Personal responsibility for cartels: UK High Court sets aside director disqualification undertakings

We reported earlier this year that the CMA now actively considers competition disqualification orders (CDOs) in every Competition Act case that it investigates, not only in cartel cases. Procedurally, when a company is found to have infringed competition law, the CMA can apply to court for a CDO. Alternatively, the CMA can accept legally binding competition disqualification undertakings from directors (CDUs). These have the same effect. A total of 12 disqualification undertakings have been obtained by the CMA over the past three years. These have all been secured through CDUs rather than imposed by a court.

Disqualifications 11 and 12 were for Aki Stamatis and Sion Davies, directors of Fourfront. In March 2019, Fourfront settled with the CMA for bid-rigging in the CMA’s design, construction and fit-out cartel investigation. Two months later the CMA extracted CDUs from the directors involved, including Stamatis and Davies.

Stamatis and Davies subsequently applied to the High Court for permission for limited leave to continue to act as directors of certain Fourfront Group companies. And last week, the High Court granted this leave, setting aside their respective CDUs.

The judgment is notable because it is the first contested competition disqualification case to be heard so far, notwithstanding that the legislation has been on foot for over a decade. Also because it sets aside voluntary undertakings given by directors.

Finally, it is important because of the implicit limits it places on the CMA’s powers. It confirms that in considering an application for leave to remain as director, the Court must balance the need of the applicant to remain a director with whether the public is sufficiently protected from a repeat of the conduct in issue. The judge emphasised that the matter was finely balanced, and that leave was not granted lightly.

Why did the Court overturn the disqualifications?

Stamatis and Davies argued that the Fourfront Group needed them to remain as directors and that the public was sufficiently protected from further infringements by extensive, robust competition compliance measures. Also, that their disqualification periods (two years, nine months and 18 months respectively) were on the lower end of the spectrum because their conduct had not been as serious. By contrast, former CEO of Fourfront, Clive Lucking, had given a CDU for four years and nine months.

The CMA’s position was that CDUs protect the public from harmful conduct by individuals and act as a deterrent to competition law infringements both generally (i.e. to directors of companies at large) and specifically (i.e. in relation to the company in question).

The High Court found that the CMA needed to balance public protection from repeat conduct against other relevant factors, including the company’s needs. In particular, the Court took into account:

• the more serious conduct of other directors of the companies involved in the cartel;

• likely redundancies (London managing director Davies’ disqualification would have resulted in the shut-down of Fourfront’s London office);

• Fourfront’s declining financial stability and significant losses in the previous financial year;

• recent internal re-organisation and a board reshuffle in response to the infringement;

• the considerable damage to Fourfront’s culture and cohesion caused by disqualification of Stamatis (the company’s Chairman);

• Fourfront’s new compliance and training policies; and

• the introduction of a new non-executive director (a particularly important safeguard and condition of the order).

Hence, Stamatis’ and Davies’ disqualifications were set aside to allow them to continue their directorships in the Fourfront Group. The CDUs remain in place generally – Stamatis and Davies cannot act as directors outside the Fourfront Group.

The CMA published a statement following the judgment. It emphasised the particular circumstances of the case and that the underlying CDUs remain in place. It also reaffirmed its intention to seek disqualifications in its Competition Act cases.

Over-enforcement?

The CMA has been actively flexing its disqualification muscles, after a decade without use. And, at a time when director disqualification ranks as the CMA’s preferred personal enforcement tool (more so than the criminal cartel offence, following a series of Court defeats), the Court’s judgment seems somewhat of a course correction for the CMA. In effect, the judgment suggests that over-application of CDUs within an individual company coupled with cooperation with the CMA and a new compliance culture can override the CMA’s pursuit of voluntary undertakings. In the present case, 3 of 5 directors of a small group of companies were disqualified, which was considered to damage the group’s operations as a whole.

Competition enforcement can take its toll on companies. This can take the form of hefty fines, damages claims, reputational loss, and personal consequences for employees involved, including disqualification and jail time. So, there is often a need, especially for smaller firms but also larger firms where the conduct occurs at management level, to re-shape their leadership team and top-down culture following anti-competitive conduct. In the fit-out cartel, the illegal behaviour was systemic and had continued for years. Fourfront took significant steps to address the issue and focussed heavily on compliance. The High Court showed sympathy for this, albeit stressing the particular circumstances of the case. The judgment strengthens the role of non-executive directors as an independent safeguard and reinforces the value of competition compliance programmes.

Periodic internal audits, regular discussion of ethics and compliance at board level, and accountability to an independent director take on new importance.