Uneasy bedfellows

Monday, 01 December 2014


    Prudence J. Smith and Nicolas J. Taylor explain why directors must tread with caution when it comes to competition law.

    Business media salivates when company directors find themselves on the wrong side of the Competition and Consumer Act (the Act) and its regulator, the Australian Competition and Consumer Commission (ACCC). The most significant interactions between company directors, the Act and the ACCC include:

    • Compulsory notices.
    • Director liability.
    • Indemnification.

    None of these issues are consistent with common international practice. These are additional considerations for company directors, of which ignorance, or disregard, places them at considerable risk.

    Key investigatory tool
    The ACCC conducts hundreds of investigations each year. Companies and directors alike might find themselves involved in an ACCC investigation including, through no fault of their own, as a third party (such as being a competitor to two merging parties). Regardless of the reason for the interaction, it nevertheless demands focused and careful management.

    Similar to the Australian Securities and Investments Commission (ASIC) or the Australian Tax Office (ATO), the ACCC is empowered to require documents and information be produced where it believes the target of the request is capable of doing so.

    This power includes the ability to require directors (and officers) to attend ACCC offices to give evidence. The ACCC has other similar powers at its disposal (such as the ACCC’s functions overseeing the carbon tax repeal) but its use of the power under section 155 far outweighs any other.

    In recognition of the significance of this power, failure to comply with such a notice is a criminal offence, attracting a penalty of up to $3,400 or up to 12 months’ imprisonment.  The ACCC considers the power so critical to the discharge of its duties that it is looking to sharpen its sting. The ACCC has petitioned an increase in the financial penalties and has also sought the introduction of civil pecuniary penalties as part of its submission to the current competition policy review. The review’s draft report agrees with the ACCC’s submission that the current sanctions for failure to comply are inadequate.

    A director’s exposure is not limited to notices addressed to them individually. A “competent officer of the body corporate” must sign a request for information addressed to his or her company.  In this way, a director risks being “knowingly concerned” in the company’s failure to comply with a notice for which he or she may be exposed to personal liability. 

    The ACCC wields its stick
    In recent years the ACCC has brought a number of actions against directors for aiding and abetting a breach by a body corporate or for breaching the provision themselves. There are two matters currently before the courts in which the ACCC is seeking jail terms among other orders. These directors may find themselves joining an infamous list including:

    • Two directors who were ordered to serve jail time for failing to respond to a notice and also for aiding and abetting a corporation breach of its obligations (ACCC v Rana). 
    • A director served 200 hours of community service and was also fined $2,160 for providing false and misleading information on two occasions when responding to questions by the ACCC in an examination and failing to retract those false and misleading statements (ACCC v Neville). 

    The right to silence
    American television has made Australians very aware of the right available to Americans to “plead the fifth” or exercise their right to silence. Alas, Australian directors finding themselves at the receiving end of a notice from the ACCC enjoy no such protections.

    The only excuse for not answering a question in an examination is on the basis of client legal privilege. The Act is explicit: there is no excuse for not answering a question posed during an examination on the basis that the answer tends to incriminate the director or exposes them to a penalty. 

    It is true that such information may only be used in any civil proceedings but once evidence has been given the horse has bolted, so to speak, as the ACCC may be compelled to produce the evidence to other parties, e.g. in discovery or share the information with foreign regulators. A very sobering thought indeed in an increasingly global environment of competition law enforcement.

    In view of the risks and exposure of the individual, directors are permitted to be accompanied by a legal representative to an examination and, in view of potential conflicts, may consider it prudent to retain separate counsel to the company particularly if the director and/or the company are the focus of the ACCC’s investigation.

    Individual liability
    There are clearly serious consequences for individuals who may face hefty pecuniary penalties or disqualification orders (discussed below), prohibiting the person from managing corporations for a period that the court considers to be appropriate, possibly bringing an end to that person’s career and/or livelihood.

    Criminal liability – Consistent with common international practice, directors of Australian companies may be liable for a criminal penalty for a breach of the Act (including for aiding or abetting, inducing, being knowingly concerned or having conspired) and exposed to up to ten years in prison and up to $220,000 per offence.

    Civil liability – Penalties imposed on individuals for breaches of the Act are on the increase. One individual, in recent years, was ordered to pay $1.5 million for his involvement in a cartel. Liability arises from any form of involvement in a breach, either direct or indirect. 

    There is little international support for civil liability for individuals. Australia and New Zealand are the only jurisdictions of which the writers are aware that actively apply civil penalties to individuals (including company directors). In view of the increasingly global nature of competition laws, such inconsistent approaches make little sense.  A director may face personal liability for conduct in Australia but not in other jurisdictions. In this way any deterrent effect will be dampened significantly, if it exists at all.

    Disqualification orders – The ACCC may apply to the court to disqualify an individual from managing a company or undertaking specific business conduct for a breach of the competition provisions (such as engaging in a misuse of market power, resale price maintenance or a cartel) if the court is satisfied that the person has engaged in or has attempted to engage in a contravention of the relevant provisions and “the disqualification is justified”.

    The disqualification can be either for a limited period of time, or permanent. The length of the disqualification order is not subject to any statutory maximum period, but rather is subject to the court’s opinion as to the appropriate method of disqualification, having regard to the extent of damage caused, whether the breach was intentional or dishonest, and also the risk of the conduct being repeated. 

    The ACCC has not issued any guidance about when, and for how long, it will seek a disqualification order. In respect to similar orders under the Corporations Act, the court has considered deterrence a central factor in making an order for a substantial period of time.

    The ACCC has sought disqualification orders in relation to six individuals for a period of up to 20 years. Needless to say, the risk of a director losing his or her livelihood for contravening the Act is a real deterrent and may be an ever-present one. In any respect, in this way, disqualification orders are very much the “sleeping giant” in the ACCC’s arsenal when it comes to directors.

    The Act prohibits companies from indemnifying directors (or other officers) in respect of any civil liabilities and the legal costs incurred in defending an action where a director is found to be liable. 

    This prohibition makes no distinction between claims for which no liability is found and claims for which liability is found in the same proceedings – it is sufficient for the director to be found liable on one claim in a proceeding for the prohibition on indemnification for all legal costs to be triggered, even those incurred in respect of claims for which no liability was found. As a consequence, there is a risk that a director may elect to settle with the ACCC, or give concessions, rather than fight any allegations for fear that they will personally be exposed to all costs in the hearing.

    Internationally, there is little support for the Australian regime that prohibits companies indemnifying their officers (New Zealand has similar anti-indemnity provisions). 

    Interactions with the ACCC are rarely straightforward or brief. This is inherent in the complexity of the subject matter of the Act.   Having regard to the likely nature and extent of such interaction, in addition to the obligations to, and risks for the company, directors must also carefully consider their personal exposure.

    In a nutshell, a director risks:

    • Civil liability, if found knowingly concerned in a breach of the Act.
    • Criminal liability, if found involved in a cartel or for being involved in a contravention relating to a notice.
    • An order that they may be disqualified from managing or operating a business for a considerable period (commonly in the vicinity of 20 years). 

    Quite apart from the significant and substantial penalties applicable to a convention of the Act, a company is prohibited from indemnifying its directors in respect of both any penalty and the legal costs associated with defending an action.   So, a director is exposed to pay, serve time or have their career brought to an untimely end, for which support from his or her company is expressly prohibited.

    For these reasons careful consideration on the question of engagement and interaction with the ACCC is critical, including distinct legal representation for the company and for its directors.

    Twitter @JonesDay

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