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Recognise the risks

15 May 2015

Recognise the risks - read more

Knowing what anti-competitive behaviour looks like can help company secretaries protect their organisations

Competition is a vital component for driving economic growth and protecting consumers: it produces increased innovation, better choice, lower prices and provides a level playing field for new challengers looking to enter a market.

The myth of the smoke-filled room

Although the importance of competition is widely understood by businesses, there is still a low level of awareness as to what anti-competitive behaviour looks like. For many, the idea of a ‘cartel’ conjures up images of a smoke-filled room where shady businessmen meet to sign secret pacts, plot illicit schemes and smoke the odd Havana. The reality is far from that: it can take just one meeting, discussion or email exchange for a cartel arrangement to be formed.

A cartel can be formed through a variety of different arrangements where companies limit how they compete against one another. These can include competitors coordinating or ‘fixing’ their prices, sharing markets by allocating customers or territories, collectively limiting output or supply, or colluding in rigging bids to control who successfully wins a tender.

Cartels artificially increase prices for purchasers (whether consumers, businesses or government), reduce output and innovation, disincentivise efficiency and lead to consumer harm. Cartels are the most serious form of anti-competitive behaviour and can attract significant penalties. These include fines of up to 10% of a company’s global turnover, as well as disqualification orders for directors and potential prison sentences for those involved.

The potential consequences of breaching competition law for both companies and individuals mean that it is essential that boards have strong oversight of the activity and culture being adopted within their organisations.

Where the risks lie

There are many risk factors that can contribute to an anti-competitive infringement being committed. Where businesses are subject to increasing pressure on their margins, competitors may agree not to undercut each other on price in order to protect profits and maintain their respective presence in the market.

Contact between those working in the same industry is common and this can lead to sensitive information being disclosed that could entail a breach of competition law. Where competitors gather at social or industry events, it can be easy for topics such as future pricing plans and commercial strategies to be broached, and herein lies a considerable risk for those keen to stay ahead of the competition, yet remain compliant in how they do so.

Recent enforcement action demonstrates how risks of cartel conduct can arise where there are informal relationships and contacts between staff from competing companies. In 2013, Mercedes-Benz and five of its commercial vehicles dealers were separately fined a total of £2.8 million for engaging in unlawful cartel activity. In one arrangement, two local dealers agreed that they would include a ‘substantial’ margin in quotations to customers based in each other’s area.

The case reveals how easy it is for conversations among competitors to cross the line between being legitimate and illegitimate. Equally, a party’s involvement in cartel activity does not need to be extensive to fall foul of the law. As a result of this investigation, one company was largely fined based on an employee having attended – and been involved in organising – a single meeting where an anti-competitive agreement was reached.

In 2014, a trio of pharmaceutical companies were found to have breached competition law by entering into an illegal market sharing agreement. In a case which concerned the supply of care home medicines, Quantum Pharmaceutical instructed its subsidiary, Tomms Pharmacy, to avoid targeting existing care home customers supplied by a rival, Lloyds Pharmacy. Although Quantum was not operating in direct competition with Lloyds, it supplied pharmaceutical products to the pharmacy sector, in which Lloyds was a customer. Quantum used its position as Tomms’ parent company to instruct Tomms to avoid competing with Lloyds for the supply of medicines to selected care homes.

As with the commercial vehicles case, much of the incriminating evidence of the cartel agreement was contained in email exchanges between the parties. The case illustrates how interrelating business structures can give rise to specific competition risks and how a blurring of commercial lines and relationships can easily result in cartel activity.

What if you have been involved

Cartel activity, by its very nature, is hard to detect. Like other leading competition authorities, the CMA operates a leniency policy under which companies can come forward and confess their involvement in a cartel in return for lenient treatment. The benefits of applying for leniency are significant: provided that an investigation is not already underway and that certain other conditions are met, the first company to apply for leniency will qualify for total immunity from financial penalties.

Being ‘first in’ will also guarantee immunity from criminal prosecution for all of a company’s cooperating current and former employees and officers. Cooperating directors of the leniency applicant will also be guaranteed immunity from director disqualification.

Leniency can be a vital lifeline for businesses who find themselves caught up in a cartel. However, applicants need to act quickly to ensure they are the first to come forward before any investigation and thus guarantee immunity. If a cartelist is not the first to confess to the CMA, there are still benefits available in applying for leniency (these can include a reduction in financial penalties, immunity for directors from being disqualified and scope for immunity from criminal prosecution for those involved). The extent of these benefits is contingent on the amount of value the applicant can bring to the investigation and the level of cooperation they provide. The benefits are not guaranteed – hence why getting in first can make all the difference.

Advice for company secretaries

Company secretaries should also bear in mind the CMA’s guidance on the operation of its leniency policy. This includes recommendations as to what the CMA expects in terms of any internal investigation the applicant may wish to carry out. This is to minimise the potential for an applicant to tip off other cartel members inadvertently, or to contaminate evidence. Although the CMA recognises that some internal investigation may be necessary prior to a leniency application, the CMA’s guidance provides that this should be limited to what is necessary to decide whether to apply for leniency. The CMA’s guidance also sets out how any such investigation should be conducted.Failure to comply with the guidance risks putting the undertaking’s lenient treatment in jeopardy.

The care home medicines case provides a perfect example of how a company secretary helped secure leniency for one of the companies involved. Upon learning of the nature of the market-sharing agreement between the parties, the then company secretary at Lloyds set in motion an application for leniency. The result was that Lloyds was granted full immunity and escaped receiving any financial penalties for its involvement in the cartel.

Against this backdrop, company secretaries play a crucial role in advising boards and acting as the guardian of their organisation’s compliance with the law. In a recent blog, ICSA Research and Policy Director Peter Swabey even referenced how one chairman saw a company secretary’s role as ‘to keep (him) out of jail’. Recognising the risk of anti-competitive behaviours, where they might occur and what they might look like, can be a vital tool for company secretaries to help their organisation stay on the right side of the law.

The two cases referenced in this article provide some valuable lessons for those at board level as to how easy it can be to breach competition law. Tacit agreements communicated via seemingly innocent exchanges can end up implicating an entire organisation. Ensuring that a robust compliance structure exists and that competition law has a place in board discussions can pave the way for companies to safeguard themselves against the threat of enforcement action.

Stephen Blake, Senior Director of Cartels at the CMA, provides a valuable last word on the matter: ‘if you believe your company is already involved in any form of cartel activity, make sure you tell the CMA about it – before someone else does’.

The CMA has a series of 60-second summaries on aspects of competition law, including what to look out for as a company secretary and how businesses can apply for leniency, which can be found on www.gov.uk.

For more information on competition law, see Robert Bell’s technical briefing on page 40. You can read the latest on competition law in the Expertise section of the Governance and Compliance website. Peter Swabey’s blog on the role of the company secretary is available at blog.icsa.org.uk/the-breadth-and-majesty-of-the-company-secretary.

The team at the Competition and Markets Authority

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