On 5 December 2019, the High Court handed down its judgement in the first contested directors' disqualification case in the context of competition law infringements. The Court granted the directors permission, subject to certain conditions, to continue to act as directors of certain companies.
The CMA's directors' disqualification powers
Competition disqualification orders: Under the Company Directors Disqualification Act 1986 (the "Act"), where a company is found to have infringed competition law, the Competition and Markets Authority (CMA) can apply to court for a competition disqualification order (CDO). If a CDO is granted, an individual may be prevented for up to 15 years from being a director of a company without obtaining the permission of the court. Breach of a CDO is a criminal offence that can be punishable by up to two years imprisonment.
Competition disqualification undertakings: Alternatively the CMA can, without the need for an application to court, accept a legally binding undertaking on the part of the directors that they will not act as a director of a company for an agreed period -, known as a competition disqualification undertaking (CDU). Normally, the CDU will result in some discount to the period of disqualification that the CMA is prepared to accept. A total of 12 disqualification undertakings have been obtained by the CMA over the past three years.
Applying to set aside a CDO or CDU: It is possible to apply to the court to set aside a CDO or CDU; the Fourfront case was the first time this had been attempted.
What happened in this case?
In March 2019, Fourfront Group admitted breaches of Chapter 1 of the Competition Act 1998 for conduct known as "cover bidding". Cover bidding involves companies that are bidding in a competitive tender agreeing with each other that one or more of them will place a bid that is deliberately intended to lose the contract. Fourfront and several other companies agreed to pay fines totalling £7m, and several directors of the Fourfront Group signed CDUs preventing them from acting as directors for specified periods of time.
Two of the Fourfront directors, Mr Stamatis and Mr Davies, subsequently applied to the court for their CDUs to be set aside, and were successful in this application.
The court concluded that there was a requirement, in deciding whether to set aside a CDU or CDO, to balance "need" (the needs of both the claimants and third parties, with the latter having more importance) against the requirement of public protection. It concluded that, in this case, "third party need" rather than the need of the claimants had been made out, in that both directors were key to the business and the culture of the relevant companies, and would be difficult to replace.
In relation to Mr Davies in particular, his removal might well result in the closure of one of Fourfront's London offices, which would result in redundancies, whilst the removal of Mr Stamatis would undermine the group's "culture and cohesion".
The court also considered that the following actions taken by the group had satisfied the public protection requirement (in providing the court with adequate comfort that there was not likely to be a repeat of the conduct in issue:
- the reorganisation of the companies and boards of directors;
- the introduction of policies and training;
- the presence of a new solicitor non-executive director with compliance functions. This was referred to as a "crucial" factor in satisfying the public protection requirement; and
- a number of other measures, such as email server searches to identify high risk terms to uncover any future attempts to engage in cover pricing.
While the application was successful, the judge noted that the case had been a difficult one and he had not reached his conclusion lightly. He further noted that applications for leave in the competition context were different from other contexts as, by their nature, they necessarily involve deception or "dishonest behaviour".
He also imposed conditions on the waiver of the CDU, including a requirement that any future press releases would have to be approved in advance in writing by the CMA, and a restriction that Mr Stamatis and Mr Davies remain unable to act as directors outside the Fourfront Group.
This case is significant in that it is the first case to arise out of the exercise of the CMA's director disqualification powers under the Act – and because the application to set aside the CDUs was successful.
The judgment confirms the balancing exercise that the court will undertake when considering whether to set aside a CDU. Key considerations here are:
- the impact of the disqualification of the directors on the financial health of the company and its employees; and
- the robustness of the competition compliance measures put in place by the infringing company to prevent a repeat of the infringement.
In particular the appointment of a solicitor non-executive director was seen as "crucial" in Fourfront in satisfying the judge that future misconduct was unlikely.
The CMA has stressed that it will continue to seek director disqualifications where appropriate and has sought to confine the case to its "particular circumstances" and emphasise the "strict conditions" put in place by the court in relation to the setting aside of the CDUs.
Directors' disqualification has become an increasingly important enforcement tool for the CMA given the difficulty that it has faced in implementing certain other deterrent measures for individuals involved in cartels. In particular, the Cartel Offence created by the Enterprise Act 2002, which was intended to act as a deterrent to individuals by introducing significant sanctions for those found guilty of involvement in more serious cartels has not been successful to date, with the only successful prosecutions being where the individual has pled guilty. CDOs and CDUs have provided a more attractive (and successful) alternative to this. The CMA is, however, likely to have regard to the balancing exercise set out in the Fourfront case, and the likelihood of a CDU being set aside when agreeing to CDUs with particular individuals.