Directors’ Agreement: When You Need One And Key Terms To Include

If you’re running a limited company, your directors are the people making the big calls - on strategy, spending, hiring, growth and risk.

But here’s the thing: many small businesses appoint directors without ever putting the working relationship into writing. Everyone’s on good terms… until they’re not.

A well-drafted directors agreement helps you set expectations early, reduce confusion, and protect the company if something changes (like a director leaving, underperforming, or falling out with co-directors).

Below, we’ll walk you through what a directors agreement is in the UK, when you actually need one, and the key terms worth including so your business is protected from day one.

What Is A Directors Agreement?

A directors agreement is a contract between a company and a director. You’ll also see the term “director service agreement” used - sometimes interchangeably, and sometimes to describe a broader document that also covers executive/consulting-style services.

In either case, the goal is similar: to set out the terms on which that person will act as a director, and (where relevant) any additional services they provide to the business.

In plain English, it’s the document that answers questions like:

• What is this director expected to do?
• Are they paid (and if so, how)?
• What happens if they stop being a director?
• How do we protect the business’ confidential information and relationships?
• Can they work elsewhere or start a competing business?

It’s worth calling out an important point: a directors agreement is different from your company’s constitutional documents (like your articles) and different from agreements between shareholders.

• Your Company Constitution (articles of association) sets the rules for how the company is run internally (appointments, voting, share rights, meetings, and so on).
• A Shareholders Agreement sets the rules between shareholders (including what happens if someone wants to sell shares, deadlocks, funding, and exit scenarios).
• A directors agreement focuses on the individual director’s role and the company’s protections if that role changes or ends.

Some businesses can get away with minimal documentation at the very start. But as soon as money, responsibility, or risk increases, having the right agreements in place can make a huge difference.

Do You Actually Need A Directors Agreement In The UK?

You’re not always legally required to have a directors agreement, but for most small businesses it’s a smart move - especially once your company is beyond the “mates building something together” stage.

A directors agreement is particularly useful when:

You Have More Than One Director

The more decision-makers you have, the more important it is to document roles and responsibilities. It avoids unclear overlaps (or gaps) and helps stop disagreements turning into deadlocks.

Your Directors Are Also Working In The Business

Many SMEs have director-founders who also do sales, operations, delivery, admin, or client work. That can blur the line between “director” (an officeholder role) and “employee” status.

In these cases, a directors agreement (or a separate agreement) can address practical working arrangements you might otherwise see in an Employment Contract - but the right approach depends on whether the director is also an employee, what duties they perform, and how they’re engaged.

You’re Paying Directors A Salary, Fees, Or Benefits

If a director is paid, you’ll want clear terms around remuneration, expenses, bonuses, benefits, and when pay can be withheld or adjusted. This often goes hand-in-hand with how you approach Director Remuneration (especially where shareholders or investors expect transparency).

Note: pay, benefits and expenses can have tax and accounting implications. This article is general information only and isn’t tax or financial advice.

You’re Bringing In Investors Or Growing Quickly

As you scale, you’ll likely become more “process-driven” (budgets, approvals, reporting lines, delegated authority). A directors agreement helps lock in those expectations and shows you’re taking governance seriously.

You Want Stronger IP And Confidentiality Protection

Directors often have access to your most sensitive information: pricing, supplier terms, customer lists, roadmap, and financials.

If you ever need to remove a director, negotiate their exit, or enforce post-exit restrictions, you’ll be in a much stronger position if the contract clearly covers confidentiality and intellectual property (IP).

You’re Planning For “What If” Scenarios

This is the big one. If a director:

• stops pulling their weight
• acts outside authority
• breaches confidentiality
• falls out with co-directors
• becomes ill and can’t perform the role
• leaves to set up a competitor

…a directors agreement gives you a pre-agreed framework to follow, rather than trying to negotiate everything in the middle of a crisis.

Directors Agreement Vs Shareholders Agreement Vs Founders Agreement: What’s The Difference?

This is where many business owners get stuck. The documents can overlap, but they solve different problems - and having one doesn’t automatically replace the others.

Directors Agreement

This focuses on the director’s appointment and working relationship with the company (duties, pay, authority, confidentiality, restrictive covenants, disputes, and what happens if the appointment or service arrangements end).

Shareholders Agreement

This focuses on shareholders’ rights and obligations, including:

• who can buy/sell shares and when
• how key decisions get approved
• funding obligations
• deadlocks
• exit events and valuations

If your directors are also shareholders (which is common in SMEs), you’ll often want both a directors agreement and a Shareholders Agreement so both the “working role” and the “ownership rights” are covered.

Founders Agreement

A founders agreement is usually used at the earliest stage, to record what each founder is contributing (time, money, IP), how decisions are made, and what happens if a founder leaves early.

It’s especially useful when you’re still validating the business model but want to avoid misunderstandings later. If you’re in that phase, a Founders Agreement can be a great starting point - and you can later build on it with formal director and shareholder documents as the business grows.

In many small businesses, the best setup is a “document suite” where these agreements work together consistently (and don’t contradict each other). That’s one reason it’s worth getting legal help rather than trying to patchwork templates from different places.

Key Terms To Include In A Directors Agreement (And Why They Matter)

A directors agreement should be tailored to your company, but there are some core clauses most UK businesses should at least consider.

Here are the key terms to include, and what they actually do in practice.

1) Appointment, Role And Duties

This clause sets out:

• when the director is appointed (and in what capacity)
• their main responsibilities
• whether they have an operational role (e.g. managing director, finance director)
• reporting lines and expectations

It can also address whether the director must follow internal policies, budgets, and delegated authority rules.

Why it matters: if responsibilities aren’t documented, it’s harder to manage performance fairly or to take action when a director claims “that wasn’t my job”.

2) Time Commitment And Other Appointments

This is where you clarify whether the role is full-time, part-time, or ad hoc - and whether the director can take other roles (like consulting, board seats, or running another business).

Why it matters: conflicts of interest are a common source of risk, especially in industries where directors have multiple ventures.

3) Director Remuneration And Expenses

Your directors agreement should clearly cover:

• salary, director fees, or both
• bonuses or commission (if applicable)
• benefits (car allowance, private healthcare, etc.)
• expense reimbursement rules (what’s allowed, approvals, receipts)
• when payments can be reviewed or changed

Why it matters: director pay can create tension (especially where some directors are hands-on and others are less involved). Clear terms reduce disputes and help your bookkeeping stay consistent.

4) Authority And Decision-Making Limits

This sets boundaries, such as:

• spending limits before board approval is required
• limits on signing contracts
• requirements to consult other directors for key decisions
• who can speak publicly on behalf of the company

Why it matters: without limits, a director might bind the company to a contract you didn’t want (and the company may still be on the hook).

5) Confidentiality

This clause requires the director to keep company information confidential during and after their appointment.

It typically covers things like:

• financial information and forecasts
• client and supplier lists
• trade secrets and processes
• business plans and strategy
• pricing and margins

Why it matters: confidentiality obligations are often central to protecting a small business’ value - especially if a director leaves on bad terms.

6) Intellectual Property (IP) Ownership

If a director creates content, systems, branding, software, designs, or processes, your agreement should clarify whether the IP belongs to the company.

Why it matters: if IP ownership isn’t clear, you can end up in a messy dispute when a director leaves (or when you try to sell the business and a buyer asks who owns what).

7) Conflicts Of Interest

This usually requires the director to:

• disclose conflicts (actual or potential)
• avoid using company opportunities for personal gain
• step out of decisions where there is a conflict

Why it matters: directors have legal duties to the company under the Companies Act 2006, including avoiding conflicts of interest and promoting the success of the company. A directors agreement can support that framework with practical “how we handle this internally” rules.

8) Restrictive Covenants (Non-Compete, Non-Solicit, Non-Dealing)

These clauses can restrict a director (for a reasonable time after they leave) from things like:

• starting or working in a competing business
• poaching your staff
• approaching your clients or suppliers
• using your confidential information to win work

Why it matters: restrictive covenants can be a key protection for SMEs - but they need to be carefully drafted to be enforceable. Overly broad “template” restrictions can be difficult to rely on in practice.

9) Term, Resignation And Removal

This section usually covers:

• how long the appointment lasts
• how a director can resign (notice periods and handover expectations)
• how the company can terminate the agreement (for example, ending service arrangements)
• what happens if the director is removed as an officeholder

Why it matters: a director can be removed as a director under company law (subject to proper process), but their contractual rights still matter. If you don’t manage the contractual position properly, you can create unnecessary claims and negotiation leverage for the departing director.

10) Garden Leave And Payment In Lieu Of Notice (PILON)

Depending on the role, you may want the option to:

• place the director on garden leave during notice (keeping them away from clients, systems and staff)
• make a payment in lieu of notice (ending the relationship quickly while paying out notice entitlements)

Why it matters: when a director leaves, there’s often a higher risk of client or staff disruption. Garden leave can protect your business while you transition responsibilities.

11) Return Of Company Property And Access

This covers practical points, like returning:

• laptops, phones, keys, passes
• documents and records
• access to email accounts, CRMs, cloud storage, bank accounts, social media

Why it matters: one of the most common “exit headaches” for SMEs is not having a clear process for removing access and recovering property quickly.

12) Indemnities And Insurance (Where Appropriate)

Some businesses include indemnities for directors (often tied to Directors’ & Officers’ insurance) to protect directors when they’re acting properly in their role. This is a nuanced area and needs to align with your constitutional documents and applicable law.

Why it matters: if you’re offering additional protection to directors, it should be documented carefully. In some cases, you may also see a separate Deed Of Guarantee And Indemnity used to support these protections.

Common Mistakes Small Businesses Make With Directors Agreements

Most issues we see aren’t caused by bad intentions - they’re caused by businesses growing faster than their legal documents.

Here are common pitfalls to avoid when setting up a directors agreement.

Using A Generic Template That Doesn’t Match Your Structure

If your director is also a shareholder, a template that ignores share rights, leaver scenarios, or decision-making dynamics can leave big gaps.

Worse still, templates can accidentally contradict your articles or shareholders agreement, which creates confusion when you actually need to rely on the documents.

Not Matching The Contract To How The Business Really Operates

If your agreement says the director is part-time, but they work full-time and manage staff, you’re building a mismatch that can come back to bite you during disputes.

Skipping Confidentiality And Restrictive Covenants Because “We Trust Each Other”

Trust is great - but a good directors agreement is about planning for change. Even good relationships can break down under pressure (cash flow issues, disagreements on strategy, personal circumstances).

Having these terms agreed upfront usually makes exits smoother and less emotional.

Not Thinking About Exit Pathways

Ask yourself now (before there’s tension):

• What happens if a director leaves suddenly?
• What if they stop performing but won’t resign?
• What if they want to keep shares but stop working?

A directors agreement is one piece of the puzzle, but it should work alongside your broader governance framework to avoid deadlocks and messy disputes.

Key Takeaways

• A directors agreement is a contract between your company and a director that sets clear expectations on duties, pay, authority, confidentiality, and what happens if the director’s appointment or service arrangements end.
• You’re not always legally required to have one, but it’s strongly recommended for most SMEs - especially where directors are paid, have operational roles, or the business is scaling.
• A directors agreement is different from your articles of association (company constitution) and your shareholders agreement; in many businesses, you’ll need more than one document to cover different risks.
• Key terms to include usually cover duties, time commitment, remuneration, authority limits, confidentiality, IP ownership, conflicts, restrictive covenants, and exit/termination processes.
• Generic templates can cause real problems if they don’t match how your business operates or if they conflict with your other governance documents.
• Getting the legal foundations right early helps prevent disputes, reduces uncertainty, and makes it easier to grow (or raise investment) with confidence.

If you’d like help putting a directors agreement in place (or checking that your existing documents work together properly), you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.