UK Competition Authority Publishes Guidance on Directors’ Disqualification
August 2002
The Office of Fair Trading (OFT), the UK’s competition enforcement authority, recently published draft guidance setting out when it may seek to disqualify company directors in the context of competition law violations. The disqualification proposals themselves are contained in the recently published Enterprise Bill. The proposals were included in response to increasing concern that existing penalties under the Competition Act 1998 do not adequately deter directors from engaging in or facilitating competition law violations.
The Enterprise Bill is due to become law next Spring. In addition to disqualification, the Bill also proposes criminalisation in order to deter individuals from participating in cartels (see recent On The Subject… "New UK Competition Law" published in April 2002). The consultation process will run until 26 September 2002, and interested parties are encouraged to comment on the guidance.
Disqualification of Directors
On application from the OFT, the court may order disqualification for up to 15 years. Directors are prohibited from being in any way concerned in the promotion, formation or management of a company during the period of disqualification. Under the Bill, "director" includes a de facto director, such as a senior employee who instructs the board or a director of a parent company who influences the business decisions of the board of a subsidiary.
The OFT may apply for a disqualification order against a director if the following applies:
- there has been a prior determination of breach of UK or EC competition law by the UK or EC competition authorities; and
- the director’s conduct is sufficiently serious.
Breach of Competition Law
As currently proposed, breach of competition law comprises infringement of all the major prohibitions on anti-competitive agreements and abuse of dominance under UK and EC competition law. As expected, this prohibition applies to participation in hardcore cartels. However, the Bill does not limit disqualification only to cartels. Disqualification is also theoretically possible for violations involving vertical non-price restraints or abuses of dominance.
Horizontal cartels are generally considered to be the most egregious form of anti-competitive conduct and are a clearly defined infringement. As such, directors will generally understand when their conduct contributes to such an infringement. However, other types of violations are more ambiguous, and directors may be uncertain whether their conduct subjects them to possible disqualification.
Conduct Susceptible to Disqualification
When evaluating whether to disqualify a director, the key consideration will be whether the director had an active role in the breach, either directly or indirectly. According to the guidance, the OFT will be very likely to apply for a disqualification order against a director in "particularly serious cases", such as where the director planned or encouraged the company’s anti-competitive behaviour. In addition, in other circumstances the OFT may apply for disqualification including where a director, either alone or with others:
- ordered or pressured others to engage in the activity causing the breach;
- attended meetings in which the activity constituting the breach either occurred or was discussed;
- knew or had reasonable grounds to suspect that employees were involved in the conduct causing the breach and failed to take reasonable steps to halt the activity in question; or
- authorised expenditure of funds used to finance any activity relating to the breach, knowing or having reasonable grounds to suspect that those funds would be used for the activity and that the activity related to the breach.
Directors will therefore be judged according to their own knowledge and experience, as well as that reasonably expected of directors of the company concerned. The OFT will also have regard to aggravating and mitigating factors. Aggravating circumstances include the director in question having been involved in a breach of competition law in the past. A mitigating circumstance would include a situation where a director voted against a Board resolution that the company should engage in the anti-competitive activity.
On application from the OFT, the court will make a disqualification order against a director if the court considers that the director’s conduct makes him or her unfit to be concerned with the management of a company. Courts can order disqualification by itself or in addition to imposing criminal sanctions. Typically, disqualification and criminal penalties will be decided together.
Extraterritorial Application
A significant shortcoming of the guidance is its silence on extraterritoriality. The guidance does not specify whether the OFT would apply to disqualify a director resident outside of the UK who was responsible for his/her company’s breach of EC or UK competition law. It is also not clear whether the OFT would take action against an officer of a parent company based outside of the UK who was responsible for a breach by the UK subsidiary. It may be that the OFT would apply to disqualify a non-UK director if his or her conduct had an effect on trade within the UK, although the court could take a different view if enforcement would be difficult or impossible.
Impact of Leniency
As regards cartel infringements, the OFT will not apply for a disqualification order against the directors in question if their company has been granted leniency with respect to its fine. Nor will the OFT take steps to disqualify a director who has received a "no-action letter" (i.e. a letter from the OFT stating that the director will not be prosecuted for his participation in the cartel: No-action letters are currently the subject of a separate consultation by the OFT).
Undertakings in Lieu of Prosecution
As an alternative to applying to the court for a disqualification order, the OFT may accept a disqualification undertaking from a director. When negotiating the undertaking, the OFT must ensure that the period of disqualification is proportional to the seriousness of the case. Further guidance is required on company disqualification undertakings generally and, in particular, as regards the circumstances in which undertakings would be appropriate and the factors that the OFT would take into account when accepting or negotiating them.
Directors will be able to appeal against a disqualification order or undertaking under the existing appeal procedure.
