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Is it OK for affiliated companies to bid against eachother?

March 7, 2024

In the world of procurement, the question often arises: “Is it permissible for affiliate companies to bid against each other?” This is an important query that requires an understanding of legalities, procedures, and potential risks, and the answer isn’t black and white but rather, “it depends’’.

Affiliate companies are business entities that have a relationship with each other, typically characterised by one company owning a controlling stake in another, or being subsidiaries of a larger parent company. These companies may share resources, collaborate on projects, and operate in a coordinated manner, yet they retain their separate legal identities. They may encounter situations where they want to bid for the same contract. From their perspective, it might be seen as a strategic move to enhance the likelihood of securing the contract, or to capitalise on shared resources, knowledge, and expertise within the larger corporate group to submit a more robust bid. The combined capabilities could potentially increase the chances of success.

Procurement perspective and fair competition

From a procurement perspective, however, the situation is less clear-cut. Many procurement processes are designed to ensure fairness, transparency, and competition. In some cases, procurement policies explicitly disallow related companies from bidding on the same contract to avoid conflicts of interest and to ensure a level playing field for all bidders. For example, the UK Government’s Procurement Policy Note (PPN) mandates that contracting authorities must ensure fair competition and prevent any conflict of interest that could distort competition. There are also instances where such bidding is allowed, often with certain conditions attached. In the case of the United Nations Procurement Division (UNPD), companies under the same parent group can bid separately, provided they operate independently and do not share confidential information related to the tender.

Such a scenario would be a large multinational company that has distinct entities with unique specialisations and these entities may wish to participate in the same tender separately. This could be acceptable, provided a ‘Chinese Wall’ principle is applied, ensuring no exchange of commercially sensitive information. The challenge lies in ensuring that no information is shared within the group, which could lead to allegations of collusion, or bid rigging.

What is bid rigging?

From a legal standpoint, understanding the concept of bid rigging is important as it can lead to severe penalties and reputational damage . Bid rigging is an illegal practice under the competition law, which involves competitors conspiring to choose the winner of a bidding process while keeping the tender prices artificially high. This can occur in various ways:

1. Cover bidding: In this scenario, some competitors agree to submit bids that are deliberately higher than that of the designated winner, or they may include terms that they know will be unacceptable to the buyer. This strategy ensures that the bid of the designated winner is selected, while maintaining the illusion of competition.

2. Bid suppression: In bid suppression, some competitors agree not to submit a bid or to withdraw a previously submitted bid, to ensure the success of the designated winner’s bid.

3. Bid rotation: In bid rotation, competitors take turns at being the winning bidder. Contracts may be allocated equally among competitors, or the distribution may be proportionate to the size of each company.

Affiliate companies bidding against each other isn’t automatically classified as bid rigging, provided no collusive behaviour is involved.

Beneficial Ownership disclosure

Disclosure of beneficial ownership does not automatically disqualify affiliate companies from bidding on the same contract. However, it provides transparency and allows procurement officials to make informed decisions. If the disclosed information reveals potential conflicts of interest or collusive practices, the procurement officials can take action accordingly. This could range from closer scrutiny of the bids to disqualification, depending on the specific circumstances and applicable procurement rules and regulations. Therfore, while beneficial ownership transparency does not necessarily prevent affiliate companies from bidding on the same contract, it does ensure that the procurement process is conducted with integrity, fairness, and transparency while holding the beneficial owners accountable for the actions of the companies they control.

Tips for affiliated companies

For affiliated companies wanting to bid on the same contract, the key lies in the careful management of potential conflicts of interest. Companies need to have robust conflict of interest policies and practices in place. This could involve measures such as maintaining separate bid teams, erecting information barriers, and ensuring that decision-making processes are independent. Additionally, it is crucial to be transparent and disclose any relationships upfront. In many jurisdictions, failure to disclose such relationships can lead to disqualification, reputational damage, and even legal consequences.

1. Implement a system for full visibility of opportunities: Having a system that provides a comprehensive view of bid opportunities is crucial. However, it’s equally important to ensure that this system keeps commercially confidential data separate, avoiding any potential for collusive behaviour.

2. Establish internal guidelines: Set up clear internal group company rules on who can participate in specific tenders. Active management oversight can help allocate participation on a case-by-case basis.

3. Maintain confidentiality: Ensure that commercially sensitive information is not shared between bidding entities. This can be achieved by implementing strict data access controls and confidentiality agreements.

4. Provide training: It’s essential to educate all relevant staff about the risks and legal implications of bid rigging and anti-competitive conduct. This will help them understand the importance of adhering to best practices during the bidding process.

Ultimately, the decision to bid should be guided by principles of fairness, integrity, and corporate responsibility. And while it’s not inherently against the rules for affiliate companies to bid against each other, it’s essential to be mindful of the legal implications and potential risks involved. Transparency, clear internal guidelines, and a firm commitment to fair competition are the keys to navigating this complex issue. If in doubt, refer to the buyer’s procurement policy or seek legal advice.

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