A Step-by-Step Guide to Drafting Directors Agreements (UK)

06/09/2023

32 min

Note: Links to our free templates are at the bottom of this long guide.
Also note: This is not legal advice

Introduction

Drafting a directors agreement is an essential step for any company seeking to protect their directors and shareholders from potential legal issues. It is a legally binding document which outlines the rights and obligations of a director, as well as setting out the terms of their appointment. It should be tailored to fit the specific needs of the company, its directors and shareholders, while being regularly reviewed to ensure it continues to meet these needs.

It is important that this agreement includes provisions relating to remuneration and benefits, as well as termination clauses that ensure the company can remove an underperforming director or make changes if needed. Provisions should also be included which protect both the company and its directors in terms of liability - ensuring no individual will be held responsible for losses or damages resulting from their behaviour while acting in their role.

At Genie AI, we understand just how important it is for companies and individuals alike to have clear guidance on drafting directors agreements. Our team provides free templates for our community template library which are informed by millions of data points around what makes up a market-standard directors agreement. Using this guide does not require you having a Genie AI account either - we just want you to receive reliable advice on protecting yourself!
So if you’re looking for step-by-step guidance on how to draft effective directors agreements that meet your particular legal requirements, why not access our template library today?

Definitions

Director: A person appointed to manage a company’s affairs, either on a full-time or part-time basis.
Duty of Care: The requirement to exercise reasonable care and skill in the performance of one’s duties.
Duty of Loyalty: The requirement to always act in the best interests of the company, and not use one’s position to gain an improper advantage.
Duty of Disclosure: The requirement to disclose any material information to the company’s shareholders and other relevant parties.
Duty to Act in the Best Interest of the Company: The requirement to act in the best interest of the company at all times, making decisions that are in the best interests of the company, and not one’s own.
Non-Compete Clause: A clause in a contract that prevents a director from working for a competitor after their employment ends.
Confidentiality Clause: A clause in a contract that prohibits a director from disclosing any confidential information to outside parties.
Compensation Clause: A clause in a contract that outlines the director’s compensation package.
Termination Clause: A clause in a contract that outlines the conditions under which the director’s employment may be terminated.
Legal Liability: The potential responsibility of a party for any errors or omissions they make while managing the company.
Breach of Contract: When a party to a contract fails to fulfill the obligations stated in the agreement.
Legal Remedies: The legal measures taken by a party to address a breach of contract.

Introduction to the legal obligations of a director
Definition of a director
Overview of duties and responsibilities
The duties and responsibilities of a director
Duty of care
Duty of loyalty
Duty of disclosure
Duty to act in the best interest of the company
The different types of directors’ agreements and when they should be used
Employment agreements
Independent contractor agreements
Shareholder agreements
Consulting agreements
An outline of the terms and conditions that should be included in a director’s agreement
Non-compete clause
Confidentiality clause
Compensation clause
Termination clause
How to negotiate a director’s agreement
Research
Drafting an initial agreement
Negotiating terms
Reviewing and revising the agreement
The legal implications of a director’s agreement
Potential legal liability for directors
Breach of contract
Legal remedies for breach of contract
The importance of having a written agreement
Clarifying roles and expectations
Defining financial and ownership arrangements
Protecting confidential information
Avoiding potential legal disputes
The benefits of having a well-drafted directors agreement
Ensuring compliance with legal requirements
Setting expectations of directors and other parties
Establishing clear roles and responsibilities
Clarifying compensation and ownership arrangements
Steps to ensure the agreement is effective
Ensuring the agreement is properly authorized
Acting in accordance with the agreement
Ensuring the agreement is up to date
Keeping records of the agreement
Summary and conclusion
Summary of the legal obligations of directors
Overview of the importance of a well-drafted director’s agreement
Summary of steps to ensure the agreement is effective
Summary of the potential benefits of having a written agreement

Get started

Introduction to the legal obligations of a director

Understand what a director is and their duties in accordance with the Companies Act 2006
Be aware of the fiduciary duties of a director and how these apply to the company
Understand the statutory duties that a director must comply with
Be aware of the potential criminal and civil liabilities for breach of duty

Once you have an understanding of the legal obligations of a director, you can move on to the next step in the guide.

Definition of a director

Understand the meaning of the term ‘director’ in the context of a company
Read and familiarise yourself with the Companies Act 2006 and the Companies Act 2006 (Commencement No 2) Order 2008
Review the definition of ‘director’ as set out in section 250 of the Companies Act 2006
Understand the distinction between executive and non-executive directors
Make sure you understand the legal consequences of being a director of a company
Understand the legal requirements of a director, such as fiduciary duties
Check that the individual you are appointing as a director does not have any disqualifications from acting as a director

Once you have completed these steps, you will have a clear understanding of the definition of a director and the legal obligations that come with the role.

Overview of duties and responsibilities

Understand the role of a director, as defined in the Companies Act 2006
Understand the duties and responsibilities of a director, as set out in the Companies Act 2006
Make sure the directors agreement covers all duties and responsibilities of a director
Ensure the agreement is tailored to the specific needs of the company
Check that the agreement complies with all applicable laws
When you have completed the overview of duties and responsibilities, check it off your list and move on to the next step.

The duties and responsibilities of a director

Read and consider the Companies Act 2006
Read the memorandum and articles of association
Identify the key duties and responsibilities of the director
Research any legal requirements on the director’s responsibilities
Draft a clause in the director’s agreement detailing the duties and responsibilities of the director
Ensure that the agreement reflects the legal requirements
Check the agreement for accuracy

Once you have completed the above steps, you can check this off your list and move on to the next step: ### Duty of care.

Duty of care

Understand the meaning of the ‘duty of care’ and the importance of meeting it: The duty of care is the obligation of a director to show a reasonable degree of care, skill and diligence in the performance of his/her duties.
Outline the standard of care expected of a director in the agreement: The agreement should include a clause setting out the standard of care required of a director, as well as the consequences of any breach of this duty.
Highlight the importance of proper record keeping: The agreement should also include a clause highlighting the importance of proper record keeping and the consequences of any failure to do so.

You’ll know when you can check this off your list when you have fully outlined the standard of care expected of a director and highlighted the importance of proper record keeping in the agreement.

Duty of loyalty

Understand the duty of loyalty and why it is important: the duty of loyalty requires directors to act in the best interest of the company and avoid conflicts of interest
Identify any potential conflicts of interest and how they will be managed: this should include any potential conflicts between directors and the company, other related companies, and personal interests
Draft a clause into the agreement that states that directors must act in the best interest of the company and disclose any potential conflicts of interest: this should include a clear explanation of the consequences if they fail to do so
Make sure the agreement outlines clear procedures for dealing with any conflicts of interest: these should include a process for reporting and rectifying any conflicts

When you have completed these steps, you can check this off your list and move on to the next step (Duty of Disclosure).

Duty of disclosure

Understand the importance of a director’s duty of disclosure: Directors must disclose any personal interests which could be seen as conflicting with their duties as a director of the company.
Learn the details of the disclosure requirements: Directors must disclose any personal interests to the other directors in writing and take all reasonable steps to ensure that the disclosure is recorded in the company’s register of directors’ interests.
Comprehend the consequences of not disclosing a personal interest: If a director fails to disclose a personal interest, the other directors may be able to set aside any contract or transaction entered into by the company as a result of that failure.

You will know you can check this off your list and move on to the next step when you have a full understanding of the disclosure requirements and the consequences of not disclosing a personal interest.

Duty to act in the best interest of the company

Understand the fiduciary duty of directors to act in the best interest of the company
Determine what the company’s best interests are
Outline the obligations of the director to act in the best interest of the company
Specify the consequences if the director breaches their duty to act in the best interest of the company
Check that the agreement is in line with company law

You’ll know you can move on to the next step when you have specified the director’s fiduciary duty to act in the best interest of the company, outlined the obligations of the director, and specified the consequences if the director breaches their duty.

The different types of directors’ agreements and when they should be used

Understand the different types of directors’ agreements available including ordinary service agreements, consultancy agreements, and executive service agreements
Decide when each type of agreement should be used, taking into account the directors’ specific roles and responsibilities
Consult with legal professionals to ensure that any agreements are in compliance with the Companies Act 2006
Once you have a clear understanding of the different types of agreements and when each should be used, you can check this off your list and move on to the next step.

Employment agreements

Draft a directors’ service contract that sets out the terms of employment for a director, including the duration of the agreement, the director’s responsibilities, the director’s remuneration and any restrictions on the director
Determine the minimum level of legal protection that must be provided to the director as required by law
Consider any additional matters that should be included in the agreement but are not mandatory, such as confidentiality clauses, restrictive covenants and provisions dealing with the transfer of intellectual property
Negotiate and agree the terms of the agreement with the director, including the duration of the agreement, the director’s responsibilities and the director’s remuneration
Ensure the directors’ service agreement is signed by both parties

You will know you can check this step off your list and move on to the next step when you have drafted a directors’ service contract, negotiated and agreed the terms of the agreement with the director, and the directors’ service agreement is signed by both parties.

Independent contractor agreements

Gather necessary information: you will need to collect information related to the individual contractor and the job role, such as the contractor’s name, address, job title, and the start and end date of the contract
Establish the scope of the agreement: define the job duties, roles, and responsibilities of the contractor in the agreement
Establish the terms of the agreement: include the payment terms, any additional compensation, and any expenses that may be reimbursed
Establish the termination terms: specify the terms for terminating or altering the agreement and the consequences of doing so
Sign the agreement: both parties should sign the agreement and have it witnessed to make it legally binding
How you’ll know when you can check this off your list and move on to the next step: once both parties have signed and witnessed the agreement, you will have completed this step and can move on to the next step.

Shareholder agreements

Understand the purpose and objectives of the shareholder agreements
Research the applicable laws and regulations in the jurisdiction where the shareholder agreements will be enforced
Establish the terms and conditions of the shareholder agreements, including the rights and responsibilities of the shareholders
Include provisions for voting and decision-making, non-compete and confidentiality clauses, and the transfer of shares
Draft the shareholder agreements, taking into account all pertinent legal and financial considerations
Have the shareholder agreements reviewed by a legal professional
Sign and execute the shareholder agreements
Keep a copy of the shareholder agreements and provide copies to all shareholders

You’ll know you can check this step off your list and move on to the next step once the shareholder agreements are signed and executed by all relevant parties.

Consulting agreements

Identify and assess the legal considerations and potential risks associated with the director’s agreement.
Draft the consulting agreement in accordance with applicable laws and regulations.
Consider the specific circumstances of the company and the director in order to create an agreement that is tailored to the needs of both parties.
Include provisions for the payment of the director’s fees, their duties, and the duration of the agreement.
Include termination clauses for both parties and ensure that the director agrees to comply with the company’s policies.
Ensure that the agreement is legally binding, and that all parties sign the document.

You will know when you have completed this step when you have drafted a consulting agreement that meets all the legal requirements and that is tailored to the needs of both parties.

An outline of the terms and conditions that should be included in a director’s agreement

Identify the legal rights and responsibilities of the director in accordance with the Companies Act.
Include details of the director’s role and responsibilities, including the services to be provided, any restrictions or obligations, and the duration of the agreement.
Ensure the agreement includes details of the director’s remuneration, including salary, bonuses, and other benefits.
Include terms and conditions relating to the director’s conduct, such as conflicts of interest and non-compete clauses.
Detail the director’s indemnity, including the extent to which they are liable for any losses incurred.
Provide a mechanism for resolving disputes, such as mediation or arbitration.
Specify the circumstances in which the agreement can be terminated.

You’ll know this step is complete when you have all the necessary terms and conditions written into the director’s agreement.

Non-compete clause

Decide whether a non-compete clause is necessary and if so, draft one.
Consider the scope of the restriction, the length of time it should apply, the geographical area it should cover and the activities it should restrict.
Make sure the clause is reasonable, taking into account the needs of the business and the impact on the director’s ability to earn a living.
Review the clause with a lawyer to ensure it is legally binding and enforceable.

Once a non-compete clause has been drafted and reviewed, this step can be checked off the list and the guide can move on to the next step: ### Confidentiality clause.

Confidentiality clause

Consider whether a confidentiality clause is necessary
Draft the clause, including:
What information is confidential
Who the parties to the agreement are
How long the confidentiality clause should last
Check that the clause is clear and unambiguous
Once the clause is completed and agreed by all parties, it is ready to be included in the Directors Agreement.

You can check this step off your list and move on to the next step once the clause is completed and agreed by all parties.

Compensation clause

Determine the type and amount of compensation that the director will receive
Express the amount in monetary terms and also as a percentage of the director’s salary
Specify the frequency of payment, such as monthly or quarterly, and if it is subject to any increase or decrease
Clarify whether the director is entitled to any bonuses or other forms of compensation
Outline any reimbursement of expenses, such as travel or business-related expenses
Ensure that the agreement covers any other forms of compensation that the director may be entitled to

When you can check this off your list and move on to the next step:
Once you have determined the type and amount of compensation that the director will receive, clarified any bonuses or other forms of compensation, and outlined any reimbursement of expenses, you can move on to the next step - drafting the termination clause.

Termination clause

Consider both the rights of the company and the director when drafting the termination clause
Specify the grounds for termination, such as misconduct or breaches of fiduciary duties
Determine the notice period for termination, and whether it will be paid or unpaid
Decide whether the director will be allowed to be terminated without cause
Include a clause that states any unpaid amounts owed to the director must be paid within 14 days of termination
Specify whether the director can be restricted from working for competitors after termination

Once you have completed this step, you can move on to the next step in the guide: How to Negotiate a Director’s Agreement.

How to negotiate a director’s agreement

Identify the main terms of the proposed agreement
Consider what the agreement should include, such as provisions for remuneration, responsibilities, and any other matters that need to be addressed
Discuss the terms with the other party, and ensure that both parties agree to them
Prepare a draft of the agreement, and discuss any changes that need to be made
Make sure that the agreement reflects the agreement between the parties, and make any necessary changes
Get the agreement signed by both parties
Check off this step and move on to the next step of researching the relevant laws and regulations that may apply to the agreement.

Research

Research relevant UK laws that apply to directors agreements, such as the Companies Act 2006 and the Employment Rights Act 1996
Take the time to understand the different elements that need to be included in the agreement, such as the duties of the director, their power, and the remuneration
Read up on relevant case law to ensure the agreement is legally binding
Look for examples of other directors agreements to use as a template for drafting
Once you have a good understanding of the legal considerations and have gathered some reference documents, you can move on to the next step of drafting an initial agreement.

Drafting an initial agreement

Draft an initial agreement that outlines the role of the Director and their responsibilities in accordance with the Companies Act 2006
Consider the contractual terms that are necessary to protect both the company and the Director
Draft the initial agreement in accordance with the common law and the Companies Act 2006
Take into consideration any specific requirements that the company may have
Check that the initial agreement is in line with the company’s articles of association
Have the initial agreement reviewed by a qualified lawyer
Once all parties are satisfied with the initial agreement, get it signed by the Director

You’ll know you can check this off your list and move on to the next step when all parties have been satisfied with the initial agreement, and it has been signed by the Director.

Negotiating terms

Prepare a draft agreement and negotiate it with the director and/or their representative.
Consider the director’s role, duties, responsibilities, and the remuneration, in detail.
Consider including in the agreement any additional terms or conditions that are agreed between the parties.
Check that the agreement complies with the Companies Act 2006.
Once all terms have been agreed, the agreement can be finalised and signed.
You will know that you have completed the negotiating terms step when both parties have agreed all the terms and conditions of the agreement.

Reviewing and revising the agreement

Carefully read through the director’s agreement and note any areas that need to be amended or clarified.
Ensure that all parties have agreed to the terms and conditions of the contract.
Pay particular attention to any clauses that could be deemed as unfair or unreasonable.
Make sure that any changes to the agreement are mutually agreed and documented.
Ensure that the agreement is updated to current legislation and regulations.
Check that all details are accurate, up-to-date, and complete.
Ask a professional legal advisor to review the document for accuracy and legal compliance.

You’ll know you’ve completed this step when you have reviewed and revised the agreement according to the steps outlined above and all parties have agreed to the terms of the contract.

The legal implications of a director’s agreement

Understand the legal implications of a director’s agreement, such as the duties it imposes on the director and any restrictions on their activities
Research any legal precedents related to directors’ agreements, such as the Companies Act 2006 and other relevant legislation
Consider any potential liabilities for directors, such as a breach of fiduciary duty or negligence
Understand the implications of the agreement in the context of any other agreements or arrangements that are in place
When you have a thorough understanding of the legal implications of the agreement, you can then move on to the next step in drafting the agreement.

Potential legal liability for directors

Understand the legal implications of being a director in the UK
Review the Companies Act 2006 and the Corporate Insolvency Act 2020
Consider the exposure to personal liability for directors in the case of wrongful acts
Identify potential areas of legal liability for directors
Consider the limits of indemnity and insurance for directors

When you can check this off your list:

When you have a clear understanding of the legal implications of being a director in the UK
When you have reviewed the Companies Act 2006 and the Corporate Insolvency Act 2020
When you have identified potential areas of legal liability for directors
When you have considered the limits of indemnity and insurance for directors

Breach of contract

Be aware of the potential legal remedies that may be available to the company or the director in the event of a breach of the Directors Agreement.
Review the Directors Agreement to identify any potential breaches of contract, and consider the remedies available to the company or to the director in the event of a breach.
Consider whether the Directors Agreement should include a clause which sets out the remedies available in the event of a breach, such as damages or compensation, or an injunction to prevent further breaches.
When you have reviewed the Directors Agreement for potential breaches and considered the remedies available, you can check this off your list and move on to the next step.

Legal remedies for breach of contract

Research remedies available to the company in the event of a breach of contract by the director
Investigate the availability of injunctions and damages for any breach
Consider how best to ensure the company’s rights are protected in the event of a breach
Draft the relevant clause in the directors agreement
Check to make sure the clause is enforceable and tailored to the company’s particular circumstances
Once the clause is drafted, you can move on to the next step

The importance of having a written agreement

Understand why it is important for directors to have a written agreement in place when taking up their role as a director
A written agreement can prevent disputes and provide clarity for each party, setting out the rights and obligations of each party
Consider the areas to be covered in the agreement, such as the duties of directors, their remuneration, indemnification and insurance, the removal of directors, and confidentiality
Seek legal advice if you need help with drafting a directors agreement
Check off this step when you have a clear understanding of the importance of having a written agreement in place for directors in the UK.