Given the difficulties that prosecuting authorities have with regards to trying to stamp out anti-competitive practices and cartel activity, it is perhaps unsurprising that the UK’s consumer watchdog wants to equip its armoury with something more threatening than punitive fines and even jail times. The Office of Fair Trading (OFT) has announced that it is considering widening its use of competition disqualification orders (CDOs) against company directors in an effort to crack down more effectively on anti-competitive practices.
Currently, company directors are only likely to face disqualification for breach of competition law if they are found to have personal responsibility for their companies’ contravention of the competition rules. However, the OFT wants to change this approach – and it does not require any change in existing law to do so. The court’s powers already exist under the amended Company Directors Disqualification Act 1986 but they have simply not been used before. Lawyers say that such a move will stop directors from “turning a blind eye” to anti-competitive practices.
CDOs were introduced by the Enterprise Act 2002 to promote compliance with antitrust law by providing sanctions for the individuals responsible. On the application of the OFT or a sector regulator the court can disqualify a company director for up to 15 years if the company has breached competition law (through price fixing or cartel offences, for example) and the court considers the director unfit to be involved in the management of a company as a result.
But the OFT thinks that this approach has not worked and on the back of research which it commissioned in 2007, it believes that sanctions should also be taken against directors where they “ought to have known of” or “should have taken steps to prevent” a breach of antitrust law, even if they were not personally involved in the breach. The OFT is also considering – in exceptional circumstances – using disqualification orders where no breach of competition law has been proven or where no financial penalty has been imposed.
Added to that, the OFT wants to extend its discretion to apply for disqualification orders to cases where a company has benefited from the lower levels of its leniency regime, typically “type c” leniency where the applicant is not the first to bring the cartel to the attention of the OFT but which later co-operates with the investigation. This has been used to controversial effect in cases such as the £121.5m fine against British Airways in August 2007 after the airline admitted collusion in fixing the prices of fuel surcharges, while giving a “no-action letter” – essentially a pardon in exchange for information to encourage companies to inform on fellow operators – to Virgin Atlantic, which had colluded in the price-fixing arrangement on six occasions before blowing the whistle.
More OFTen than not
Presently, the OFT will not apply for the disqualification of a current director of a company which has benefited from any form of leniency. This is because it wants to encourage companies to come forward with information in exchange for leniency for their role in the unfair practice. As the OFT still wants to encourage the early offering of information on cartels, it has said that it would not seek disqualification orders against first whistle-blowers or in other cases where a company has qualified for the highest levels of leniency.
Launching the consultation in August, Ali Nikpay, the OFT’s senior director of policy, said: “We know that the prospect of being disqualified as a director is one of the most powerful deterrents to anti-competitive behaviour. Our proposals aim to increase the incentives on company directors to take responsibility for competition law compliance and tackle behaviour that harms competition.”
Lawyers believe that the OFT’s proposals are a strong inducement to make compliance a major boardroom issue. “These proposals are significant in that they increase the dangers for individuals in being involved in cartels, which the OFT hopes will feed through to corporate behaviour,” says Liz Fowler, competitions lawyer at City law firm CMS Cameron McKenna. “While there may be room for argument on the facts in individual cases about whether a director ‘ought to have known’, the OFT’s proposals will in any case up the ante in what is already a very stressful time for company directors. The proposals re-emphasise the need to know what is going on at all levels of your organisation and to make competition law compliance a company priority.”
Ros Kellaway, partner and head of competition at law firm Eversheds, says that “the OFT seems to have moved from zero to 100 mph on this subject”. “The OFT has never used its powers of director disqualification under the old guidelines but its lack of experience hasn’t stopped it from producing a very aggressive new set of proposals which make it far more likely that disqualification will become a real possibility.”
Lawyers agree that the OFT wants to have a greater range of threats than just levying fines. “The OFT has noticed that fines don’t seem to act as a deterrent,” says Stephen Hornsby, specialist competition lawyer at solicitors Davenport Lyons. “Some industries are characterised by recidivism and it is innocent shareholders who pay the fine,” he adds. “In addition, in some cases, the workforce may be affected. It is natural, therefore, to focus on other means of securing compliance and in this context widening the circumstances in which directors can be disqualified is understandable.”
Nicole Kar, competition partner at Linklaters, says that the proposals are significant in that they indicate a much tougher stance toward directors of companies involved in cartel conduct. She warns that “the consultation period should be viewed by directors as a notice period within which to have their companies’ compliance and early detection systems put in order as increased enforcement activity against directors of companies breaching competition law seems an inevitability of the OFT’s current proposals.”
In the hot seat
The ramifications of the proposals for companies are likely to be twofold, says Kar. Firstly, companies should expect greater challenge from directors about their compliance efforts and may find that directors require as a matter of policy that they are provided with audit reports and receive early warning of competition law concerns. “The proposals will prompt directors to make inquiries of the companies they are involved with in terms of their compliance programmes, training and early detection systems, such as whistleblower hotlines, and spot audits,” she says. Typical hot-spot areas that will need increased director scrutiny include the sales and marketing divisions which tend to be at higher risk of cartel conduct than other divisions with little or no interaction with competitors or customers, such as finance and IT, she says.
Secondly, says Kar, companies should expect that the divide between corporate and individual interests will widen further as a result of the measures, which form the most recent part of a package of proposals adopted by the OFT to strengthen the deterrence effect of competition law. Another significant measure from the corporate perspective in this vein are amendments to the OFT’s leniency policy which prevent a corporate from securing immunity where a director or employee was the first to blow the whistle on a cartel.
Kar also believes that seniority of directors is also likely to be a factor in terms of how culpable they may be regarded if a prosecution should take place. In December 2007 the OFT charged three businessmen with dishonestly participating in a cartel to allocate markets and customers, restrict supplies, fix prices and rig bids for the supply of marine hoses and ancillary equipment in the UK over a four-year period. However, the County Court judge was significantly influenced in his sentencing of one of the Dunlop executives by the fact that he was managing director. The judge stated that “even though you may not have been as deeply involved as [the other Dunlop defendant] in the everyday workings of the cartel, I have no doubt that your responsibility in the dishonest management of your company was greater than his”.
Yet despite the potential benefits of “beefing up” the OFT’s ability to threaten directors into compliance, the regulator’s proposals are not without significant problems. Crucially, there is no concrete guidance provided to directors of the circumstances in which the OFT would seek a director disqualification order in cases where the OFT believes a director “ought” to have known of cartel conduct but had no actual knowledge. Cartel conduct is by its nature covert and the individuals involved (often rogue employees) may go to great lengths to conceal it. As a result, directors will be judged – with the benefit of hindsight – about whether facts were such that they should have known that the company was involved in a cartel with its competitors.
This issue is exacerbated by lack of precedent. Despite its apparent current tougher enforcement stance, the OFT has not, in practice, sought an order for a director’s disqualification for breach of competition law since the Act was amended to provide for a competition disqualification order in 2003. As a result, says Kar, there is no precedent to inform a director of the appropriate standard of due process which he or she is meant to attain, and that, she says, is “very unsatisfactory in circumstances where a director’s employment and career prospects may be seriously jeopardised”.
Lawyers also point out that the OFT’s proposals may “cloud” the way that a director reacts when faced with the prospect of an OFT investigation. As directors can now be made personally liable for anti-competitive practices taking place in their organisations – with or without their knowledge or consent – they may act in their own interests to seek leniency for themselves, rather than act in the best interests of the company. For example, as Kar points out, a corporate decision to seek leniency is often a difficult one, involving fine judgments as to the sufficiency of the evidence available (and whether further investigation is required before any approach to a regulator should be made) and the financial and reputational impacts on the corporate both of the conduct discovered and of a leniency application. If the OFT gets its way, however, “a director is obliged to act in the best interests of his or her company but will now have significant considerations of personal liability to factor into any ‘corporate’ decision to seek leniency,” she warns.
While lawyers are agreed that tougher enforcement against anti-competitive practices may be welcome, they can also see the potential pitfalls. Some are worried that the proposals could cause more harm than good. As Kellaway at Eversheds points out: “The new guidelines are said to reflect the need to deter individuals and not just to punish shareholders through fines, but this seems to ignore the fact that depriving a company of its experienced directors will unquestionably punish shareholders – in the case of smaller companies possibly even more than any fine. The new approach will also fall exceptionally harshly on smaller businesses where directors are inevitably more hands on. And yet those businesses often have less access to advice in an area of law which is specialised and complex.”
How directors and companies can protect themselves
Directors and companies can best protect themselves by taking measures to prevent and detect competition law breaches. The former could include instituting a competition compliance programme and training “higher risk” divisions of the company, such as sales, purchasing and marketing teams. Companies will also need to seriously consider employing a compliance officer or setting up a compliance hotline (with, for example, external lawyers) to answer practical questions about the permissibility of conduct, as well as requiring employees to sign annual competition compliance certifications, seek consent before attending trade association meetings (a fertile source of anti-trust breaches) and to file reports on meetings with competitors. Other measures aimed at detecting competition law breaches could include establishing a whistleblower hotline, as well as conducting spot competition audits of “higher risk” divisions or individuals.
The global scene
The UK is not the only country to consider revising its regulations on anti-competitive practices. A number of jurisdictions have recently introduced or are in the process of considering the introduction of director disqualification in relation to competition law breaches, or more specifically, cartel conduct.
For example, provisions permitting director disqualification were introduced in Sweden’s new Competition Act which came into force on 1 November 2008, and in 2007 amendments to Russia’s Code on Administrative Violations were made. Similar provisions already exist in Australia under the country’s Trade Practices Act.
Director disqualification is being considered in relation to proposed competition legislation in Hong Kong, and a number of jurisdictions including the US, Canada, and South Africa, provide for director disqualification under company law as a result of an individual being sentenced to imprisonment. According to Robert Heym, partner in the Munich office of Reed Smith, in Germany “a director can be recalled at any time from his position by the shareholders or a supervisory board of a stock corporation if the corporate body is of the opinion that a director has violated the law and caused a material damage for the company.”
However, some countries have had their efforts to introduce more stringent rules against directors rebuffed. In Hungary, for example, provisions intended to provide for two year occupational bans of executives working for enterprises found to have been involved in cartels were declared unconstitutional. This was because their proposed
implementation did not provide sufficient protections for the individuals’ rights of defence.
