How To Assess Interlocking Directorates In Antitrust Ramp-Up
This article originally appeared in Law360 on October 25, 2022. It is republished here with permission.
Recent activity and statements from the U.S. Department of Justice and Federal Trade Commission signal that the federal agencies are likely to be more aggressive in pursuing enforcement against what they identify as interlocking directorates, which may violate Section 8 of the Clayton Act.
An interlock arises when a person who serves as an officer or director of one corporation simultaneously serves as an officer or director of a competing corporation.
Historically, interlocks usually caught enforcers’ attention in the context of investigations into other antitrust matters, such as during merger reviews.
Now, however, the agencies appear poised to proactively seek out interlocks, even independent of separate compliance matters.
On Oct. 19, the DOJ announced that seven directors resigned from corporate board positions from five companies after the DOJ expressed concerns that their roles violated Section 8.1
As a result of this heightened interest, corporations should consider conducting reviews of their board and officer relationships to identify any interlocks that may pose problems.
Section 8’s Prohibition of Interlocking Directorates
Section 8 of the Clayton Act broadly prohibits individuals from serving as an officer or director of two competing corporations.
Section 8 only applies when the corporation has capital, surplus and undivided profits of a certain threshold, which, as of this writing, is $41.03 million.2
Section 8 is a strict liability statute, meaning that violations are illegal per se, and plaintiffs are not required to separately show an actual harm to competition.3
In enacting Section 8, Congress sought to create an additional layer of protection to prevent competing corporations from exchanging commercially sensitive information or coordinating business decisions.
As a simple illustration, suppose that two corporations, A and B, each sell a competing product in the same geographic area.
Assuming that Corporations A and B each meet the statutory threshold and no safe harbor applies — more on that below — Section 8 prohibits, for example, the chief financial officer of corporation A from simultaneously serving as an officer or director of corporation B.
By adopting a bright-line rule against these sorts of interlocks, Section 8 is designed to reduce the risk that Corporations A and B might form an agreement in restraint of trade in violation of Section 1 of the Sherman Act.
Safe Harbors Under Section 8
Section 8 includes three safe harbor exceptions, which focus on the parties’ competitive sales. Section 8 does not apply if:
- Either corporation’s competitive sales are less than $4.1 million;
- Either corporation’s competitive sales are less than 2% of that corporation’s total sales; or
- Each corporation’s competitive sales are less than 4% of each individual corporation’s total sales.
The essence of these safe harbors is that an interlock will not be prohibited if the two corporations only compete for a small portion of business.
In practice, however, these safe harbors are sufficiently complicated to apply that they should not be relied upon without a detailed analysis. Compounding this difficulty is the fact that, because Section 8 cases are rarely litigated, there is little case law discussing the three safe harbor exceptions or applying them in real-world situations.
The Deputization Theory of Section 8
Section 8 states that “[n]o person shall, at the same time, serve as a director or officer in any two [competing] corporations.”
Importantly, the DOJ and FTC have occasionally taken the position that a person for Section 8 purposes means not only a natural person, but also potentially a legal entity.4
Referred to as the “agency” or “deputization” theory of Section 8, a legal entity under this interpretation can violate Section 8 if it has representatives serving on the boards of two competing corporations, even if the entity’s representatives are themselves different individuals.5
Although it does not appear that any court has ever squarely held that the deputization theory is a valid interpretation of Section 8, at least one court has referred to the deputization theory as a legal possibility in denying a motion to dismiss.6
The deputization approach to Section 8 presents challenges requiring increased diligence. For example, under this interpretation, a corporation may have an interlocking problem when it makes a minority investment in a competing corporation and negotiates the right to appoint a board member.
These types of situations also may arise regularly in the context of private equity
investments, where, for instance, one private equity fund or fund manager might have the right to appoint board members to two or more different competing corporations. These situations are highly complex and require careful consideration of Section 8.
The Changing Enforcement Landscape
Historically, stand-alone Section 8 investigations and enforcement actions have been uncommon. In recent years, however, the DOJ and FTC’s public statements signal a change in their approach.7
For example, at the 2022 Spring Enforcers Summit in April, DOJ Assistant Attorney General Jonathan Kanter delivered remarks stating that the DOJ was “ramping up efforts” to identify and remedy Section 8 violations and making clear that the DOJ will no longer limit Section 8 enforcement to merger reviews.8
True to its word, recent reports suggest that the DOJ has begun sending letters — and at least in some instances, civil investigative demands — to public companies, private equity firms, individuals and investors requesting information about their directorates.
In addition to Section 8, interlocking directorates may also be actionable as an unfair trade practice under Section 5 of the FTC Act or as an unreasonable restraint of trade under Section 1. The FTC previously has stated it could assert Section 5 to enforce the “spirit and policy” of Section 8, even for conduct that does not amount to a technical violation of Section 8.
Corporate Considerations to Assess and Monitor Problematic Interlocks
As the DOJ continues to ramp up its investigative efforts, corporations should consider revisiting the roles of their own officers and directors in other corporations to determine whether they may pose an improper interlock.
In doing so, corporations also should keep in mind the agencies’ broad interpretation of “person” under the deputization theory.
To discover and monitor for potentially problematic interlocks, corporations may choose to employ various strategies, such as surveying their officers and directors, compiling lists of all the companies its officers and directors serve on, and finding a manageable way to monitor what may be changing competitive dynamics in an industry.
If a corporation discovers it may have a problematic interlock, it should immediately attend to resolving the issue and minimizing future risk.
Conclusión
Although stand-alone Section 8 enforcement proceedings have been uncommon in the past, the agencies’ enforcement priorities and landscape — as with many areas of antitrust — are changing.
The recent DOJ letters to public companies, private equity firms, individuals and investors signal interlocking directorate issues may no longer be only addressed as part of a larger investigation but instead be resolved under a separate, stand-alone investigation.
The intent of the agencies to pursue Section 8 violations under the deputization theory further poses risk and uncertainty, particularly where firms may have minority holdings in entities that compete in one or more product or service areas.
Now may be the time to evaluate corporate holdings, interests, and officer and director roles to review where there may be issues.
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1 See DOJ Press Release, “Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates” (Oct. 19, 2022), https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially.
2 Federal Trade Commission, “Revised Jurisdictional Thresholds for Section 8 of the Clayton Act” (Jan. 24, 2022), https://www.ftc.gov/legal-library/browse/federal-register-notices/revised-jurisdictional-thresholds-section-8-clayton-act-20. The threshold is adjusted annually based on changes in gross national product. Regardless of the threshold, however, the government or other plaintiffs can challenge interlocks under Section 1 of the Sherman Act (Section 1), 15 U.S.C. § 1, as unreasonable restraints of trade. The FTC can also challenge them as unfair trade practices pursuant to Section 5 of the FTC Act.
3 Federal Trade Commission, Competition Matters Blog, “Interlocking Mindfulness” (June 26, 2019), https://www.ftc.gov/enforcement/competition-matters/2019/06/interlocking-mindfulness
4 See FTC Blog Post “Have a plan to comply with the bar on horizontal interlocks,” Debbie Feinstein (January 23, 2017) https://www.ftc.gov/news-events/blogs/competition-matters/2017/01/have-plan-comply-bar-horizontal-interlocks<span>; Brief for the United States as Amicus Curiae, Reading Int'l v. Oaktree Capital Mgmt. (Oct. 1, 2003), https://www.justice.gov/atr/case-document/brief-united-states-amicus-curiae-13.
5 It is unclear how a legal entity could “serve as a director or officer” as envisioned by the statutory language.
6 See Reading Int’l v. Oaktree Capital Mgmt., 317 F. Supp. 2d 301, 332 (S.D.N.Y 2003).
7 See DOJ Press Release, “Assistant Attorney General Jonathan Kanter Delivers Opening Remarks at 2022 Spring Enforcers Summit” (Apr. 4, 2022), https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers<span>; see also "Have a plan to comply with the bar on horizontal interlocks," Debbie Feinstein (January 23, 2017) https://www.ftc.gov/news-events/blogs/competition-matters/2017/01/have-plan-comply-bar-horizontal-interlocks</a>; Federal Trade Commission, Competition Matters Blog, "Interlocking Mindfulness" (June 26, 2019), https://www.ftc.gov/enforcement/competition-matters/2019/06/interlocking-mindfulness.
8 See DOJ Press Release, “Assistant Attorney General Jonathan Kanter Delivers Opening Remarks at 2022 Spring Enforcers Summit” (Apr. 4, 2022), https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers (“For too long, our Section 8 enforcement has essentially been limited to our merger review process. We are ramping up efforts to identify violations across the broader economy, and we will not hesitate to bring Section 8 cases to break up interlocking directorates.”).
