Reinvigorated Antitrust Enforcement of Interlocking Directorate Violations

January 2023

Reinvigorated Antitrust Enforcement of Interlocking Directorate Violations

Over the past several months, the Department of Justice’s Antitrust Division and the Federal Trade Commission have indicated their intent to reinvigorate enforcement of the Clayton Act’s prohibition against “interlocking directorates,” situations where a person simultaneously serves on the board of two or more competing corporations. In April, for example, Assistant Attorney General Jonathan Kanter expressed the DOJ’s intent to apply the “bright-line rule” against interlocking directorates beyond the merger review process. This fall, there were reports of the DOJ sending letters and civil investigative demands to companies, private equity firms and investors requesting information about their board composition; shortly thereafter, the DOJ’s concerns regarding interlocking directorates between five pairs of companies led to the resignation of seven directors. Although those companies and directors were able to unwind the interlocks in question by resigning without admitting to liability, the action by the government forewarns of greater enforcement in this area. Meanwhile, in November, the FTC issued a policy statement that expressly lists interlocking directorates as a method of unfair competition subject to enforcement under Section 5 of the FTC Act, even if not covered by the literal language of the Clayton Act, as conduct that “violates the spirit of the antitrust laws.”

While historically interlocking directorates received less attention, in this new enforcement environment, the issue calls for increased attention for private equity firms when considering the corporate governance of their portfolio companies.

The Prohibition against Interlocking Directorates

Subject to certain de minimis exemptions, U.S. antitrust laws prohibit a “person”—an individual or a company—from simultaneously serving as a director or officer of two competing corporations. This prohibition can be triggered, regulators contend, even when a company has two different employees sitting on the boards of competing companies. A finding of competitive injury is not required for enforcement actions to be taken against an interlocking directorate. The prohibition is prophylactic, designed to prevent unlawful collusion and sharing of competitively sensitive information through a person sitting on competitors’ boards.

Historically, the FTC and DOJ have taken action against interlocks in the context of premerger investigations during Hart-Scott-Rodino review. These agency actions typically have been resolved through consent decrees between a company and the FTC or DOJ that remove the offending interlock by requiring a director to resign or by implementing safeguards that effectively eliminate the interlock in any area of competitive overlap. In cases where the government has identified a “cognizable danger of recurrent violation,” it also has sought prospective injunctive relief, such as barring corporate defendants from having common directors or placing directors at certain companies for several years. For example, the DOJ required Tullett Prebon Group to restructure its proposed $1.5 billion acquisition of ICAP’s hybrid voice brokerage business such that ICAP obtained neither post-acquisition ownership interest in Tullett Prebon nor any right to appoint board members to Tullett Prebon. Similarly, after the DOJ challenged CommScope’s acquisition of Andrew Corp. due to Andrew Corp.’s holdings in Andes, a competitor of CommScope, CommScope agreed to divest its holdings and forfeit its investor rights in Andes, including the right to appoint certain board members.

With the government signaling its intent to pursue interlocks outside of the HSR review process, companies can expect actions of this type to form a more frequent part of the enforcement landscape.

What Should PE Firms Keep in Mind?

Regulators are making good on their commitment to seek out interlocking directorate violations as part of their broader toolbox to promote robust competition, and there is no reason to expect this trend to shift.

PE firms should assess the composition of the management teams and boards of their portfolio companies—with a particular focus on portfolio companies with overlapping or potentially competing businesses—and obtain counsel to minimize risk and uncertainty in this area. PE firms may also consider annually reviewing other director or officer positions held by independent board members at their portfolio companies.