tied to defined performance metrics.

The treatment of equity on cessation is built around the good leaver / bad leaver distinction. A good leaver — typically death, disability, retirement, redundancy, mutual termination, termination by the company without cause — receives some pro-rated treatment of unvested awards and a stated period within which to exercise vested options. A bad leaver — resignation, summary termination for cause, breach — typically forfeits all unvested awards and may also forfeit vested awards or be required to sell back vested shares at the lower of cost and fair value. The drafting careful: bad-leaver clawback at book value rather than fair value is sometimes challenged under the penalty doctrine (Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 reframed the test as whether the consequence is out of all proportion to the legitimate interest).

D&O Insurance and the s.232 Architecture

Section 232 of the Companies Act 2006 invalidates any provision (in articles, in a contract, or otherwise) that purports to exempt a director from liability for negligence, default, breach of duty, or breach of trust in relation to the company. The strict no-exemption rule is qualified by three carve-outs: s.234 qualifying third-party indemnity (the company may indemnify a director against liability to a third party, subject to detailed conditions); s.235 qualifying pension-scheme indemnity; and s.233 insurance — the company may maintain insurance for a director against liability for negligence, default, breach of duty, or breach of trust.

The protective vehicle for executive directors is therefore directors’ and officers’ liability insurance (D&O cover), maintained by the company. The service agreement undertakes that the company will maintain D&O cover throughout the term of office and for an appropriate run-off period after cessation (typically six years, mirroring the Limitation Act 1980 s.5 limitation period for breach-of-duty claims). Cover limits scale with company size, sector, and risk profile — a typical FTSE-250 cover might run to £25-50m; smaller-cap and private-equity-backed companies sit lower; financial-sector firms typically higher.

Loans to Directors — ss.197-214

Companies Act 2006 ss.197-214 regulate loans, quasi-loans, and credit transactions involving directors. The general position for private companies is that loans to directors require member approval by ordinary resolution before the loan is made (s.197). Public companies and associated companies are subject to broader restrictions on quasi-loans and credit transactions (ss.198, 200-201). De minimis carve-outs apply (e.g. £10,000 for ordinary loans; expenditure on company business under s.204). The service agreement should not provide for loans to the director without acknowledging the s.197 approval framework — uncompliant loans are voidable at the company’s election (s.213) and the director (and any approving director) is liable to account for any profit and to indemnify the company against loss.

Change of Control and the Takeover Code Overlay

Executive directors often have change-of-control protection — accelerated vesting of equity, change-of-control bonus, enhanced severance on termination following a change of control. For directors of companies that are subject to the City Code on Takeovers and Mergers (publicly-quoted and certain other companies), Rule 21.2 of the Code restricts inducements during an offer period — payments to directors made during an offer period that have not been previously approved are subject to Panel scrutiny. The drafting move is to include the change-of-control protections in the service agreement before any offer period — so that the protections are pre-existing contractual entitlements rather than inducements created in response to a bid.

Bid-defence considerations also matter. A service-agreement notice period of two years (the s.188 ceiling without approval) is a defence-minded term — it raises the cost of replacing the executive and so deters a hostile bid that is conditional on management departure. The Code (Rule 21.1) restricts frustrating actions during an offer period, but pre-existing contracts (executed before the bid) are not normally frustrating actions even if they have a deterrent effect.

Post-Termination Restraints, IP, Confidentiality, and Whistleblowing

The post-termination restraints in an executive service agreement are more extensive than in an ordinary employment contract — typically 12 months across non-compete, non-solicit, non-deal, and non-poach. The Tillman v Egon Zehnder analysis applies in full (see the restrictive covenants page). The standard drafting moves: shareholding carve-out for Tillman compliance; graduated covenants; garden-leave set-off; severance recital; injunctive-relief acknowledgement under Senior Courts Act 1981 s.37.

The intellectual-property architecture combines the statutory positions in CDPA 1988 s.11(2) and Patents Act 1977 s.39 with a belt-and-braces present assignment, a moral-rights waiver, and a further-assurances recital. The director’s fiduciary duty under s.176 (no benefits from third parties) and s.175 (no conflicts) provides a parallel route — a corporate opportunity diverted to a personal interest is recoverable on the Regal (Hastings) Ltd v Gulliver [1942] UKHL 1 principle, an authority codified in s.176 and reaffirmed in Bhullar v Bhullar [2003] EWCA Civ 424.

Confidentiality obligations are indefinite for trade secrets (the Faccenda category-three position carried over from the underlying employment law) and for fiduciary-quality information held in the director’s capacity as officer. Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244 imposes a duty on a director, in some circumstances, to disclose own misconduct as part of the s.172 duty to promote success — a tension worth drafting around, particularly in the context of self-reporting clauses. The PIDA whistleblower carve-out applies as in any employment context and cannot be silenced by the agreement.

Shadow Directors

Companies Act 2006 s.251 defines a shadow director as a person in accordance with whose directions or instructions the directors of the company are accustomed to act. Shadow directors are subject to the same fiduciary duties as formally-appointed directors (s.170(5)), and exposure to wrongful-trading and disqualification liability runs in parallel. In the context of private-equity, venture-capital, and family-business arrangements, senior individuals who do not hold formal director appointments but operate as de facto directors may fall within s.251 — and the company’s D&O cover and any indemnification arrangements should be drafted to accommodate them. Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 is the foundational authority on the threshold.

Sample Structure

A modern English service agreement typically follows this order: preamble; parties; recital (appointment as director and as employee in a named office); definitions; appointment, term, s.188 acknowledgement; duties (with cross-reference to the seven s.171-177 statutory duties); time commitment and outside appointments; remuneration (base, bonus, LTIP, benefits, pension); expenses; equity (cross-reference to share-option agreement); intellectual property; confidentiality; data protection; conflict declarations; notice; termination on cause; PILON; garden leave; effect of removal from office under s.168; post-termination restrictive covenants; clawback and malus; return of property; D&O insurance and indemnification; change of control; governing law; jurisdiction; execution. For quoted companies, a recital aligning the package with the approved remuneration policy is conventional.

Cross-references

Bibliography

Disclaimer: Handbook content is informational, not legal advice. Director service agreements engage corporate-law approval and disclosure requirements that vary materially by company type — always consult a solicitor admitted to practise in England and Wales for binding decisions on specific service-agreement matters, particularly for listed-company and PE-backed-company contexts. Last verified 2026-05-11.