High Court Issues Lengthy Director Disqualification Order for Contributing to a Competition Law Infringement

Latham & Watkins LLP
Contact

Latham & Watkins LLP

The judgment has important implications for the competition law compliance responsibilities of company directors.

On 3 July 2020, the High Court disqualified[1] Michael Martin from acting as a director for seven years. The court found that Mr Martin had contributed to a breach of competition law by his former company, which owned and ran an estate agency (Berryman’s) in Burnham-on-Sea. This finding was made despite the fact that Mr Martin was not concerned with day-to-day sales, had not attended any of the meetings with the other estate agents where the competition law infringement had taken place, and had taken some steps following the inspection of the company by the Competition and Markets Authority (CMA) including the obtaining of legal advice that led to compliance actions.

This is the first judicial guidance on an application by the CMA for a director disqualification order. The judgment will embolden the CMA’s current drive to ramp up director disqualifications for competition law infringements. The court notably held that a failure by a director (who is not active in day-to-day sales) to prevent a competition law infringement and report it to the board can be classified as a direct contribution to a competition law infringement, which constitutes serious misconduct and a breach of director duties.

The competition law infringement

In 2017, the CMA found that six estate agents operating in the Burnham-on-Sea area entered into an anti-competitive agreement to fix a minimum level of commission fees (1.5%) for the provision of residential sales services. The CMA imposed fines totalling £370,084 on five of the six estate agents involved, with the sixth company receiving immunity from fines under the CMA’s leniency policy. Subsequently, the CMA obtained disqualification undertakings from three directors involved in the conduct, by which they undertook not to act as a director of any UK company (two directors for three and a half years, and one director for five years, respectively). Mr Martin disputed that disqualification was warranted in his case, and the CMA applied to the court to disqualify Mr Martin by a competition disqualification order.

The evidence against Mr Martin

The CMA relied principally on four pieces of Direct Evidence for its disqualification claim against Mr Martin:

  • The minutes of an employee meeting at Berryman’s attended by Mr Martin: The minutes record that a representative of Berryman’s had “met with other local agents to discuss fee war to try to reach some mutual agreement”. The court commented that there were no minutes to the effect of requiring competition as opposed to agreement.
  • Emails between an employee of Berryman’s and Mr Martin concerning the intention to instigate an agreement between local agents and Berryman’s. The court commented that a reading of one of the emails would have led Mr Martin to identify the proposed terms as anti-competitive.
  • A further email from the Berryman’s employee to Mr Martin spelling out the terms of the local agents’ agreement: Whilst Mr Martin denied reading this email as he was extremely busy, the court noted that Mr Martin arranged a time to meet as requested in that email.
  • The minutes of a meeting between Mr Martin and a senior employee from Berryman’s referring to the local agents’ agreement.

Legal framework for director disqualification

Under Section 9A of the Company Directors Disqualification Act 1986 (CDDA), the CMA can apply to court requesting a competition disqualification order (CDO). The court must make a CDO where:

  • An undertaking, which is a company in which the individual is a director, has committed a breach of competition law (the First Condition).
  • The court considers that the individual’s conduct as a director makes them unfit to be concerned in the management of a company (the Second Condition). For the purposes of the Second Condition, the court must have regard to:
    • Whether the director’s conduct contributed to the breach of competition law (irrespective of whether the director knew it did) or, if not
    • Whether the director had reasonable grounds to suspect that the company’s conduct constituted the breach of competition law and took no steps to prevent it, or
    • That the director ought to have known that the conduct constituted the breach even if the director did not know of it

Alternatively, the CMA can accept legally binding competition disqualification undertakings from directors (CDUs). A CDU has the same legal effect as a CDO, namely to prohibit the individual from being a director, or directly or indirectly participating in the management of a company, for up to 15 years. However, the CMA will also normally consider a reduction in the disqualification period if a director offers a CDU in terms acceptable to the CMA. The CMA has powers to pursue former and shadow directors, in addition to current company directors.

To date, 19 directors have been disqualified following a CMA competition investigation.

Judgment

The court ruled that the Direct Evidence established Mr Martin’s knowledge and involvement in the competition law infringement. The court highlighted that Mr Martin had kept his knowledge of the competition law infringement to himself, had allowed Berryman’s employees to participate and perform in the agreement, and had taken no steps to prevent or end Berryman’s participation. This constituted misconduct, which led the court to rule that Mr Martin’s behaviour as a director contributed to the breach of competition law.

This finding meant that the court did not need to rule on the other tests under the CDDA, namely whether Mr Martin had reasonable grounds to suspect that the conduct of Berryman’s constituted the breach of competition law and that he took no steps to prevent it, or whether Mr Martin ought to have known that the conduct constituted the breach (even if he did not know of it).

The Second Condition of the CDDA test was therefore satisfied. Mr Martin’s conduct fell below the standards of probity and competence appropriate for persons fit to be directors of companies, making Mr Martin unfit to be involved in managing a company.

Proportionality and the CMA’s CDO regime

Given the adverse effect that disqualification would likely have, Mr Martin argued that his right to respect of his private and family life under Article 8 of the European Convention on Human Rights was clearly engaged. It was, therefore, incumbent on the CMA to consider whether it was necessary and proportional to issue a CDO against him, and that, on the facts presented, a disqualification order was disproportionate.

The court rejected this argument, and held that there is no obligation on the court to consider the proportionality of making an order in an individual case, once the court has concluded that the conduct of a director justifies a finding of unfitness.

Length of disqualification

The court considered that this was a case in which the “middle bracket” for the length of disqualification should apply. Whilst the court recognised that the period could be set in the top bracket (15 years), in view of the importance of fair competition and the seriousness of breaches of competition law, the court took into consideration the fact that Mr Martin was not at the forefront of the organization and implementation of the cartel. The court considered that it was not appropriate to adopt the same approach as in the disqualification undertakings cases (where lower level periods of three to five years were agreed) in determining the length of Mr Martin’s disqualification. The court found mitigation in Mr Martin’s previous good character as a director over many years, the fact that he has retired due to ill health, and the fact that Berryman’s introduced measures following the CMA’s inspection to introduce a compensation scheme.

Key messages

The CMA is increasingly focusing on director disqualification, recognising the importance of individual liability as a powerful deterrent — not just for cartels, but all types of anti-competitive conduct.

Company directors, even if they are not directly involved in day-to-day operations, bear competition law compliance responsibilities in their capacity as a director. In particular, directors should note the following points:

  • Directors should have sufficient understanding of the principles of competition law to be able to recognise risks and to realise when to make further enquiries or seek legal advice.
  • As soon as directors become aware of a potential infringement, they must take all possible steps to prevent the company from implementing the anti-competitive conduct.

[1] Competition and Markets Authority v Michael Christopher Martin [2020] EWHC 1751 (Ch)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Latham & Watkins LLP | Attorney Advertising

Written by:

Latham & Watkins LLP
Contact
more
less

Latham & Watkins LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.