Appointing a managing director is a crucial decision for any company. The managing director occupies an executive position on the board and often takes on the most senior leadership role. They make major management and business decisions that can profoundly impact the company’s performance and direction.
Given the significance of the managing director role, it is important to have properly drafted appointment documents in place. These documents clearly define the terms, powers, responsibilities and other particulars regarding the managing director’s appointment. Ambiguous or erroneous appointment documents can lead to corporate governance issues and disputes down the road.
In this article, we provide a step-by-step guide to drafting comprehensive appointment documents for managing directors.
Key Appointment Documents
The three main documents involved in appointing a managing director are:
- Letter of Appointment – This letter formally offers the managing director position to the chosen candidate. It summarizes the key terms of appointment that will be included in the service agreement.
- Service Agreement – This is a detailed contract between the managing director and the company. It sets out the complete terms and conditions such as duties, remuneration, powers, performance criteria and termination clauses.
- Board Resolution – The company’s board of directors pass a resolution to officially appoint the managing director. This document is filed with regulatory authorities.
Research the Role and Responsibilities
Before drafting the appointment documents, thoroughly research the precise roles and responsibilities expected of the managing director. The managing director’s duties should be clearly outlined in the company’s Articles of Association. Some key responsibilities include:
- Overseeing daily operations and making major company decisions.
- Developing business strategies and plans with the board of directors.
- Leading and building the company’s management team.
- Liaising with stakeholders and acting as company spokesperson.
- Ensuring statutory compliance and good corporate governance.
- Reporting to the board of directors and implementing their decisions.
The service agreement should have a detailed job description that sets clear expectations for the managing director and avoids confusion down the line.
Define the Powers of the Managing Director
In addition to roles, the managing director’s powers need to be well-defined in the service agreement. This includes powers to:
- Enter into contracts and make binding commitments on behalf of the company.
- Hire and dismiss employees according to the company’s HR policies.
- Open, operate and close company financial accounts.
- Execute legal documents in the company’s name.
The service agreement should note any variations or limits to these powers. For instance, contracts above a certain monetary threshold may require board approval. Defining the powers upfront prevents misuse or overstepping of authority.
Set the Remuneration and Benefits
The compensation package is a key part of the managing director’s appointment terms. The service agreement should define all monetary and non-monetary components of remuneration such as:
- Base salary.
- Performance-linked bonuses and/or commissions.
- Health, life and disability insurance.
- Retirement benefits and pension plans.
- Stock options and equity incentives.
- Expense reimbursements.
- Leave and vacation policies.
Research current market rates and company finances when setting the remuneration. The package should be attractive enough to retain a talented managing director.
Draft the Letter of Appointment
The letter of appointment is prepared first and it should cover:
- Identity of the company and proposed managing director.
- Offer of the managing director position.
- Commencement date, term and probation period if any.
- Brief overview of duties and remuneration.
- Request to the proposed appointee to accept the offer by returning a signed copy.
This letter should be brief as it precedes the detailed service agreement. It can be useful to engage a lawyer to review the letter of appointment.
Prepare the Service Agreement
The service agreement contains all information about the managing director’s appointment. In addition to points already covered above, it should also include:
- Commencement date and term of the appointment.
- Process for renewal of the term.
- Probation period clauses.
- Notice period and termination conditions for both parties.
- Post-employment restrictive covenants.
- Confidentiality clauses.
- Shareholding and ownership conditions if any.
- Dispute resolution mechanisms.
Lawyers should thoroughly review the service agreement before finalizing to minimize legal risks.
Pass Board Resolution
Once the candidate accepts the offer and returns a signed copy of the letter of appointment, the company’s board should pass a resolution. The resolution documents the board’s approval to officially appoint the named individual as managing director with effect from the agreed commencement date.
File Documents with Authorities
The company must file certain appointment documents with regulatory authorities within the stipulated timelines. This includes filing the board resolution with the Registrar of Companies. The appointment only takes effect once the required filings are completed.
Keep Documents Updated
It is prudent governance for companies to review and update the managing director’s appointment documents periodically. This allows the terms to be revised in light of changing company policies, industry standards and regulations.
Properly drafted appointment documents that precisely define the managing director’s role, powers, remuneration and other conditions are essential for optimal corporate governance. Following the best practices and step-by-step process outlined in this article will enable your company to put sound appointment documents in place. With clear expectations set from the outset, your company can avoid many pitfalls down the road.
Here is a sample template for a letter of appointment for a managing director:
Date: [Insert date]
[Managing Director Name]
Dear [Managing Director Name]:
Appointment as Managing Director
I am pleased to offer you appointment as Managing Director of [Company Name] on the following terms, subject to approval by the Board of Directors:
Commencement Date: Your appointment will commence on [date].
Term: Your appointment as Managing Director is for an initial term of [number] years unless terminated earlier as per the provisions of the Service Agreement.
Role & Responsibilities: As Managing Director, you will undertake the roles and responsibilities outlined in the attached Service Agreement. This includes but is not limited to overseeing company operations, implementing business plans, hiring and managing staff, financial planning and statutory compliance.
Remuneration: You will be entitled to an annual remuneration of [amount and currency] inclusive of salary, bonus and other benefits as detailed in the Service Agreement.
Service Agreement: The key terms set out in this Letter are subject to a formal Service Agreement to be signed between you and the Company. This comprehensive agreement will include further details on your duties, powers, remuneration components and other terms and conditions of your appointment.
Shareholding Requirement: You [will/will not] be required to hold [number] shares of the Company within [time period] of commencement of your appointment. [Optional clause]
Acceptance of Offer: We request you to confirm acceptance of these terms by signing and returning the enclosed copy of this letter.
We are excited at the prospect of your leadership taking the company forward. Please do not hesitate to contact me if you need any clarification. We look forward to having you onboard.
For [Company Name]
Encl: Draft Service Agreement
I, [Managing Director Name], hereby accept the terms set forth in this letter and the attached Service Agreement regarding my appointment as Managing Director of [Company Name].