Wednesday, August 20, 2014

Competition law violations get personal | Business Standard

Competition law violations get personal
Directors and senior officers could be now fined for the anti-competitive conduct of their companies
Avirup Bose

The Competition Commission of India (CCI) has upped the ante on competition law compliance by Indian companies. Now a director or a senior officer incharge of the affairs of a company may be held personally liable for anti-competitive conduct of the company. The company may be penalised separately for such anti-competitive conduct.

The CCI in a recent order against Bengal Chemist and Druggist Association (BCDA) not only penalised the association for its anti-competitive conduct but additionally held 78 of its senior officers to be personally liable for taking/endorsing such anti-competitive conduct of the BCDA. The aggregate fine imposed on the BCDA and its officers was approximately Rs 18.38 crore (out of which the amount of fine imposed upon the BCDA was a mere Rs 13.24 lakh). The BCDA case marks the first instance when the infringement of competition law by a trade association triggered action against its senior officers.

Under the Competition Act, the term "company" includes a partnership firm or a trade association. Thus, the provisions of the Competition Act under which the BCDA officers were held personally liable are equally applicable to directors and senior officers of a company or the managing partner of a firm. Therefore, from now on directors and senior officers of a company are equally vulnerable to such liability.

At the core of an anti-competitive conduct by a company is a decision of a director and/or its corporate officers to pursue such an anti-competitive conduct. A company cannot remain in compliance with rules of competition law if its corporate officers either willingly or unknowingly adopt corporate practices that are anti-competitive in nature or willingly ignore their commitment towards competition law compliance programmes. A survey conducted by Deloitte in 2007 revealed that one of the top-most incentives for senior management to comply with competition rules are sanctions that operate at the individual, as opposed to corporate, level. Section 48 of the Competition Act provides such an incentive by rendering directors and other officers who are in charge of the affairs of the company to be personally liable, where their actions result in the company falling foul of the rules of Indian competition law.

In the BCDA case, the CCI found, among other things, that the trade association engaged in issuing anti-competitive circulars directing its member-retailers not to give any discount to consumers and to sell drugs only at their MRP, thereby indirectly determining the sale prices of drugs and controlling or limiting the supply of such drugs in the market. The CCI found such practices of the BCDA to be anti-competitive in nature and violative of the provisions of the Competition Act. The CCI also identified: (a) senior officers of the BCDA who were directly responsible for the BCDA to adopt such anti-competitive practices; and (b) members of the BCDA's executive committee who ratified such decisions. The senior officers and the executive committee members were penalised at the rate of 10 and seven per cent of their annual salary/receipts for the preceding three years, respectively.

The law does not expect the directors or the senior management of a company to be experts in competition law. However, they should be aware of the basic rules, which will allow them to manage and avoid the risk of a competition law infringement.

It is pertinent to note that since offences under the Competition Act are not criminal in nature, the CCI may hold directors personally liable for offences committed by their corporations based solely on circumstantial or indirect evidence. There is, however, a silver lining. The Competition Act provides that directors and senior officers may avoid liability through a "due diligence defence". This would require them to demonstrate that an anti-competitive act occurred despite there being an appropriate competition law compliance programme in place, which consisted of proper controls and systems, or without their knowledge. The due diligence defence relies more on the process that the directors or senior officers followed than on the result. Therefore, if the directors "inform" themselves before making a decision - for example, if they approve the merger of the company with a competitor after due discussions, asking the appropriate questions and seeking advice from experts - they may be able to use the due diligence defence to avoid personal liability, even if their decision produces results that contravene Indian competition law. The CCI would usually not second-guess the business judgement of a company's directors where they have followed the proper procedure in reaching their business decisions.

In the BCDA decision, the CCI did not have an opportunity to address the issue of personal liability of an independent director for the company's anti-competitive conduct, since the decision dealt with the anti-competitive conduct of a trade association that typically does not have any independent board members. In my opinion, executive directors are more likely to be held liable for anti-competitive acts of a company than independent directors because they usually have decision-making responsibilities and a supervisory role over the company's business on an ongoing basis. However, even an independent director may be held liable if s/he knowingly endorses an anti-competitive conduct of the company.

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