Title: Changes to rules in directors' service contracts
Date: 22 June 2008

The Companies Act 2006 has amended many aspects of company law including the law relating to directors’ service contracts.

The principal changes which came into force on 1 October 2007 concern:

  • the introduction of a definition of a director’s service contract;
  • inspection of service contracts by shareholders and the right to request a copy; and
  • shareholder approval for a director’s fixed-term contract of two years or more.

Definition of a director’s service contract

Section 227 of the 2006 Act defines for the first time the meaning of a director’s “service contract” for the purposes of the Act. It includes contracts of service (i.e employment contracts with a company or a subsidiary of the company of which he is a director); contracts for services (provided the contract requires the director personally to perform the service in question); and letters of appointment to the office of director.

Inspection of service contracts

Section 228 says that a company must keep a copy of all directors’ service contracts, or a memorandum of the terms of a contract if the contract is not in writing, at the company’s registered office for a period of at least one year from the date of termination or expiry of the contract. This obligation applies regardless of the length of any service contract and whether or not it is terminable within 12 months. Directors’ service contracts must be open to inspection by the shareholders.

Under section 229 members have the right to request a copy of a director’s service contract on payment of a fee. The copy must be provided within seven days of the request being received by the company. The right to request a copy on payment of a fee is in addition to the right to inspect a copy free of charge.

Shareholder approval

Prior to the implementation of the relevant sections of the 2006 Act, a director’s service contract could not exceed five years except with the prior approval of the shareholders. Under section 188 of the 2006 Act shareholder approval is required for directors’ service contracts in excess of two years.

Under section 189, if the company agrees to a provision in contravention of section 188, the provision is void and the company is deemed to be able to terminate by giving reasonable notice.

Transitional arrangements

In relation to the inspection of service contracts and the right to request a copy, the provisions contained in the 2006 Act apply to all service contracts entered into, and appointments made, on or after 1 October 2007.

With regard to members’ approval of directors’ service contracts, the 2006 provisions requiring approval for contracts of more than two years, will apply to contracts entered into, and appointments made, on or after 1 October 2007, although, if a resolution is passed before that date approving a contract, the 1985 Act provisions will apply.

For advice on any employment matter please contact Amanda Hyam.

Disclaimer

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published.

Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

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