Legal Alert

What Companies Need to Know about the DOJ's Recent Targeting of Interlocking Directorates

October 26, 2022

Summary

Earlier this year, the head of the Antitrust Division at the U.S. Department of Justice, Jonathan Kanter, signaled that the agency would be ramping up its investigation of companies with interlocking directorates as potential violations of Section 8 of the Clayton Act. Section 8, oft-overlooked and rarely enforced, prohibits any person from simultaneously serving as an officer or director of two competing corporations. Last week, the Department made good on Kanter’s promise, announcing that directors had resigned from the boards of five companies in response to DOJ investigations of potential Section 8 violations. In a press release announcing the resignations, the DOJ warned “[c]ompanies, officers, and board members should expect that enforcement of Section 8 will continue to be a priority for the Antitrust Division.”

The Upshot

  • Interlocking directorates occur where a person simultaneously serves as an officer or director of two corporations.
  • Generally speaking, Section 8 of the Clayton Act, a seldom used provision of the antitrust laws, prohibits interlocks between competing corporations due to the potential to result in unlawful coordination and anticompetitive effects.
  • Violations of Section 8 are per se violations of the antitrust laws; a lack of competitive injury will not excuse liability for a violation.
  • Companies can expect increased government scrutiny in this area and should be proactively examining whether their boards and officers might come under investigation.

The Bottom Line

Investigating interlocking directorates has become an increased priority of government enforcers. Many corporations may soon find their officers and directors under the microscope. Companies should assess whether Clayton Act Section 8’s prohibition against a person serving as an officer or director for two competing corporations may apply to them, and consult with antitrust counsel to ensure that their directorates do not violate the newly revitalized Clayton Act Section 8.

Section 8 of the Clayton Act prohibits any person from simultaneously serving as an officer or director of two competing corporations.1 Federal antitrust enforcers and private parties may bring enforcement actions to challenge interlocking directorates under Section 8.

Although interlocking directorates are generally legal, interlock between competing corporations may be prohibited. The antitrust laws can prohibit these arrangements between competitors due to their potential to result in harm to competition, such as allowing competitors to exchange competitively sensitive information and synchronize business decisions. 

In his opening remarks at the 2022 Spring Enforcers Summit, the current head of the DOJ Antitrust Division, Assistant Attorney General Jonathan Kanter, told the audience that “[o]ne tool that I think we can use more is Section 8 of the Clayton Act,” explaining that the purported advantage of Section 8 is that it prevents collusion before it can occur.He continued: “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.”3

This was not an empty threat. On October 19, the DOJ announced that directors had resigned from the boards of five companies in response to Justice Department investigations of potential Section 8 violations. In the accompanying release, the DOJ warned that “[t]his announcement is the first in a broader review of potentially unlawful interlocking directorates” and “[c]ompanies, officers, and board members should expect that enforcement of Section 8 will continue to be a priority for the Antitrust Division.”4

Violations of Section 8 are per se violations, meaning that a lack of competitive injury will not excuse the parties from liability unless one of the de minimis exemptions in the statute applies (discussed below). To determine whether Section 8 applies to an interlocking directorate, companies must evaluate whether:

  • the two corporations are engaged in commerce;
  • the two corporations compete with one another by virtue of their business;
  • any person serves as an officer or a director of the two corporations; and
  • each corporation’s financial records show that it has capital, surplus, and undivided profits totaling more than $41,034,000.5

Section 8 does not apply to all entities. It applies to corporations. Even though Section 8’s prohibition on its face does not apply to non-corporate entities, the agencies have previously advocated that its coverage should be extend to other structures, such as LLCs. Moreover, this limitation does not mean that private equity funds and other financial investors need not be concerned. PE funds and others may still violate Section 8 by appointing board members to their portfolio companies. Furthermore, the federal antitrust agencies and some courts have interpreted the word “person” in Section 8 to apply to representatives sitting on competing boards under an agency theory.6

Companies should be particularly mindful when they enter a new product market. Companies may choose to preempt any concerns by foregoing board seats or otherwise eliminating the interlock.

Despite Section 8’s broad reach, there are limited safe harbors and exceptions to its prohibitions.  For example, in addition to the limitation on the types of entities to which it applies, Section 8:

  • provides a one-year grace period following an event that creates interlock7;
  • applies only to horizontal interlocks; and
  • contains de minimis exceptions: (1) where competitive sales of either corporation are under a dollar threshold (currently $4,103,400, but adjusted annually), (2) where competitive sales are less than 2 percent of either corporation’s total sales, or (3) where each corporation’s competitive sales are less than 4 percent of its total sales.8

Attorneys in Ballard Spahr’s Antitrust and Competition Group are available to advise businesses on the effects of these developments on their current practices and competitive arrangements. Please call us for more information.

 


[1] 15 U.S.C. § 19. 

[2] DOJ, 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.

[3] Id.

[4] DOJ, 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.

[5] Id.; FTC, Revised Jurisdictional Thresholds for Section 8 of the Clayton Act, 87 Fed. Reg. 3540 (Jan. 24, 2022) (this amount is adjusted annually by the FTC based on changes in the gross national product).

[6] See, e.g., Reading Int’l Inc. v. Oaktree Capital Mgmt., 317 F. Supp. 2d 301, 327-28 (S.D.N.Y. 2003); Square D Co. v. Schneider S.A., 760 F. Supp. 362, 364 (S.D.N.Y 1991); Michael E. Blaisdell, Interlocking Mindfulness, FTC (June 26, 2019).

[7] 15 U.S.C. § 19(b).

[8] Id. at § 19(a)(1),(2); 87 Fed. Reg. 3540.

Subscribe to Ballard Spahr Mailing Lists

Get the latest significant legal alerts, news, webinars, and insights that affect your industry. 
Subscribe

Copyright © 2022 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.