Dealpoint is a regular briefing on issues relevant to corporate transactions, notably M & A and reconstructions. Each edition of Dealpoint will focus in detail on one area of law and practice which may be of interest to principals and practitioners in the corporate transactions area.

This edition of DealPoint considers the extent to which the Target’s compliance with competition law should form part of due diligence.

Due Diligence and Cartels

The competition authorities in many countries are now focussed on stamping out cartel behaviour. An investigation in the US or Canada can quickly spread to Europe. Even if the problem is purely a national one, the OFT in the UK is as keen as everyone else to capture cartelists. All the major competition jurisdictions offer benefits to whistleblowers. Usually the benefit is a reduction in levels of fine (leniency) and even 100% immunity from fine for the “first through the door”. In countries such as the UK and the US where the behaviour can also be a crime it can be more personal - immunity from a jail sentence for senior personnel. The wheels of justice can turn very slowly in a cartel investigation, often because of the numbers of participants involved over the years that the cartel lasted and the complexity of the arrangements. There are typically delays of some years between the start and end of an investigation.

Acquirors that buy the shares in a company buy its competition history. Even an assets (rather than shares) transaction can still make the acquiror liable for breaches of competition law committed by the business in which the assets were previously used. This is because competition law is concerned with effects rather than form and any other approach would make it relatively easy to liquidate a company and leave liability behind. The fines for breach of EC and UK competition law are enormous - the maximum cap on a fine is 10% of group worldwide turnover in all goods and services. The EC has recently changed its practice on calculation of fines so that the levels of fine actually imposed on cartels are going up.

While competition compliance is usually warranted the sheer cost in management time, fees and fines can be enormous. It may be there is insufficient cover in the financial arrangements to meet these costs if problems come to light. This means that at the due diligence stage acquirors should examine the opportunities for cartel behaviour. “Cartel behaviour” in the UK means price fixing, sharing markets or customers, and bid rigging. Consider how easy would it be to set up a cartel? Are there relatively few operators in the market? Do all the main operators have opportunities to meet? Consider various levels in the company, including sales and finance personnel - e.g. do company personnel attend trade association meetings? Are all those meetings properly minuted? What do the minutes show? Do operators in the market tend to bid for the same contracts- so that bid rigging and “cover bids” are possible? Is there a history of problems in the areas where the target operates or in closely connected ones? It should not be forgotten that typically every cartel investigated by the authorities leads to discovery of at least one further cartel in a closely linked industry.

Evidence of cartel behaviour is usually found in files, perhaps notes of meetings or scribbles on price lists, but it can sometimes be found in agreements. Make sure all contracts between the target and its competitors are subject to particularly careful scrutiny.

Even if acquirors are relatively happy that the target is clean from problems they should ensure that new staff joining the company are trained in competition compliance so that no bad behaviour is introduced into the business. Additionally a proper, board endorsed, competition compliance plan should be put in place.

If problems come to light at a later stage it is important to act promptly. Days, and even hours, can count if there is any prospect of someone blowing the whistle on a cartel. The authorities operate a marker system to protect the whistle blower’s place in the queue for leniency/immunity from fines/personal immunity from criminal prosecution. This means the whistle blower can phone up and put down a marker and he/she/it is then given a period of time in which to provide the details to the authorities. It is also important to get an external private practice lawyer to investigate any suspicions of problem. This will ensure that documents that are produced during the investigation are subject to legal privilege. Internal documents produced by a company during an investigation are unlikely to be privileged. Although advice from an in house lawyer in a purely UK cartel should be privileged if it transpires that there are problems under EC law also then the in house lawyer’s advice is not privileged in relation to the EC investigation. By getting the investigation subject to the protection of privilege companies will gain some space to consider the best course of action for your business.

December 2007

For further information please contact
Geraldine Tickle
T: 44(0)870 763 1529
E: geraldine.tickle@martineau-uk.com

This article is a summary of the law of England & Wales as at December 2007. Its contents are general only and should not be relied upon in relation to any specific matter or transaction where advice should be sought.

© Martineau 2007