Earlier this year, the Competition and Markets Authority (CMA) launched a new campaign that challenged businesses to know if they are “cheating or competing”.
The campaign was set against the background of research, conducted on behalf of the CMA, which disclosed that only 6% of firms in the construction sector were familiar with how competition law operates. The survey also found there was a low general understanding of the illegality of anti-competitive practices such as price fixing, bid rigging, and market sharing.
Does your business know the difference? Is your business one of the 94% of firms in the sector that is not familiar with the rules of competition law?
The cost of getting it wrong
Recent developments have illustrated the increasing cost to business and directors of getting this wrong. Last year, several construction businesses felt the effects first-hand as the CMA wielded its investigatory and enforcement powers.
Following one such investigation, the CMA imposed fines totalling more than £36 million on three construction companies alone. This was because the companies in question broke competition law by supplying certain concrete drainage products for building projects. Individual fines ranged from £4 million to over £25 million – on any view a significant penalty.
The CMA found that, for nearly seven years, the companies in question agreed to fix or coordinate their prices, shared the market by allocating customers, and regularly exchanged competitively sensitive information, all in breach of competition law.
The customers affected by the anti-competitive behaviour included engineering firms, utilities providers, and local authorities, which the CMA described as “leading players in the market”.
Lower fines were imposed where the companies accepted that a breach of competition law had occurred, sparing the CMA the additional cost and time it would have incurred in establishing evidence before the Competition Appeal Tribunal (if the parties had appealed the finding that anti-competitive behaviour had taken place). Those reductions illustrate the significant impact that the CMA's provisions for leniency and settlement can have.
What about director disqualification?
Significant fines are not the only thing about which company directors should be worried.
It is also important not to overlook the personal cost to directors, with 15 disqualification undertakings having now been secured by the CMA since 2016 (across various sectors). Those undertakings prevent the individuals concerned from being involved in director/ management roles.
Disqualification orders (by the court) or disqualification undertakings (agreed out of court by the director) are commonly imposed upon directors of insolvent companies when the Secretary of State for Business, Energy and Industrial Strategy considers their conduct (as directors) to be “unfit”. In 2019/20, 1,280 disqualification orders/undertakings were granted or agreed with directors who had been concerned in the management of failed companies.
However, disqualification is also relevant in the competition law context when a company of which that person is a director commits a breach of competition law, and that person’s conduct as a director makes them unfit to be concerned in the management of a company.
The relevant statutory provision is section 9A of the Company Directors Disqualification Act 1986 (CDDA), under which the CMA has the power to apply to the court for a disqualification order following its own investigations into the company where a breach of competition law is established (or agreed).
A breach of competition law is defined as being an infringement of any of the Chapter 1 or Chapter 2 prohibitions of the Competition Act 1998 or Articles 101 or 102 of the TFEU (put shortly, agreements affecting trade, or abuse of dominance). Examples include predatory pricing by a dominant company, bid rigging and discussing tenders, dividing up and sharing markets and price fixing.
Where the CMA is successful, the court can impose disqualification for a period of up to 15 years, which for many senior executives would end their careers. What the CMA (and ultimately the court) is concerned with is whether an individual director’s conduct contributed to the breach of competition law, or, even if there was no direct involvement, the director took no steps to prevent the company breaching competition law. Ignorance of the competition law breach will not be an excuse.
The High Court handed down the CMA’s first disqualification order on 3 July 2020.
It concerned a breach of competition law relating to a cartel among estate agents. What is significant is that the director was disqualified from acting as a director for seven years, notwithstanding that he:
- did not take part in the day-to-day operation of the business,
- was not aware of the competition law infringements, and
- had subsequently taken steps to address compliance issues.
Nevertheless, the court held that the director was aware of the cartel, and that his knowledge meant his subsequent failure to inform the board of directors and/or to prevent the company entering into the anti-competitive agreement amounted to misconduct.
Creating a culture of compliance
What is clear from the High Court’s judgment is that a director who is not directly involved in anti-competitive practices, did not attend all of the relevant meetings, and has no day-to-day involvement still bears a compliance responsibility in his capacity as director of the company.
Directors need to understand competition law, identify possible risks, and know when to ask more questions. It is therefore imperative to ensure that there is a culture of compliance among a company’s board of directors, for which the directors recognise they have individual and joint responsibilities.
The importance of competition law and compliance was summed up in the opening paragraph of the High Court judgment:
“The fact that the Competition and Markets Authority (“the CMA”)… investigated and reported upon suspected cartel activity by [an] estate and letting agency businesses in the area of Burnham-on-Sea is a reminder not only of the scope of its work but also of its reach. Its statutory powers and duties exist because of the importance of competition law for the day-to-day business activities not only of large corporations but of all markets within this jurisdiction.”
Regulators will try to understand whether companies have tried to foster a culture of compliance through their corporate practices, because a company’s compliance culture is a determinant of how employees behave. A company should look at the processes and policies underpinning what it does and consider the messages it wants to send its employees. Using the correct board level and management level tone, setting organisational values and applying consistency in approach are key to leading by example.
Employees should be adequately trained on compliance risks and regulatory changes, so that they have a consistently satisfactory level of awareness of their obligations and can identify issues as they arise. Adopting a range of policies and techniques can also be effective. Each company will be different and should assess its need for a tailored framework for tracking compliance. Importantly, companies must try to foster an environment in which employees feel able to report errors or breaches. This can be achieved, in part, by ensuring that there is robust and clear processes in place for employees to follow.
Evaluating what processes are already in place, and thereafter analysing where improvement may be needed, will be essential.
Shepherd and Wedderburn’s specialists regularly conduct policy assessments to help companies formulate a best practice approach and have considerable experience in advising on compliance matters, dealing with investigations and court proceedings under the CDDA. We also have the expert knowledge to advise directors who may be subject to investigation and/or the negotiation of undertakings.