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.