A director’s service agreement is a contract between a director and the company which specifies the precise terms of the director’s relationship with that company. Many tech companies, whether large or small, employ key people to act as directors. In this role these people are entrusted to run the business and they necessarily have access to the business’ most valuable (and often confidential) information.
Despite this, many tech companies do not put in place sufficient documentation to protect the company’s relationship with its directors should matters become contentious. Further, section 227 and section 188 of the Companies Act 2006 have put into place requirements that a director’s service agreement be written to cover such matters as the duties of the company’s directors and their rights and terms on how they will be paid. Nonetheless, many directors and senior employees do not have any written service contracts and those who do, are usually employed under written terms which are not fit for purpose.
What are the key terms for a tech company?
A well drafted director’s service agreement should contain clear provisions determining what happens if and when relationships with the company breakdown. In tech companies, post-termination restrictions are of paramount importance as an outgoing director could potentially take key intellectual property rights, staff, clients and confidential information to a competitor and the company will be left with very little it could do to stop the director.
Accordingly, the following clauses, are just some of the terms that tech companies should consider including in their directors’ service contracts:
A non-compete clause seeks to impose a restriction preventing the director, for a certain period and within a restricted area, from engaging in any business which is likely to be competitive with or similar to the business carried on by the company. Non-compete clauses are often seen to be unreasonable, extreme and therefore difficult to enforce. A court will generally question why sufficient protection to the business could not be provided by less stringent clauses (e.g. non-solicitation, non-dealing and non-poaching covenants or an express confidentiality provision) and will question the company’s right to preclude an individual from joining a competitor.
Notwithstanding this, it may, be possible to justify a non-compete provision where: (i) the company has a local client base that may be expected to follow a departing employee; or (ii) the company can prove that significant technical or other business-critical information that is not necessarily client-specific and, therefore, not necessarily safeguarded by non-solicitation/dealing covenants, could not be adequately protected through an express confidentiality provision.
A non-solicitation clause is one of the simplest types of covenant to enforce, as it will generally seek to impose a restriction prevent a former director, from soliciting the custom of any customer of the company for a given period of time after the contract is terminated.
This restriction prevents the former director for a certain period from trying to poach any other director or employee of the company. The key to enforceability is to ensure that the covenant is drafted only to cover those who may be expected to have particular knowledge of/influence with clients or knowledge of a company’s confidential information and is of reasonable duration.
Clear provision should be made obligating the director to keep business critical information confidential. A well-drafted confidentiality clause should include all information relating to the business products or services, affairs, and finances. Together with the trade secrets, including the company’s technical data and know-how relating to the business of the company or any of its business contacts.
It is also good practice for companies to include wording within the director’s service agreement requiring the director to return and/or delete all confidential information on termination or at any time if requested by the company. The clause should include both the return of physical documents and anything which the employee may have stored electronically.
In recent years intellectual property ownership has become increasingly complex so a standard clause is no longer sufficient. As a matter of law, the creation of intellectual property in the course of a director’s normal employment duties, will automatically vest in the company. Nonetheless, directors developing rights outside of their normal duties arguably, may not be owned by the company.
Most well-drafted directors’ service agreement, especially in the technology sector should make express provision for intellectual property created by the director in the course of his contract. As a general rule of thumb, the scope of the clause should be tailored depending on the level of creative input the director is likely to have, to ensure there is adequate protection in place.
Restrictive covenants may be enforced through an injunction or action for damages. The crucial issue for a company that believes that an employee may have acted in breach of a covenant is to act quickly. Injunctions can prevent former director and senior employees from taking certain steps, but they are emergency measures; courts will be reluctant to grant them if they feel the company has been late in seeking relief.
Should you require further advice on any of the issues outlined above, please contact Alston Asquith on +44(0)20 3950 3538