The Office of Fair Trading has recently published guidance for directors of businesses regarding their responsibilities under competition law. The purpose of the guidance is to inform directors about the level of understanding they are required to have in order to prevent their companies from infringing competition law.
Consequences of Infringement
Competition law infringement can have several adverse consequences including:
- Financial penalties
- Director Disqualification Orders
- Criminal convictions for those involved in a cartel (a non-compete agreement between two or more businesses)
- Unenforceability of restrictions in agreements that infringe competition law.
- Potential legal proceedings being brought by those who have been harmed as a result of the infringement.
It is therefore important for directors to be aware of their position in relation to competition law and any potential infringement.
By virtue of section 9A of the Company Directors Disqualification Act 1986, regulators including the OFT have the power to apply to the court for an order disqualifying a director from being involved in the management of a company for up to 15 years. The use of the word ‘company’ in this context encompasses unregistered companies as well as limited liability partnerships and so its scope is wide. The risk of a Competition Disqualification Order being made against a director is likely in itself to cause a director to be more wary of the individual consequences infringement can have. The guidance explains that “directors have a direct individual incentive to be committed to ensuring that their company has an effective competition law compliance culture”.
A director, however, will only face disqualification if the following two criteria are met:
- there is a breach of competition law, and
- a court considers that his or her conduct in connection with the infringement makes him or her unfit to be concerned in the management of a company.
Competition Law Risks
Although the OFT does not expect that all directors should have specific expertise in competition law, it does expect them to understand the most serious forms of infringement of competition law. For example, the existence of cartels agreeing to fix prices, engaging in bid-rigging, limiting supply, along with sharing customers or markets constitute serious breaches of competition law.
The guidance also assists by describing other key competition law risks for directors to look out for. These include contracts with exclusivity provisions of five years or more, intellectual property licensing agreements with exclusivity provisions, agreements between a company and its customers relating to reselling terms, and agreements involving standardisation, joint selling/purchasing, and collaboration with competitors.
Detection and Prevention of Infringement
The OFT distinguishes between the responsibilities of an executive and a non-executive director. Executive directors are expected to have more detailed knowledge of the day to day running of a company. Non-executive directors are expected to challenge the decisions and actions of the executive directors – this includes ensuring appropriate compliance measures are in place to prevent and detect competition law infringement and asking certain questions to assure themselves of compliance. However, it states that “the core requirement to achieving competition law compliance within an organisation is a clear and unambiguous commitment from all directors (and across all levels of management) to competition law compliance”.
With significant penalties that have been imposed on companies historically as a result of competition law infringement and the increasing need to make individuals accountable through disqualification orders and criminal convictions, it is now most important that directors understand their responsibilities in this area of law to avoid such consequences.
If you would like more information on this topic or an initial discussion with no obligation please call Paul Haycock on 0114 274 4275.