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Car dealerships and cartels: the risks for purchasers

Car key exchange between businessmen Print publication

12/11/2015

The car dealership sector has seen considerable consolidation over the past year or so. One of the main drivers of this is the pressure being put on dealers to spend money upgrading or fitting out facilities to comply with manufacturers’ corporate identity standards. Smaller dealers may be reluctant to meet the costs involved and may be amenable to offers to sell.

Purchasers of dealerships need to be mindful of competition law considerations. The sector is continuing to attract substantial fines from regulators in the UK and across the EU as a result of anti-competitive activity.

For example, in July this year the Spanish National Markets and Competition Commission announced a record fine of €171 million for 20 car manufacturers and distributors. The Commission considered that the undertakings involved had exchanged commercially sensitive information and strategic information on the Spanish vehicles and after-sales market for the brands involved. The commercially sensitive information allegedly covered “practically all” activities from new and used vehicles to workshop and repair services.

Earlier in the year, the same regulator imposed fines totalling £41.13 million on 99 undertakings, including 95 car dealers, for colluding to fix maximum discounts and commercial conditions and for sharing sensitive information.

Closer to home, in March 2013 the Office of Fair Trading (whose competition law functions have since been assumed by the Competition & Markets Authority) imposed fines totalling over £2.8 million on Mercedes-Benz and four of its dealers. The infringements related to market sharing, price co-ordination and the exchange of commercially sensitive information between the dealers with the object of restricting competition for sales of vans or trucks in dealers’ respective areas.

The principle of successor liability applies under competition law. A purchaser of a company that has been involved in anti-competitive activity may find itself liable for a hefty fine, even though the purchaser has not actually engaged in any anti-competitive activity – i.e. it may be picking up the bill for a prior infringement committed by the target entity. The level of fine that may be imposed on a company that has engaged in anti-competitive activity is up to 10 per cent of group worldwide turnover. The company may face damages actions from aggrieved third parties who have suffered loss by reason of the company’s involvement in a cartel. Commercial arrangements tainted by infringement may be void and unenforceable. Individuals involved in hard core cartel activity may face personal fines and/or imprisonment. Directors can be disqualified from post for up to 15 years. There is also the loss of management of time and expense of defending an inquiry.

This makes effective, competition-focused due diligence, backed up by appropriate warranties and, if necessary, indemnities in the sale and purchase agreement, of paramount importance. The principal types of anti-competitive agreement or practice amongst competitors to look out for in the sector are:

  • agreeing or co-ordinating prices or other terms of sale
  • customer allocation or division of markets on a geographic basis
  • exchanging sensitive  commercial information.

An anti-competitive practice need not be documented – it could be an oral agreement or an unacknowledged “understanding”. It may be so commonplace in the industry that it appears legitimate. The practice itself may no longer be happening (but the competition authorities can investigate historic practices). Knowing what to look for and where to look will usually require specialist legal involvement.

The Walker Morris Corporate Group, working with colleagues from our Competition Team, have a  wealth of experience acting on disposals and acquisitions of motor dealerships and how to navigate any potential competition law pitfalls. As well as advising on the risks presented by anti-competitive practices highlighted in this briefing (which may lead the purchaser to require the protection of a leniency application) we have also considerable experience of advising on the applicability of the UK (and EU) merger regimes and of dealing with the competition regulator in a merger situation, something which may be applicable in the case of larger targets.

If you are considering purchasing a dealership and need advice on how to ensure you are not acquiring any hidden liabilities – competition-related or otherwise – please speak to the authors.

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