The CMA’s director disqualification power – a power now being put to use

23.05.2020

The UK Competition and Markets Authority (the “CMA”) has had the power to disqualify directors of companies that have been found to have infringed competition law since 2003. It is a power that, until the last couple of years, had scarcely been exercised – as at the end of 2018, only three directors had been disqualified through its use. However, in 2019, a further six directors were disqualified, and one case is now for the first time proceeding through the courts. With new CMA guidance on procedure issued in February 2019, the CMA itself stated that it has been “ramping up how we use our disqualification powers and as a result, the risk of director disqualification to those who break the law has never been higher”. This is therefore a power that the CMA is actively using, and is one that all companies operating on the UK market should be aware of. Although the power has not yet been publicly used in relation to cases in the pharmaceutical sector, it is a sector that remains a focus of the CMA’s enforcement activities; there is no reason to think that the CMA would treat the sector differently when it comes to director disqualification proceedings.

The power to disqualify directors on the basis of competition law infringements are contained in the Company Directors Disqualification Act 1986 (“CDDA”), which applies to England, Wales, and Scotland, and the Company Directors Disqualification (Northern Ireland) Order 2002.

Under the CDDA, a director or former director can be disqualified for up to 15 years, with any breach of that disqualification punishable by a fine and/or up to two years imprisonment. Disqualification can be effected in two ways: a voluntary but binding competition disqualification undertaking may be given by a director (a CDU); or the CMA can apply to court for a competition disqualification order (a CDO). To date, all disqualifications have been by way of a CDU, although the CMA has applied for CDOs in two instances. One settled with a CDU before trial, and the other is due to be heard in 2020. The CMA has noted that the offering of CDUs have resulted in a shorter period of disqualification than would have been sought under a CDO procedure before the Court.

When deciding whether to apply for a CDO, the CMA will have regard to the seriousness of the infringement, its duration, the impact (or potential impact) on consumers, the company’s conduct during the course of the investigation, and whether the company had previously breached competition law. For a CDO to be made, two conditions must be satisfied:

  • The company for which they are a director commits a breach of competition law; and
  • The court considers that their conduct as a director makes them unfit to be concerned in the management of a company.

Whilst the first condition suggests (but does not require) that the CMA will have issued an infringement decision before it is satisfied, the CMA has recently changed its process, and now opens CDDA proceedings before the main investigation into any anti-competitive conduct has been concluded. Previously, the CMA stated it would only use its disqualification power after the conclusion of any appeal. This changed in June 2018, as the CMA now considers it to be more efficient for a CDO to be assessed at the same time as any infringement or penalty. While there may be efficiency gains (at least where the breach of competition law is clear-cut and highly likely to lead to an infringement finding), this also gives the CMA a procedural advantage of placing parties to investigations under increased pressure.

For the second condition, the Court must have regard to whether the director’s conduct contributed to the breach; if it did, it is immaterial whether they knew that the conduct was contrary to competition law. Alternatively, if a director’s conduct did not contribute to the breach, the legal test is whether the director had reasonable grounds to suspect that conduct constituted a breach and took no steps to prevent it, or whether s/he did not know but ought to have known that the conduct constituted a breach.

One of the key differences between insolvency based disqualifications, and competition disqualifications is that in the latter case, the company is likely to still be active. While this does not affect the disqualification process itself, it is likely to be important in any application for permission to act as a director (the court can give dispensation to directors to act in specific roles, notwithstanding the disqualification). Indeed, in the first decision relating to permission to act following a competition law infringement handed down in December 2019, the High Court has given permission to act, in view of the strategic importance of the individuals to the companies in question and the potential for adverse impacts on those companies without the individuals being in place (In the Matter of Fourfront Group Ltd & Ors [2019] EWHC 3318 (Ch)).

While this ruling may somewhat temper the CMA’s new enthusiasm for its power, directors should be looking to ensure that they protect themselves against breaches of competition law, by attending regular competition training, and maintaining a top down compliance culture; the key is not to become experts in competition law, but to demonstrate a commitment to diligence. National authorities of EU27 member states may also have chosen to implement a disqualification regime, and directors should familiarise themselves with the personal risks associated with each jurisdiction.

Sophie Lawrance

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Aimee Brookes

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