On 30 May 2014 the Loan Market Association (LMA) published a notice on the application of competition law to syndicated loan arrangements.1
This follows the recent changes to the UK competition law regime introduced by the Enterprise and Regulatory Reform Act 2013 which came into force on 1 April 2014.2 The notice serves as a reminder to LMA members that multi-bank dealings in syndicated loans are not exempt from competition law.
The LMA recommends that lenders put in place compliance procedures to limit the risk of competition law infringement – in particular given the enhanced risk of criminal sanctions resulting from the recent strengthening of the cartel offence.3
Nature of competition law concerns
Syndication carries inherent competition law risk as it requires at least some degree of contact between competitors. The key competition law concern is that syndication could result in an exchange of competitively sensitive information between lenders, potentially leading to the co-ordination of their behaviour on the market in a way which could be considered anti-competitive.
The most obvious form of illegal information exchange is the exchange of commercially sensitive information directly with a competitor. However, information exchange that takes place indirectly through a third party (such as the facility agent) can also amount to a breach of competition law.
Competition law is typically most concerned with the exchange of commercially sensitive price information but the exchange of cost information (which might allow a company to infer competitors’ price levels) and other confidential information can also breach competition law.
In addition, the regular concerns around price fixing and market sharing/bid rigging apply to participants in syndicated loans and it is important that staff receive appropriate training to allow them to identify and prevent potential competition law breaches.
Areas of potential risk identified by the LMA
The LMA has identified five practices that could give rise to concerns, where companies are advised to exercise particular caution:
- taking general market soundings;
- the bidding phase – companies are advised to ensure there is no inappropriate contact between competing origination desks that may raise the possibility of the unacceptable exchange of competitively sensitive information, price fixing or market manipulation;
- dealing with the receipt of unsolicited competitive sensitive information;
- interaction between members of a syndicate related to the establishment or flexing of terms; and
- contact between banks in the context of refinancing or distressed arrangements.
Recommended compliance procedures
Given the heightened competition law risk that companies that participate in syndicated loans are exposed to, we recommend that: (i) procedures are put in place to limit the risk of competition law infringement; and (ii) tailored competition law training is rolled out to all staff that might potentially be in contact with competitors.
In particular, where possible, we recommend that the following steps are adopted in syndicated loan negotiations:
- As suggested by the LMA, before entering into negotiations with other lenders, a lender should seek and record the consent of the borrower to contact with competitors.
- All commercially sensitive communications between syndicate members, whether direct or indirect, should be considered from a competition law perspective and advice sought if required. In particular, the parties should consider whether (i) the communication is really necessary; and (ii) the information could be shared in a way that minimises any potential competition law concern.
- Appropriate procedures should be put in place to ensure that the information that the facility agent receives in its role as agent is not passed to other areas of the bank where it might be used to formulate future strategy.
- Under no circumstances should a lender discuss prices or future commercial strategy with competing lenders.
The consequences of getting it wrong
The consequences of breaching competition law are serious. They include:
- Financial consequences for the company – including: (i) fines of up to 10 per cent of turnover; (ii) liability to compensate victims of anti-competitive conduct for the loss caused by that conduct; and (iii) any anti-competitive agreement being void and unenforceable.
- Personal consequences for the individuals involved including: (i) disqualification from acting as a director; and (ii) criminal sanctions which could include fines or imprisonment.
- Significant legal cost and management time, as well as reputational damage caused by negative publicity.
Further, as noted above, following the competition law reforms that entered into force in April, the criminal cartel offence has become tougher. The authorities no longer need to establish “dishonesty”, but mere participation in a “hardcore” anti-competitive agreement such as price fixing or market sharing. We expect these changes to give rise to an increase in the number of criminal prosecutions. However, it will be a defence to criminal prosecution if the customer has been informed of any arrangement, and it is for this reason that it is particularly important that the consent of the borrower is sought before any contact takes place between competitors.
In addition, potential criminal consequences are not limited to the UK. In the event that anti-competitive conduct has an effect on other markets – such as the USA – an individual could be liable to criminal investigation in those markets and potentially be extradited to that jurisdiction.