A contract for services should be implemented before you proceed with any non-executive director appointment. As a NED you have absolute liability in the same way as any other executive director. This at its worst can see you being disqualified from acting as a director in the future, paying a personal financial contribution to creditors or even being sent to prison.
Granted, the points raised above are the worst cases and of course, you would have to be found liable or guilty of the case brought against you or the company, but there are some protections you can put in place, and no NED worth their salt will ignore these risks.
The number one protection is a contract for services and this isn’t just an appointment letter. It’s much more comprehensive and should contain some of the following key elements:
- The right to access external advice about issues concerning your board role and that such advice will be paid for by the company.
- The right to take your board papers and minutes with you if you wish to leave the company to use to defend yourself should that become necessary.
- The right that the company secures and maintains directors and officers liability insurance with what’s called a ‘run-off clause’ i.e. the fact that you can still access the benefits of this policy post-resignation.
- Details of the expectations of the role as a NED.
- Exit rights related to notice and notice procedure for both parties.
- Remuneration structure and revision rights.
- If you have shares or share options, how are these treated on exit?
- Director development opportunities.
- Details of any conflict restrictions now or in the future.
- Any other benefits attached to the role.
Whilst these are only some elements, they are some of the more important ones and shouldn’t be overlooked as they protect both parties and prevent confusion.
If you proceed without a contract for services you could be risking matters accelerating to lawyers and that often means substantial costs at best, and at worst courtroom appearances and more.
Don’t forget a contract is a negotiation and as such is better done between two willing parties at the start of the process. Once signed though it becomes a legally binding document, so it would be recommended to seek external advice before final commitment.
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