Consulting » INSIGHT – Competition lawyers warn: There’s more than one kind of

INSIGHT - Competition lawyers warn: There's more than one kind of

The new Competition Act, which brings the UK into line with EC law, could see companies fined up to 10% of turnover, while their directors may be imprisoned if found guilty of obstructing investigations.

The new Competition Act was placed on the statute books in November last year, and although it will not come fully into force until March 2000, companies are being urged to take measures now to ensure that they do not feel the hefty weight of the new, sterner penalties at the disposal of the authorities. According to the Office of Fair Trading, 77% of key business managers in the UK are unaware of the act. “Before now the OFT has not had the power to fine, and it has not had the power to conduct dawn raids,” says Paul Hughes, partner at law firm Edge Ellison. But the Competition Act promises to create a more aggressive and powerful OFT. In essence, the act merely brings the UK into line with EU law on competition, but the new strictures will potentially affect a greater number of UK firms than the old rules did. And the fines Hughes refers to could run to 10% of a company’s UK turnover, while company officials who are caught obstructing the draconian new investigations may be subject to imprisonment. The main new provision is that the regulators will not have to prove that company activities are having an anti-competitive effect on inter-state trade. Now, two new prohibitions, which mirror articles 85 and 86 of the European treaty, will apply if a company’s trading practices can be proved to show an effect on the UK economy. Even regional monopolies – which could exist in single towns – and trade agreements may fall within the remit of the law. There is also a great deal of confusion about precedents. The OFT, under the new act, must refer to EC jurisprudence, but as Hughes explains, “Lawyers rubbed their hands at this because it opens up a Pandora’s Box – many of the judgments of the European Court have been opaque and difficult to follow, and the decisions of the Commission are often at variance with those of the Court of Justice.” As an example of the severity of the law, Hughes cites the case brought against British Sugar and Tate & Lyle. During a due diligence process preparing for a joint venture between the two companies late last year, lawyers for Tate & Lyle discovered that their client had actually been involved in a price fixing arrangement. They realised this would incur hefty fines from the EC, and advised their clients to plea-bargain by confessing. Tate & Lyle was fined Ecu7m, British Sugar Ecu39.6m and two other companies just over Ecu1m each. In the four weeks before Christmas last year, the European authorities collected fines worth more than Ecu400m from European businesses. “Some directors are starting to resign if they’re investigated, irrespective of their own involvement, because the financial magnitude is so high,” warns Hughes. “Institutional investors are not going to go into companies where they don’t have compliance programmes to deal with this. An investigation could hit the balance sheet quite severely, and the directors would often rather just go.” Hughes outlined to Financial Director the key dangers that company directors may face: Your industry sector might come in for scrutiny. Under existing legislation, which is being retained, the OFT can investigate a “complex monopoly” where companies acting in parallel have more than 25% of their market. It has already said it will target a number of individual sectors for special attention under the new powers. Particular care should be taken by companies in industries that are stagnant, where there’s a concentration of market power in the hands of a few companies or where prices appear high or rigidly set. Companies with market share higher than 25% will be liable for serious investigation and big fines if they are found to be anti-competitive, although even businesses below that level may be subject to OFT attention. The problem is, 25% of what market? The regulators can shift the goal posts, redefining geographical or product definitions of market share, and in industries where share is ill-defined, even trade publications might be used to decide whether a player has a dominant position. You might not know whether employees are engaging, even at a local level, in anti-competitive practices, so ensuring there is a sound information policy is essential. Hughes also advises that procedures are in place in the event of a dawn raid – for example, will a receptionist know who to call if an OFT official turns up one morning demanding to see paperwork? All employees will also be open to questioning. Correspondence should be kept separate in a privileged and confidential file with your lawyers; counsel can exercise legal privilege, and segregating documents will prevent company information falling willy-nilly into the hands of the OFT. Any communication with competitors could be interpreted as colluding towards anti-competitive behaviour. There will be block exemptions from the act for particular situations; and vertical agreements (between suppliers and distributors, for example) will be exempt except where they include price fixing. But if you provide the OFT with documentation on agreements, this will ensure immunity from fines. Risk-averse solicitors, Hughes points out, will be sending documentation to the authorities by the truckload, despite their pleas not to be swamped with paperwork by concerned companies. While FDs should not necessarily become paranoid, Hughes points out that there are many ways to find yourself in trouble. “Any decent compliance programme should address what your representatives do and say at trade association meetings,” he says, by way of an example. “If any price-fixing or market-sharing type issues came up there, get out. Announce you are leaving, have it minuted, and go. You have got to have policies to deal with those sort of issues.” Public relations is also a minefield. “I’ve seen public announcements which say ‘Following acquisition of XYZ, we are now dominant in our field and we’re going to take the competition to the cleaners’,” Hughes says. Even “macho” internal documentation can attract attention. In advance of the March 2000 start date, Hughes recommends that companies seek advice from the OFT itself. “If you’re entering into arrangements now that might be caught by the new act, they will give you guidance,” he advises. Where an arrangement may affect inter-state trade, companies should make any submissions to the European Commission rather than the OFT, since clearance from the OFT will still not necessarily prevent a case being brought by the European authorities. The OFT Web site can be found at: Edge Ellison will be conducting a confidential postal survey of FD readers to assess preparedness for the new Competition Act. The results of the survey will be published in Financial Director later this summer.

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