Justice Department’s Investigation of "Interlocking Directorates" Leads to Corporate Board Resignations
Section 8 of the Clayton Antitrust Act of 1914 (Section 8) prohibits directors and officers from serving simultaneously on the boards of competing corporations, subject to limited exceptions. Specifically, Section 8 prohibits a "person" from serving as a director or board-appointed officer of two or more "corporations" if (i) the corporations are "by virtue of their business and location of operation, competitors …;" and (ii) certain monetary thresholds are met. By prohibiting coordinated efforts by those holding "interlocking" director positions, Section 8 is intended to prevent violations of antitrust laws before they occur. Earlier this year, the U.S. Department of Justice’s (DOJ) Antitrust Division announced its intent to monitor and enforce compliance with Section 8 more closely. Assistant Attorney General of the DOJ Antitrust Division Jonathan Kanter stated that "[t]he Antitrust Division is undertaking an extensive review of interlocking directorates across the entire economy" and that enforcement against interlocking directorates will continue to be a priority.
As a result of the Antitrust Division’s enforcement efforts, seven directors have recently resigned from corporate board positions due to concerns that their roles violated Section 8’s prohibition on interlocking directorates, according to a DOJ release dated October 19, 2022. Among the directors who resigned were board representatives from multiple investment firms, including the private equity firm, Thoma Bravo. The DOJ demanded that each of the individuals resign because the same individual or another individual from his company simultaneously served on the board of a company that allegedly competed with the company whose board the individual was resigning from. Each of the directors stepped down without any admission of liability by the respective companies or the directors themselves.
"Competitors 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," said Assistant Attorney General Jonathan Kanter. "The Antitrust Division is undertaking an extensive review of interlocking directorates across the entire economy and will enforce the law." This is another step in the antitrust agencies’ recent change in enforcement policy regarding private equity firms and their frequent common ownership of competing companies.
As noted above, there are a number of limited exceptions to Section 8. Simultaneous service as a director or officer in two competitive corporations is generally permissible under Section 8 if (i) either corporation’s competitive sales are less than $4,103,400 (the Section 8 thresholds are adjusted annually by the FTC based on changes in the gross national product); (ii) the competitive sales of either corporation are less than 2% of that corporation’s total sales; or (iii) the competitive sales of each corporation are less than 4% of that corporation’s total sales. "Competitive sales" are defined in Section 8 as the "gross revenues for all products and services sold by one corporation in competition with the other, determined on the basis of annual gross revenues for such products and services in that corporation’s last completed fiscal year." However, exactly what constitutes "competitive sales" generally depends on the conclusions of the Antitrust Division and may require in-depth analysis and legal advice to be accurately determined.
Companies, directors and officers should be mindful of potential Section 8 antitrust violations resulting from interlocking directorates, as the DOJ stated in its October 19 release that "enforcement of Section 8 will continue to be a priority for the Antitrust Division." Companies need to be aware of and evaluate the prohibitions of Section 8 not just when naming new officers and directors but also as a company’s business evolves, because companies who are not currently competitors may become competitors and competitive lines of business may grow to exceed the thresholds set by the law.
The penalty associated with a Section 8 violation is typically an elimination of the interlock, with a one-year grace period for a director to resign from a position in which an interlock did not exist at the time of appointment but arose over time. However, persons on potentially competing boards and the companies involved could also be subject to allegations of improper exchange of competitively sensitive information, which could contribute to allegations of violating Section 1 of the Sherman Act, which could have significantly greater consequences.