Recent scrutiny of interlocking directorates – when a person serves as an officer or board director of two competing corporations – by the U.S. Department of Justice Antitrust Division (DOJ) and the Federal Trade Commission (FTC) sends a clear signal that antitrust authorities are escalating enforcement of Section 8 of the Clayton Act.
On October 19, 2022, the DOJ announced that seven directors from the boards of five separate companies resigned after the DOJ raised concerns that their roles violated antitrust laws. This follows Assistant Attorney General (AAG) Jonathan Kanter’s announcement in an April 2022 speech that the DOJ was “ramping up” efforts to identify Section 8 violations, along with several other recent statements and actions from antitrust authorities signaling an escalation in Section 8 enforcement. Simply put, this message must be heeded. The antitrust agencies are taking more aggressive action to discover and eliminate unlawful interlocks, with potentially serious consequences for public companies, for private equity, venture capital, and portfolio companies, and for the broader investment community.
In light of this enforcement priority, companies should proactively assess governance frameworks to identify and resolve potentially problematic interlocks to limit their exposure. In this client alert, we offer an analysis of Section 8 and discuss the key takeaways for entities to approach the agencies’ reinvigorated enforcement.
What Is an Interlocking Directorate?
Section 8 of the Clayton Act prohibits a “person” from serving simultaneously as an officer or director of competing corporations engaged in commerce in the United States, where each corporation has capital, surplus, and undivided profits of more than $41,034,000 (adjusted annually). Serving in these dual roles is referred to as an “interlocking directorate.” While this covers the same individual sitting on the boards of two competing corporations (or serving as the officer of one and sitting on the board of another), the courts and agencies have broadly interpreted the prohibition to include an agency theory. For example, different individuals from the same investment firm could trigger a Section 8 violation where one individual sits on the board of one corporation and the other sits on the board of a competing portfolio company. The courts and agencies have also found Section 8 violations stemming from certain indirect interlocks between corporations with competing subsidiaries.
Section 8 provides a safe harbor where: (1) the competitive sales of either corporation are less than $4,103,400 (adjusted annually); the competitive sales of either corporation are less than two percent of that corporation’s total sales; or (3) the competitive sales of each corporation are less than four percent of that corporation’s total sales. There is also a one-year grace period for resignation if there is change that creates an interlock in violation of Section 8 (e.g., corporations becoming competitors).
What Are the Consequences of an Interlock?
Section 8 is intended to prevent antitrust violations by reducing the opportunity for competitors to coordinate decision-making or exchange competitively sensitive information. While the agencies or private plaintiffs can seek injunctive relief or civil damages, the most common remedy has been elimination of the interlock through removal of a conflicted officer or director. Further, agency enforcement actions and litigated cases have been uncommon to date. Section 8 enforcement has instead relied on a mix of proactive self-policing and naming and shaming. For example, in the recent announcement by the DOJ, companies “unwound” the interlocks without admitting to liability. However, this may change in light of the agencies’ recent aggressive posture.
What Actions Are the Antitrust Agencies Taking?
In an October 19, 2022 announcement, AAG Kanter stated that the DOJ “is undertaking an extensive review of interlocking directorates across the entire economy and will enforce the law.” This enforcement effort was foreshadowed by the antitrust agencies over a year ago. In September 2021, the FTC adopted a resolution giving staff greater authority to use compulsory process to investigate “common directors and officers and common ownership.” More recently, in April 2022, AAG Kanter vowed to “ramp up efforts to identify [Section 8] violations” and bring enforcement actions. In late September 2022, the DOJ began issuing letters to public companies, investors, and individuals, alleging unlawful interlocking directorates, citing public filings in support of their claims, and threatening legal action if the recipients did not respond within 24 to 48 hours. It is understood that the DOJ has sent similar notice to private equity firms, presumably stemming from information provided in Hart-Scott-Rodino Act (HSR) filings.
This week’s announcement stated that companies, officers, and board members “should expect that enforcement of Section 8 will continue to be a priority for the Antitrust Division.” The message is clear: In the upcoming year, we will see aggressive enforcement against interlocking directorates.
What Can I Do?
To address this ramped-up enforcement, companies should work with experienced counsel to assess and address antitrust risk stemming from potential interlocks. This may include:
- A detailed, proactive review of governance frameworks across portfolios to identify issues;
- Close analysis of Section 8, possible exemptions, and relevant case law to judge whether there is a violation; and
- Measures to effectively address any violations.
If a company receives a letter from the agencies alleging an unlawful interlock, counsel can assist in developing an effective responsive strategy. Finally, companies should understand that the DOJ and FTC are proactively identifying unlawful interlocks by analyzing public disclosures and connecting the dots across HSR filings over time. Companies should take this into account when considering deals and drafting public filings.