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United Kingdom Office of Fair Trading Discussion Paper on wider use of director disqualification orders in competition law case

​On 18 August 2009, the United Kingdom Office of Fair Trading (“OFT”) released proposed changes to its guidance on director disqualification orders in competition law cases. Currently, a company director can be disqualified from acting as a director for up to 15 years if their company is involved in a contravention of competition law and a Court finds they are unfit to be involved in the management of a company as a result [1].

The OFT’s current guidance indicates that it will focus on seeking such disqualification when a director is actively involved in the contravention of competition law, e.g. cartel activity.

Under the proposed changes, the OFT or sector specific regulators would also focus on cases where a director should have taken steps to prevent a breach, or where a director ought to have known of a breach but did not.

Ali Nikpay, OFT Senior Director of Policy stated:

“We know that the prospect of being disqualified as a director is one of the most powerful deterrents to anticompetitive behaviour. Our proposals aim to increase the incentives on company directors to take responsibility for competition law compliance and tackle behaviour that harms competition.”

The UK OFT’s consultation period runs to 20 November 2009.

Background

In the UK, Competition Disqualification Orders (CDO) are intended to provide incentives on individuals to comply with competition laws. CDOs complement the OFT and sectoral regulators’ competition law enforcement powers, which are primarily targeted at companies and their shareholders, as opposed to the individuals responsible for a contravention.

The OFT does not believe that the current guidance maximises the deterrent effect of CDOs, as it focuses on situations where a director is actively or directly involved in a breach of competition law. The proposed new guidance favours the OFT or sectoral regulators seeking CDOs in cases where they think that a director is unfit to be concerned in the management of a company, whether or not his conduct directly contributed to the breach of competition law. In other words, the OFT proposes that it will seek to hold directors to account for failing to monitor competition law compliance or prevent breaches, as well as for actively contributing to competition law breaches.

Key Proposals

The OFT is proposing four principal changes to the existing guidance:

1. Whether the director’s company has breached competition law - the OFT proposes a limited change to its existing guidance that it will apply for CDOs only where the relevant breach of competition law has been proved in a decision or judgment which is not subject to appeal. In “exceptional cases” (such as in the case of companies that have been liquidated), the OFT considers that it may be appropriate for CDOs to be sought where the breach of competition law has not been established in a decision or judgment

2. Whether a financial penalty has been imposed for the breach - in accordance with the OFT’s proposed changes to the guidance in relation to cases that have not been proven in a decision or judgment, the new proposed new guidance will allow the OFT to apply for a CDO where no financial penalty has been imposed, or the amount is subject to appeal

3. Whether leniency has been sought - the existing guidance states that the OFT will not seek a CDO for a current director of a company which has benefitted from leniency in relation to the breach of competition law. The OFT proposes a change whereby it may seek a CDO in respect of a director whose company has benefitted from Type C leniency in the UK, or a reduced fine under section III of the European Commission’s Notice on Immunity [2]. Similarly, the OFT is seeking responses on whether directors who have resigned from their positions as a result of their responsibility for the breach of competition law should be subject to CDOs, even where the company has benefitted from leniency. The OFT has expressly acknowledged the importance of the impact of its proposed approach on companies’ incentives to apply for leniency; and

4. Whether the director is responsible - the OFT proposes a fundamental change in approach to the application of CDOs in circumstances where a director is both active in the breach of competition law, and where the director improperly failed to take corrective action against the breach, or “failed to keep himself informed of the company’s activities which constituted the breach of competition law”. In proposing this change, the OFT is conscious of the need to ensure that CDOs operate as an effective deterrent for directors of large and small companies, and to permit case by case assessment of the suitability of CDOs.

Conclusion

The proposed changes are wide ranging and have serious implications for the manner in which the OFT and sectoral regulators may be expected to approach CDOs. A key impact of the proposed new guidance will be on companies’ approach to leniency applications and the introduction of positive obligations on directors to monitor compliance with companies’ competition law obligations.

Additionally, the proposed new guidance is aimed at introducing a positive obligation on directors to ensure compliance with competition law, including by not engaging, or facilitating the engagement, in cartels or abuse of dominance (misuse of market power) behaviour. In situations where a director takes positive steps which lead to a contravention of competition laws, the purpose of the CDOs are reasonable. However, there is a risk the proposed new guidance may create an unreasonably high onus on directors to have detailed knowledge of all facets of a company’s business, including operational areas traditionally reserved for management decisions. This positive obligation may be particularly onerous for non-executive directors.

The Consultation Paper recognises the inherent tensions in the proposed new guidance and states that:

While the OFT and Regulators do not expect that directors should have specific expertise in competition law, they do expect that all company directors should appreciate that competition law compliance is a crucial matter for their companies. Furthermore, the OFT and Regulators expect that every director of every company ought to know that price-fixing, market sharing and big-rigging agreements are likely to break competition law. However, the fact that a director is responsible for ensuring competition law compliance within a company will not itself expose that director to an increased risk of CDO proceedings should a breach of competition law occur, or create a presumption that the director ought to have known about any breach that occurs. The OFT and Regulators will also take into account the actions taken by such a director to create a compliance culture and to avoid breaches of competition law occurring.”

Accordingly, in seeking comments on its proposed new guidance, the OFT is aiming to publish updated guidance which will “encourage directors to take positive steps to uncover potentially anticompetitive behaviour or monitor their companies competition law compliance”.

The potential implications for Australia are in relation to the increased responsibility on directors to address and manage competition law issues proactively. Given the very recent criminalisation of cartel laws in Australia and the increase in penalties, it may be that the introduction of more rigorous compliance programmes is just prudent practice.

Endnotes

[1] Under the Directors Disqualification Act 1986, the OFT and certain sectoral regulators have the power to apply for CDOs in cases involving an infringement of the Chapter I and Chapter II prohibition of the Competition Act 1998, or Article 81 or Article 82 of the EU Treaty. These regulators are Ofcom, Ofgem, Ofwat, Office of Rail Regulation and the Civil Aviation Authority.

[2] There are three principal types of leniency in the UK. Type C leniency is the lowest tier, and is only available where the company is not the first applicant to an existing OFT investigation and the company provides significant added value to the OFT to assist with its investigation.

 

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