Although a modest period of disqualification, it nonetheless marks a significant development in Hong Kong competition law enforcement. It serves as yet another reminder of the Hong Kong Competition Commission’s focus on holding individuals liable for anti-competitive conduct.

 

The HKCC is currently seeking director disqualification orders in two other on-going cases against local businesses and persons involved in alleged cartels.

 

Director disqualification orders are not the only tool available for the HKCC when targeting individuals. The HKCC has also sought pecuniary penalties to be imposed on individuals (e.g. directors and managers) for their alleged involvement in cartel arrangements. The Tribunal has yet to issue its decision on fines against individuals and thus it remains to be seen the methodology and scale for ‘quasi criminal’ fines.

 

With this first director disqualification, it cements the principle in Hong Kong SAR that directors are not protected behind the corporate veil and should take pro-active steps to ensure their businesses are taking effective and robust compliance with competition law.

1. Director disqualification – transplant into competition law

 

A director disqualification order (“DDO”) is not a new concept in regulatory enforcement proceedings against individuals.

 

In Hong Kong, the Securities and Futures Commission regularly seeks DDOs in its enforcement proceedings for market misconduct and breaches of the Securities and Futures Ordinance. Directors can also be disqualified under the Companies Ordinance for breaches of their statutory duties. For example, based on recent enforcement trends, the Securities and Futures Commission has obtained on average more than a dozen DDOs in recent years. The Competition Tribunal therefore has been able to transpose case law from other regulatory environments into the competition law setting.

 

Internationally, competition authorities in a number of jurisdictions have powers to disqualify directors for breaches of competition law, including the United Kingdom, Australia, New Zealand, Indonesia, Russia and Brazil. While it seems that these powers have historically rarely been used in practice, there is a quickly emerging trend for DDOs to become an increasingly popular tool to deter individuals and their companies from engaging in anti-competitive conduct.

 

For example, the United Kingdom’s Competition and Markets Authority adopted new guidance in 2019, which gives it greater procedural flexibility and discretion to exercise its director disqualification power. Further to the issuance of its revised guidance, there have been a wave of directors disqualified as a key enforcement outcome of cartel investigations. Notably, in July 2020, the UK High Court disqualified a director for seven years for contributing to price fixing of residential sales services. The Court considered that a failure by a director to prevent and report a competition law infringement itself can be classified as a direct contribution to the infringement.2 This has further emboldened the UK regulator to seek director disqualifications for competition law infringements.

 

2. When can the Competition Tribunal make a DDO?

 

Under Section 101 of the Competition Ordinance, the Competition Tribunal may make a DDO of up to five years. A DDO can only be made if

 

  •   The company of which the individual is a director has contravened a competition rule, and

  • The individual’s conduct as a director makes him unfit to be managing the company. The test for unfitness is set out in Section 103 of the Competition Ordinance and is modelled on the UK Company Directors Disqualification Act.3

 

A DDO is not a standalone enforcement outcome. The HKCC will need to have taken action against a company and proven the company has engaged in anti-competitive conduct to be able to attach a DDO application to the Competition Tribunal.

 

Under the Competition Ordinance, an individual is determined to be unsuitable for the management of the company concerned if his conduct amounted to any one of the following:

 

  • a contravention of a competition rule, or

  • he had reasonable grounds to suspect that the conduct of the company constituted the contravention and took no steps to prevent it, or

  • he did not know but ought to have known that the conduct of the company constituted a contravention. 

 

A director therefore does not need to have actually been a participant in the anti-competitive conduct. Liability and a DDO can potentially be made on the basis of a director turning a blind eye or to have failed in their directors’ duties to properly supervise the management of the company.

 

In practice, those unfitness conditions are broadly worded. Directors cannot place responsibility for competition law solely onto management. The personal impact on directors should be an alarm bell for directors to familiarise themselves with the Competition Ordinance and take active steps to ensure their company is taking compliance seriously. Competition law compliance should be a board-level topic – and the potential for DDOs is a reinforcement of this message to all businesses and directors.

 

3. Classification of the seriousness of contravention

 

In line with the HKCC’s aim to use a DDO for deterrent purposes, the Competition Tribunal’s approach in the Decoration Cartel has highlighted that the penalty is specific to the facts of the case – and therefore it must reflect the seriousness of the anti-competitive conduct.

 

In this regard, the Tribunal has laid out a general guideline on the classification of directors’ breach of competition law and the corresponding disqualification periods, with five years as the statutory maximum disqualification period: 

 

Severity Level

Contravention

Disqualification period

page3image18968

High

Serious circumstances (e.g. knowingly committing contravention, major participation, repeated offences, and inciting others to participate in anti- competitive conduct)

4-5 years

Intermediate In between both levels

page3image27600 page3image29112

2-3 years

Low

Minor circumstances

page3image36408 page3image36568 page3image36888

Less than 2 years
 

Apart from those general classifications, the Tribunal will also consider a basket of case-specific factors as aggravating and mitigating factors. These include:

 

  •   the extent of the effect of the contravention on shareholders and the public

  •   the extent and methods of the director’s involvement in the contravening conduct

  •   whether the director had any personal gains from the contravening conduct 

  •   the extent of effort made by the director to personally prevent or rectify the contravening conduct

  •   whether the director has admitted liability in the contravention

  •   whether the director has cooperated with the HKCC.

     

In this first disqualification order, the Tribunal recognised that in 2017 competition law in Hong Kong was still in its nascent stage (at the relevant time of the alleged cartel arrangement), and therefore the disqualified director may not have been able to take steps to prevent any contravention of competition law. In light of those circumstances, the Tribunal considered that the director’s involvement was regarded as “intermediate” level and used a two-year disqualification order as a starting point. The Tribunal further applied a discount of two months after taking into account the cooperation with the HKCC during its investigation.

 

In a separate case that concluded this week, the Tribunal has shown that a DDO is not an automatic outcome in enforcement proceedings. The recent judgment handed down by the Tribunal in respect of cartel conduct by an IT company in the Ocean Park case demonstrates that the Tribunal is sensitive to the specific facts of each case and exercises its discretion when considering whether a director disqualification order is appropriate. In the Ocean Park case, the Tribunal suspended the HKCC’s application for a director disqualification order, on the condition that the contravening company will conduct a competition compliance programme for all its employees and directors.4

 

4. Compliance – its personal!

 

The first DDO arose in a case where the director of a local SME admitted liability and settled the case with the HKCC.

 

It therefore remains to be seen how the Tribunal determines directors’ liability in a contested atmosphere. For example, it is likely to be a significant hurdle for the HKCC to prove that a director “has reasonable ground to suspect” a competition law contravention when the director had no personal involvement in the alleged anti-competitive arrangement. This is especially so for directors of large, complex multinational corporations. Proving the chain of responsibility will be a difficult task – it is questionable to what extent the directors of a parent company should be responsible for the misconduct of its subsidiaries where the parent company is not actively involved in the day-to-day management of its subsidiaries.

 

The combination of the DDO and the Individual Leniency Policy issued by the HKCC in April 2020 seeks to encourage employees to whistle-blow and report on their employer to the HKCC. Therefore, it is ever more crucial for directors to make early decisions for their company to self-report and cooperate with the HKCC in suspected cartel arrangements.

 

Further, given that businesses are prohibited under the Competition Ordinance from indemnifying its officers for paying any pecuniary penalty or costs incurred in defending the action if the individual is convicted of an offence, directors should, more than ever, be vigilant of competition law compliance risks.

 

This case outcome serves as a timely reminder to both individuals and businesses that there will be individual liability for breaching competition law in Hong Kong. Directors setting the tone is now a personal imperative – and they should ensure that there is a clear and unambiguous commitment to active competition law compliance in their businesses. 

 

 

For further information, please contact:

 

Marcus Pollard , Competition Counsel, Linklaters

marcus.pollard@linklaters.com 

 

1 Competition Commission v Fungs E&M Engineering Company and others [2020] HKCT 9

2  Competition and Markets Authority v Michael Christopher Martin [2020] EWHC 1751 (Ch)

3  Section 9A(6) of the Company Directors Disqualification Act 1986 

4 Competition Commission v Quantr Limited and Cheung Man Kit [2020] HKCT 10