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