Director's Contracts: Everything You Need to Know — and What Happens on a Sale

Whether you're hiring a new director — or you're the owner and director of your own company — a proper director's contract is one of the most important documents to have in place when selling a business. That's because of a legal detail many only discover when it's too late: a director isn't protected by the same rules as an ordinary employee under Danish law.

Why doesn't the Salaried Employees Act apply to a director?

A genuine director — meaning the person registered with the Danish Business Authority as the company's director, who genuinely holds overall, independent management authority — isn't considered an ordinary employee in the sense of the law. The director is largely regarded as part of the "employer side", not as an employee needing the law's protection. That means neither the Salaried Employees Act, the Holiday Act, nor the Act on Employment Certificates apply to the director the way they do for the business's other employees.

The consequence: no contract, no protection

Because the Salaried Employees Act doesn't step in as a safety net, generally nothing applies between the parties on points not explicitly regulated in the director's contract. If no notice period is agreed, there's in practice no clear statutory notice to fall back on. If bonus arrangements aren't described, there's no automatic right to them. This reversed burden — where a missing agreement means a missing right, rather than a statutory minimum protection — is the main reason a director's contract should be thoroughly drafted and reviewed by someone who knows the area.

What should a director's contract include, at a minimum?

• Start date and title: When the employment starts, and what formal role and authority the director has.
• Salary and benefits: Base salary, any company car, phone, health insurance and other benefits.
• Bonus and incentive schemes: How any bonus is calculated, when it's paid, and what happens to accrued but not yet paid bonus on departure.
• Holiday: Since the Holiday Act doesn't apply automatically, holiday terms — number of days, pay and scheduling — should be written directly into the contract.
• Notice periods: The notice for both parties should be stated explicitly — the director's notice is often negotiated to be longer than for ordinary employees, precisely because there's no statutory floor to lean on.
• Garden leave: Whether and how the company can place the director on garden leave during the notice period, and whether that triggers an offset against other income.
• Non-compete and non-solicitation clauses: See the separate section below — the rules for directors differ significantly from the rules for ordinary employees.
• Confidentiality: Should apply both during and after employment, independent of any non-compete clause.
• Ownership of intellectual property: Who owns inventions, concepts or anything else the director develops as part of their role.
• Severance pay: Whether severance pay is triggered on departure — including specifically on a change of ownership, see below.

Non-compete clauses for directors: a completely separate set of rules

Ordinary employees' non-compete and non-solicitation clauses are regulated by Danish employment clause legislation, which, among other things, requires compensation and sets a maximum duration. This legislation generally doesn't apply to managing directors — with one important exception: the rules on when a non-compete clause can be invoked on departure also apply to directors. Outside that exception, there's far greater freedom of contract around a director's non-compete clause than around an ordinary employee's — including no general statutory requirement for compensation. That makes it even more important to negotiate the clause's scope, duration and any compensation, and write it precisely into the contract, rather than relying on the law's general protection, which simply doesn't apply here.

The director's contract when selling a business: this is where complications arise

This is where many are caught off guard: the Business Transfer Act, which otherwise automatically protects ordinary employees' terms on a change of ownership, generally doesn't apply to directors. A director therefore has no statutory right to automatically continue in their role if the business is sold — and the new owner isn't automatically bound by the terms the previous owner agreed, unless it's written directly into the director's contract or agreed separately as part of the deal.

What should you address before a sale?

• A "change of control" clause: A provision explicitly regulating what happens to the director's employment on a change of ownership — including whether it in itself gives the director the right to resign on short notice, or triggers severance pay.
• Severance pay on a change of ownership: Without such an agreement, the director has no automatic right to compensation if the new owner wants to install their own management after the takeover.
• Bonus and options during the deal: Clarify what happens to accrued but unpaid bonus, or any option schemes, if the deal is completed mid-vesting-period.
• The non-compete clause's continued validity: If the director is also the seller of the business, it needs to be clarified how an existing non-compete clause in the director's contract interacts with the non-compete restriction typically agreed as part of the purchase agreement itself — the two shouldn't contradict each other.
• Due diligence risk: A buyer will thoroughly review all director's contracts during due diligence — unclear or incomplete terms here are one of the things that most often creates uncertainty or gives grounds to negotiate the price down.

Can the director continue in the business after a transfer?

Yes, that's certainly possible — but it doesn't happen automatically, and should be explicitly agreed as part of the deal. In many small and medium-sized business deals, the buyer specifically wants the current director — often the former owner — to stay for a transition period to ensure a smooth handover of customer relationships and operational knowledge. This should be formalized in a new or updated director's contract or a temporary consulting agreement clearly setting out duration, pay, responsibilities and termination terms for that specific transition period — not left to a verbal understanding between the parties.

What if the parties instead want to end the director relationship at the sale?

If the buyer instead wants to install their own management immediately after the takeover, it should be handled through a severance agreement clarifying:

• Departure date and any garden leave during a notice period
• Payment of any severance, as agreed in the director's contract or negotiated separately in connection with the deal
• Settlement of accrued but untaken holiday, and any bonus
• Confirmation that non-compete and non-solicitation clauses remain in effect, and to what extent they're supplemented by the non-compete restriction that applies to a selling owner
• Confidentiality obligations that continue after departure

If the director is also the business's selling owner, many of these points typically go directly into the purchase agreement instead of a separate severance agreement — but the content should be addressed just as thoroughly.

Why is it important to get this in order long before a sale process starts?

Incomplete or unclear director's contracts are something a buyer typically discovers during due diligence — and ambiguity here can either delay the deal or give grounds to negotiate the price down, because the buyer needs to price in a risk of unexpected severance costs. Get the director's contract reviewed as part of your general sale preparation, well before entering dialogue with a potential buyer.

Frequently asked questions

Does a director automatically have the right to continue if the business is sold?

No. The Business Transfer Act, which protects ordinary employees' terms on a sale, doesn't apply to directors. Any continuation needs to be specifically agreed between the parties.

Does a director need compensation for a non-compete clause, like ordinary employees?

No, not as a statutory requirement. Employment clause legislation doesn't apply to managing directors, except for the rules on when the clause can be invoked on departure. It's therefore up to the specific agreement whether compensation is agreed.

What happens if we don't have a director's contract at all?

Then generally nothing applies on points not agreed elsewhere — neither notice period, bonus, nor other terms. That leaves both parties vulnerable, particularly if disagreement later arises or a sale process becomes relevant.

Can the director's contract be updated once we're already in a sale process?

Yes, but it's easier to agree on changes before a specific buyer and price are on the table. If you're already in process, the ambiguities should be clarified as quickly as possible regardless, ideally with an advisor.

Need a director's contract drafted or reviewed, or unsure what happens to it on an upcoming sale? Book a no-obligation call, or read more about what a purchase agreement should generally include.