On 19 October 2010, the Office of Fair Trading ("OFT") published for consultation its proposed guidance for company directors in the UK on their duties under competition law. This guidance expands on the revised guidance on director disqualification which the OFT published on 29 June 2010, where the OFT indicated that it would apply for director disqualification not only where the director had been involved in a competition law breach but in circumstances where he "ought to have known" of the infringing activity and did not take reasonable steps to avoid it.
The consultation on directors' responsibilities coincides with the publication of draft guidance for consultation on "How your business can achieve compliance". This sets out the OFT's recommended risk-based, four-step approach for creating a culture of compliance within a business, and the practical compliance measures that businesses might be able to take.
The OFT's guidance on director disqualification
Under the Company Directors Disqualification Act 1986, a director can be disqualified from acting as a director for up to 15 years if his company is involved in a breach of competition law and the court considers he is unfit to be concerned in the management of the company as a result.
The OFT considered that the existing approach whereby directors were likely to face disqualification if they were found to have personal responsibility for the infringing activity needed to be revised so as to increase the incentives on company directors to take responsibility for competition law compliance.
The OFT does not limit the cases where it believes it appropriate to seek a disqualification to those who were directly involved in a competition law infringement. It will also consider disqualification orders:
- for a director who did not contribute to a competition law breach but who had reasonable grounds to suspect that the conduct of the undertaking constituted a breach of competition law and took no steps to prevent it, and
- for a director who did not know but ought to have known that the conduct of the undertaking constituted a breach.
In applying the tests above, the OFT notes:
- where a director's conduct contributed directly to a breach, for example where a director attended cartel meetings or exchanged commercially sensitive materials with a competitor, the OFT is likely to apply for a disqualification order against that director regardless of his role in the company
- while non-executive directors are not expected to have an intimate knowledge of the company's day-to-day activities, they are "expected to ask appropriate questions of the company's executives to ensure that appropriate compliance methods have been adopted to prevent and detect breaches of competition law"
- directors whose responsibilities include higher risk areas (for example, responsibility for sales or setting prices as opposed to personnel) are expected to take greater steps to prevent and detect breaches of competition law
- directors in smaller organisations are expected to be more aware of actual or potential breaches of competition law, because they are expected to have a more intimate knowledge of day-to-day activities
- directors of large organisations, while not expected to have intimate knowledge of day-to-day activities, are expected to take steps to ensure that there are appropriate systems in place to prevent and detect breaches of competition law
- all directors are expected to understand that compliance with competition law is important and that infringing competition law could lead to serious legal consequences. While the OFT does not expect all directors to have specific competition law expertise, it does expect all directors to understand the most serious forms of infringement (such as price-fixing, bid-rigging, market sharing, agreements to limit production, exchange of commercially sensitive information and resale price maintenance)
- where a director has overall responsibility for a business area, but not immediate management responsibility over the individuals directly involved in an infringement, the OFT will consider what evidence that director actually saw or was presented with, and what evidence that director ought to have seen having made reasonable enquiries. In considering what a director ought to have seen, the OFT will consider (i) whether the information was of the type that would usually be made available to a director in that position, and (ii) whether the information would have come to light if the company had effective compliance measures in place.
The OFT has maintained its commitment to use a variety of tools to incentivise compliance, as well as just levying hefty fines. The position stated in this draft guidance provides a stronger inducement to make competition law compliance a boardroom issue because it increases the risks for individuals not only of being involved in anti-competitive activity, but also of "turning a blind eye".
Despite many of the benefits in ramping up the enforcement against individuals, the OFT proposals raise a number of challenges.
- The OFT has not used its disqualification powers to date. In the 2008 marine hose cartel case, three individuals were disqualified from being company directors; one was disqualified for seven years and two others for five years each. However, these disqualifications did not result from the OFT seeking disqualification but from powers that were available to the court in any event. This increases the need for clear and realistic guidance on what is required of company directors, and the extent to which this differs depending on whether the director is more or less "hands on" in operation of the business.
- Making directors responsible for anti-competitive practices occurring with or without their knowledge raises wider corporate governance considerations. For example, directors may have incentives to act in their own self-interest rather than in the interests of the company. This has implications for the timing of seeking leniency where the individual and company interests may not be closely aligned.
In light of the lack of precedent and detailed guidance on the circumstances in which a director "ought to have been aware", the OFT's consultation on how the regime will operate in practice is to be welcomed. One issue is clear: directors, including non-executive directors, are facing increased competition law exposure. Companies also can expect increasing challenges to their commercial strategies from management which will require greater co-ordination between the competition, corporate governance and risk management functions than has existed previously.
Responses to the consultation are requested by 21 January 2011, and respondents are encouraged to review both the proposed guidance for company directors and the guidance on "How your business can achieve compliance" in this context. Both documents are available on the OFT's website.