Category Legal Affairs

Increased risk for Companies and Directors implicated in contravening the Competition Act

06 November 2008 Rosalind Lake & Jason van Dijk, Deneys Reitz

Risk takes on various masks and it is imperative that directors and companies are aware of new developments in competition law policy that must be incorporated into corporate governance compliance risk management strategies. But what exactly are these risks and what can companies and directors do to protect themselves?

Aside from the fiduciary duty of directors to manage the various risks faced by a company, directors and managers must also be aware of the possible personal consequences of causing the company to contravene the Act or failing to effectively manage the risk of contravention. The Competition Amendment Bill, which was approved this month and is awaiting signature by the President, introduces criminal penalties for directors and managers who are responsible for or who knowingly acquiesce in fixing prices and trading conditions, market division or collusive tendering. Directors and managers may face criminal fines of up to R500 000 or prison sentences of up to 10 years (or both).

Companies and their directors should also be wary of the risks associated with acquisitions of existing companies. The purchase of a company with past or existing anti-competitive practices can turn a seemingly good investment into an expensive litigious and reputational liability. This is illustrated by the R3.7 billion fine levied against Sasol by the European Competition Commission this month for the involvement of one of its subsidiaries in a hardcore cartel in the paraffin wax industry. Exposure to these risks can be mitigated by establishing that there has been competition law compliance when conducting due diligence exercises prior to embarking on such acquisitions.

A recent development that introduces another potential weapon in the arsenal of combatants against anti-competitive practices, will impact heavily on companies that rely on state tenders and who are involved in cartel conduct. Last month, Cabinet endorsed a resolution of the National Anti-Corruption Summit to introduce legislative measures to ensure that companies involved in price fixing, market allocation and collusive tendering will be prohibited from participating in state tenders.

It is therefore advisable for companies to develop a competition law compliance strategy that is incorporated into contracts of employment and to take disciplinary measures against employees who fail to abide by the policy. Competition law risk management should make provision for regular reviews of agreements and practices to ensure compliance with the Act. Customised staff training and ongoing maintenance of monitoring and reporting procedures of potential competition law issues should be conducted. Early reporting can make all the difference in securing leniency.

Firms will be prohibited from directly or indirectly paying any fine imposed on a manager or director who is convicted of an offence in terms of the amended provision, or from indemnifying, reimbursing or compensating that person in respect of any legal expenses incurred or other losses suffered whilst defending the charges. This means that any costs will be for the individual’s account and the company will not be allowed to take out insurance on behalf of their directors or managers to cover such expenses and losses. There is, in addition, the concern that a civil claim could be brought against the errant director or manager for the loss caused to the company, its shareholders or third parties.

As if these deterrents do not serve as an adequate disincentive to those with managerial powers, there will be additional risks for individuals under the anticipated new Companies Law. The draft Bill proposes empowering the Competition Commission to seek a court order disbarring a person from serving as a director if they have been responsible for contraventions of the Act.

Business is all about undertaking risk for reward. It is clear, however, that when it comes to non-compliance with competition law, the risks far outweigh the rewards. Directors and management must ensure that they, and their staff, are conducting business within the law.

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