Clayton Act Prohibition on Interlocking Directorates
Section 8 of the Clayton Act prohibits interlocking directorates (where a person serves as an officer or a director of two corporations) when the two corporations are competitors, each of the corporations satisfies the thresholds for capital, surplus, and undivided profits, and the corporations’ competitive sales do not meet any of the three statutory exceptions.1 Section 8 was intended to “nip in the bud incipient violations of the antitrust laws by removing the opportunity or temptation to such violations through interlocking directorates.”2
The Federal Trade Commission (FTC) adjusts annually3 the thresholds related to Section 8 based on changes to the gross national product. The FTC, DOJ, and states attorneys general have the authority to enforce Section 8, and there is also a private right of action for Section 8 claims. Section 8 does not provide the agencies with the authority to impose fines or other monetary damages for a Section 8 violation alone, limiting the agencies’ enforcement authority to seeking injunctive relief to eliminate the interlock.
However, a prohibited interlock may also result in the violation of other federal antitrust laws that, unlike Section 8 of the Clayton Act, may lead to civil or criminal penalties. For example, in addition to being challenged under Section 8, an interlock may also be challenged as a violation of Section 1 of the Sherman Act4 if the interlock facilitates collusion among competitors. And even if the interlock cannot be reached by Section 8, other antitrust laws in addition to the Sherman Act may still be applicable. For example, Section 5 of the FTC Act5 could apply to interlocks involving non-corporate entities, even though Section 8 arguably applies only to the boards of corporations.
Kanter Commits to Robust Enforcement of Section 8
AAG Kanter has indicated that, under his stewardship, the Division is seeking to use “the whole legislative toolbox” to promote competition. At the Spring Enforcers’ Summit in April 2022, Kanter singled out Section 8 of the Clayton Act as one of these legislative tools, arguing that “for too long, [the Division’s] Section 8 enforcement has essentially been limited to our merger review process.” Kanter pledged that the Division will be looking for violations of Section 8 “across the broader economy,” and will “not hesitate” to bring cases under the statute.
Kanter’s predecessor, former AAG Makan Delrahim, also spoke publicly about expanding the Division’s enforcement of Section 8. Delrahim questioned whether Congress intended to limit the application of Section 8 solely to corporations (excluding non-incorporated entities such as LLCs), and said that the Division under his tenure “believe[d] the harm can be the same regardless of the forms of the entities.” However, despite these statements, Delrahim did not ultimately challenge any interlocks under Section 8.
The recent board resignations announced by the Division on 19 October appear to be a direct result of Kanter’s stated initiative to increase Section 8 enforcement. In a press release announcing the seven resignations, AAG Kanter noted that “[c]ompetitors sharing officers or directors further concentrates power and creates the opportunity to exchange competitively sensitive information and facilitate coordination – all to the detriment of the economy and the American public . . .” Kanter also cited increased Section 8 enforcement as a way for the Division to “prevent other violations of the antitrust laws before they occur.”
Recent Board Resignations
Four of the seven interlocks involved direct interlocks – i.e., the same individual served on the boards of two alleged competitors. A fifth interlock also involved a direct interlock since the same Thoma Bravo representative sat on the Solarwinds and Dynatrace boards. But two additional Thoma Bravo representatives sat only on the Solarwinds board. All three were required to step down from their board positions. Going forward, it is clear that the Division intends to not only target direct interlocks but also interlocks arising where agents of the same entity sit on competing boards, an issue that is likely to arise more frequently in the private equity context. In fact, in a June 2022 speech, Deputy Assistant Attorney General Andrew Forman outlined a number of areas in which the Division is seeking to increase antitrust enforcement specifically with respect to private equity firms, including “taking aggressive action” where “private equity investments in competitors leads to board interlocks in violation of Section 8.”
Takeaways
The Division’s announcement puts corporations and their officers and directors (and investors entitled to those board seats) on notice that the agency is reinvigorating Section 8 enforcement against interlocking directorates.
In-house and outside counsel can play a critical role in reducing Section 8 risks by implementing processes and safeguards to prevent problematic interlocks and related information sharing issues before they arise, including:
- For corporations, periodically reviewing all external directorships held by officers or directors and assessing for new directors before they join the board.
- For private equity and venture capital investors, regularly monitoring board positions at portfolio companies across all funds—even if the board seats are held by different representatives of the firm. Because the competitive relationship between companies can change, reviewing annually is prudent.
- Assessing whether certain events may trigger new Section 8 issues, such as when:
- A corporation experiences sales growth, such that the company’s revenue now exceeds the de minimis exception thresholds;
- A corporation expands into a new line of business or introduces a new product, such that two businesses that previously did not compete now do so; or
- Any company, private equity firm, or venture capital firm invests in another corporation or is involved in M&A with a corporation.
Should one of these intervening events occur, the director has a one-year grace period to resign from the overlapping board position. It is therefore important for counsel to act quickly to identify any new, potentially problematic interlocks to ensure that—if necessary— the director steps down within the one-year period.
Even in scenarios where an interlock is not technically prohibited by Section 8, adopting firewalls and other guardrails may be prudent to ensure information is not improperly shared between companies. For example, a private equity firm with board participation on two emerging competitors may fall within the de minimis exception of Section 8, but information sharing between the two companies via the board seats may raise risks under Section 1 of the Sherman Act.
Authored by Robert Baldwin, Ilana Kattan, and Jill Ottenberg.
References
1 Section 8 includes (1) a de minimis exception for corporations with competing sales that fall below a certain threshold; (2) an exception for certain types of interlocks that might violate other antitrust laws, including vertical interlocks; and (3) an exception for interlocks involving non-corporate entities, such as partnerships or LLCS.
2 U.S. v. Sears, Roebuck & Co., 111 F. Supp. 614, 616 (S.D.N.Y. 1953).
3 Currently, a person may not serve as a director or officer of competing corporations if each corporation has capital, surplus, and undivided profits aggregating more than US$41,034,000, unless one of the corporations has competitive revenues of less than US$4,103,400, either corporation has competitive revenues of less than 2% of its total revenues, or each corporation has competitive revenues of less than 4% of its total revenues.
4 15 U.S.C. §1
5 15 U.S.C. §15
