South Africa: No Place To Hide?

Last Updated: 24 May 2011
Article by Stephen Langbridge

Could a South African company successfully recover a penalty and other associated costs it suffers following a finding of contravention of the Competition Act from those directors or management who were involved in the anti-competitive conduct?

This question arises following the recent United Kingdom case of Safeway Stores and others v Simon John Twigger and others where the court allowed an action to proceed to trial in which the company sought to recover a penalty and associated costs by way of indemnity from certain former directors and employees involved in anti-competitive conduct.

That decision of the court of first instance has since been overturned on appeal.

The case has been eagerly followed by senior executives, managers and competition practitioners. In the light of the imminent changes to the South African competition law, the implications should be considered.

Background
The company claimed that the loss it had suffered by way of imposition of a fine was as a direct result of the wrongful breach of the fiduciary duty owed to the company and/or the breach of employment contract. The initial defence to the claim was based upon public policy grounds and that (a) the company could not benefit from its own wrongdoing, an application of the ex turpi causa rule, and (b) the target of the law was companies and not individuals in the companies.

The court of first instance attended mainly to the first aspect, although noted that passing on liability to the employees was not inconsistent with the scheme of UK competition law. The application of the ex turpi causa principle would mean that it is contrary to public policy that a company which had wrongfully derived commercial benefit from the anti-competitive conduct could not later seek to recover losses and costs it suffers as a result of such conduct.

The court found the contravention to be sufficiently serious to engage the rule, but stated that it was not clear that the company was primarily or directly responsible for the act (as against vicariously responsible) for the rule to apply.

Much discussion in the judgment involved circumstances under which the knowledge of the executives may be attributed or imputed to the company. This was not decided at this stage on the facts, as it would be dealt with at trial, but there was sufficient for the court to accept that there may be a distinction between the authorised conduct of the executives (authorised say by resolution, its founding documents or necessarily implied by virtue of an executive's position) from unauthorised conduct of executives. Anti-competitive conduct is seldom authorised conduct. In the case of unauthorised conduct the company may be able to raise a proper defence to the ex turpi causa rule.

The Appeal
The executives successfully appealed. The key issue in the appeal was whether the company was vicariously liable or personally liable. Following its decision that the only person liable for payment of the penalty under the UK statute was the firm itself, it held that the liability was personal. If such liability was personal then there was no basis to allow the firm to seek to recover the penalty from executives who may have been involved in the conduct concerned. The ex turpi causa rule was of application and the claim would be barred both as a matter of law and policy.

Discussion
Both instinctively and as a matter of policy, the appeal decision seems correct. One cannot have a firm transgress the competition law in a way in which it is advantaged and then seek to recover any penalty from its executives.

But what would the objectives of the company be and what are the practical implications of such an action? In most cases a company is unlikely to be able to successfully recover a very significant penalty from a few directors or rogue employees. However where the executives have insurance to cover conduct, this may make the target more attractive.

It is unlikely that there will be claims of this nature where the executives remain in the employment of the company. However such claims may be raised where the executives have been dismissed or there has been a takeover of the company in the interim.

The current scheme of South African competition law closely resembles its UK counterpart. The language in our legislation dealing with the imposition of administrative penalties is not as clear as it might be, although it would be rather difficult to argue that where the target of the administrative penalty was a legal entity, the authority of the Tribunal extends to the imposition of a penalty against the firm's executives. It is thus likely that a similar interpretation of the ex turpi causa principle as adopted by the appeal court in Safeway would be followed in South Africa.

However this approach should not be regarded as a free pass for executives to act contrary to the law and escape civil retribution by their employers (or former employers). In fact we suggest that the outcome may be very different depending on the factual circumstances. Consider three different examples:

  • Acting under the direct guidance of its CEO a firm is found guilty and fined for excessive pricing;
  • Unknown to shareholders or the board, the CEO engages in an explicit price fixing cartel;
  • The CEO makes an express representation that the necessary merger approval has been obtained and the firm proceeds to implement the transaction when such approval is outstanding.

The CEO may be able to raise a defence based upon public policy in the first case, but what of the second and third examples? It is submitted that this is not so clear and an action for recovery of any administrative penalty may well succeed.

The implications of a different finding in South Africa from that of the appeal court could have far reaching consequences for firms found to have contravened the Competition Act and their employees. Some of these may be summarised as follows:

  • Directors and Executives may be held responsible for causing the firm to engage in anti-competitive practices. This may result in them being liable to the firm for the resultant administrative penalty, related costs and potentially damages claims.
  • The result would be that firms are further deterred from engaging in anti-competitive conduct in the light of greater risk
  • There may be an increasing conflict between the executives and the companies they represent in uncovering and bringing past contravention to the fore and in the co-operation in enquiries
  • Leniency applications may suffer as a result
  • Insurers will more carefully consider and grant directors and officers insurance
  • Representations, warranties and indemnities in commercial merger transactions will need to be carefully considered
  • Severance agreements with executives need to take these possible claims into account

In all the circumstances our view is that even if the South African courts do follow the line of the appeal court in Safeway, local executives are still vulnerable.

This will be even more so once the Competition Amendment Act becomes operative. Sections 73 and 74 target the individual executives establishing the possibility of individual conviction, penalty and even imprisonment for personal involvement or acquiescence in cartel activity. Moreover, under section 73A of that Act, a firm may not directly nor indirectly pay any penalty imposed on an executive convicted of an offence in terms of the section, nor his indemnify expenses, unless the prosecution is abandoned or he is acquitted. Thus an action by the company for recovery of loss which the company suffers may simply compound the fallen executive's woes.

We suggest the issues raised are of significance in South African practice, extending beyond competition law but into company and employment law fields.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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