Directors' Service Agreements in Hong Kong: A Legal Guide

What Is a Directors' Service Agreement?

A directors' service agreement (DSA) is a contract between a company and an executive director that governs the terms and conditions of the director's appointment and service. It covers matters such as remuneration, duties, scope of authority, termination rights, post-termination restrictions, and benefits.

Unlike non-executive directors, who are typically appointed under a letter of appointment on a more limited basis, executive directors are employees of the company as well as directors, and their relationship with the company is governed by both company law and employment law. A well-drafted DSA provides clarity for both parties and reduces the risk of disputes.

Why DSAs Matter for Hong Kong Companies

The Companies Ordinance (Cap. 622) and common law impose duties on all directors, but they say relatively little about the commercial terms of a director's service. Without a DSA, the terms of an executive director's service may be implied by common law or the company's articles of association, creating uncertainty. A DSA gives the company and the director a clear contractual foundation for their relationship.

For listed companies, the Securities and Futures Commission (SFC) and Hong Kong Exchanges and Clearing Limited (HKEX) impose specific requirements on the service agreements of executive directors, including disclosure obligations and limitations on the length of fixed-term appointments.

Key Provisions of a Directors' Service Agreement

Term and Appointment: The DSA should specify the commencement date and, where applicable, the duration of the appointment. The Companies Ordinance requires that any service agreement under which a director is to serve for a period of more than three years must be approved by shareholders in general meeting. This is a mandatory statutory provision that cannot be overridden by the parties.

Role and Responsibilities: The DSA should define the director's title, reporting line, and scope of authority. It should also set out whether the director is required to devote their full time and attention to the company or may hold other directorships.

Remuneration: The DSA specifies the director's basic salary, bonus arrangements (including performance criteria, targets, and caps), and benefits such as share option entitlements, pension contributions, health insurance, and car allowances. For listed companies, the remuneration package must be disclosed in the annual report.

Termination: The DSA should set out the notice period required by each party to terminate the agreement, and the grounds on which the company may terminate without notice (summary dismissal) in the event of gross misconduct or material breach. The notice period and severance terms must comply with the Employment Ordinance (Cap. 57), which provides minimum standards for notice and severance pay for employees.

Garden Leave: During the notice period, the company may elect to place the director on garden leave — requiring the director to remain at home, away from the business, while continuing to receive salary and benefits. Garden leave is a useful tool to protect the company's confidential information and client relationships during the transition period.

Post-Termination Restrictions: Non-compete, non-solicitation, and non-dealing clauses restrict the director from competing with or soliciting the company's clients and employees after termination. Under Hong Kong law, post-termination restrictions are enforceable only to the extent they are reasonable as to duration, geographic scope, and the activities restricted. Courts will not enforce restrictions that are wider than necessary to protect the company's legitimate business interests.

Confidentiality: The DSA should impose express confidentiality obligations on the director both during and after the term of service, covering trade secrets, client information, financial data, and strategic plans. Confidentiality obligations survive termination and may be enforced by injunction.

Intellectual Property: Where the director creates intellectual property in the course of their duties, the DSA should address ownership (which will typically vest in the company) and the director's obligation to execute any documents required to give effect to the assignment.

Statutory Protections Under the Employment Ordinance

Executive directors who are also employees are entitled to the protections of the Employment Ordinance. These include minimum notice periods, severance pay entitlements, long service payment, and protection from unreasonable dismissal. The DSA cannot contract out of these statutory minimums, and any provision that purports to do so is void.

HKEX Listing Rules Requirements

For directors of listed companies, HKEX Listing Rules require that executive directors' service contracts with a term exceeding three years be approved by shareholders, and that material terms be disclosed in the annual report. The remuneration committee of a listed company is responsible for recommending the director's remuneration package to the board.

How Alan Wong LLP Can Help

Alan Wong LLP advises companies and individual directors on the drafting and negotiation of directors' service agreements in Hong Kong. We ensure that agreements comply with the Companies Ordinance, Employment Ordinance, and applicable listing rules, and that post-termination restrictions are appropriately tailored to protect the company's interests without being unenforceable. Contact us for practical, experienced advice on directors' service agreements for your business.