OFT puts directors on notice

The Office of Fair Trading (OFT) is considering widening its use of competition disqualification orders (CDOs) in an effort to crack down 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 competition rules.

However, the OFT wants to change this approach and directors should be aware that the regulator 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 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 against the individuals responsible. On the application of the OFT (or another industry 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 this approach has not worked and on the back of research, which it commissioned in 2007, believes sanctions should also be taken against directors when 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.

Powerful deterrent
Launching the consultation in August, Ali Nikpay, the OFT’s senior director of policy, says: “We know 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 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 involved in cartels, which the OFT hopes will feed through to corporate behaviour,” says Liz Fowler, competition 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.”

Room for leniency
The OFT is also considering extending 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 later co-operates with the investigation. The OFT will not currently apply for the disqualification of a director of a company that 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 wants to encourage the early offering of information on cartels, it will not seek disqualification orders against first whistleblowers or in other cases where a company has qualified for the highest levels of leniency.

Ros Kellaway, partner and head of competition at law firm Eversheds, says, “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.”

However, Kellaway points out that the proposals may not achieve their stated aims. “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. Yet those businesses often have less access to advice in an area of law which is specialised and complex,” she says.

Stephen Hornsby, specialist competition lawyer at solicitor Davenport Lyons, says the significance of the proposals cannot be underestimated. “This extension of liability ­ almost vicarious ­ will undoubtedly cause alarm and as a result improve compliance, which is what the OFT is after,” he says.

“The OFT has noticed that fines don’t seem to act as a deterrent. 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.”

Useful links
Read the OFT’s consultation paper by clicking here
The full Code of Practice on Consultation can be found here
The consultation ends on 20 November 2009. The OFT will publish its final guidance as well as a summary of responses here