On October 19, 2022, the U.S. Department of Justice’s (DOJ) Antitrust Division announced that seven directors had resigned from their respective corporate board positions in response to concerns of interlocking directorates.1 This announcement followed reports that DOJ had issued letters to numerous public companies, investors, and individuals last month. The letters reportedly indicated that DOJ was examining potential interlocks and advised the targets of the risk of potential enforcement actions.2 DOJ’s muscular posture toward enforcement under Section 8 of the Clayton Act is only the “first in a broader review of potentially unlawful interlocking directorates.”3
- DOJ is aggressively scrutinizing possible interlocking directorates, resulting in multiple director resignations.
- DOJ is expected to continue its assertive approach to Section 8.
- Based on the recent resignations, DOJ appears to be addressing both direct and indirect interlocks–including interlocks within companies backed by private equity and investment firms.
- Corporations and directors should consider reviewing their Section 8 risk and implementing appropriate safeguards—including implementing annual assessments of any such risk.
Section 8 Legal Framework
Section 8 of the Clayton Act prohibits an individual from simultaneously serving as an officer or director on the boards of two or more “competing” corporations (otherwise known as an “interlocking directorate”).4 A breach of Section 8 is a strict liability or per se offense. Nevertheless, an interlocking directorate is exempt from Section 8 in the following circumstances:
- Either company has less than $41,034,000 in total capital, surplus, and undivided profits; or
- When competitive sales of:
- either corporation are less than $4,103,400;
- either corporation are less than 2% of the corporation’s total sales; or
- each corporation are less than 4% of the corporation’s total sales.5
The typical remedy is injunctive relief (e.g., removing the individual from one of their positions to eliminate the interlock). Private parties are also able to pursue private actions and technically can seek damages, though we are not aware of any instance where a plaintiff has successfully obtained damages under a Section 8 claim.
In general, Section 8 addresses two types of interlocking directorates:
- Direct Interlocks. Direct interlocks exist where a specific individual simultaneously serves as a director or officer on two or more competing companies.
- Indirect Interlocks. Indirect interlocks can occur through a variety of scenarios. Courts have recognized that certain commingled board relationships may be sufficient to support an indirect interlock finding (e.g., an investment firm appointing different individuals to serve on the boards of its competing portfolio companies).6 The key issue in determining the presence of prohibited indirect interlocks is the extent of control exercised over the affiliated company. Although case law is not settled in this area, DOJ and FTC have obtained relief in the context of certain indirect interlock challenges.7
Closer Analysis of DOJ’s Most Recent Enforcement Action
The recent resignations follow a string of DOJ enforcement actions.8 The resignations occurred in five different matters. All the resignations seemingly involved direct interlocks, and two also may have involved indirect interlocks.
- In all five matters, a director sat on the board of two competing companies and therefore created a direct interlock. In each of those matters, the director resigned from one board to eliminate the interlock.
- In one matter, two directors may have stepped down because of an indirect interlock. That is, three directors were employed by the same investment firm, and one of the three directors sat on the boards of two competing firms. As a result of the single director’s interlock, all three directors resigned from the board of one of the two competing companies.
Section 8 is expected to continue to be a priority in DOJ’s enforcement agenda, and the recent issuance of letters show that DOJ will be scrutinizing potential interlocks. As a result, corporations should consider taking steps to mitigate Section 8 liability. In particular:
- Companies should consider conducting annual check-ups of directors’ and officers’ board memberships to avoid any concerns presented by potentially developing Section 8 interlocks. This is especially the case for companies in dynamic industries where new competition may emerge quickly and frequently.
- Companies that have not conducted an annual review should consider doing so as soon as possible.
- Companies, including private equity firms or investment companies, should be aware that where two firm employees sit on the boards of competing companies, an interlock concern could arise.
- Although Section 8 expressly refers to officers or directors, certain courts have opined that Section 8 liability may be extended beyond officers and directors under an agency theory—e.g., where a company’s agent sits on the board of a competitor of that company.9
- Interlocking directorates also may raise risk under Section 1 of the Sherman Act or Section 5 of the Federal Trade Commission Act—as an interlock may facilitate (or be perceived to facilitate) a separate antitrust violation. Consequently, whether or not an exemption may apply under Section 8, it is important to consider implementing organizational safeguards such as firewalls between potentially interlocked executives and procedures for directors when handling competitively sensitive information.
1 See DOJ, Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates [“DOJ Announcement”].
2 See LexBlog, Word on the Street: DOJ Issuing Inquiries Into Director Interlocks.
3 See DOJ Announcement.
4 15 U.S.C. § 19, s. 1.
5 Id. at s. 2. These dollar figures are adjusted annually.
6 See Reading Int’l, Inc. v. Oaktree Capital Mgmt. LLC, 317 F. Supp. 2d 301 (SDNY 2003).
7 See United States v. Crocker Nat’l Bank, 656 F.2d 428, 450 (9th Cir. 1981) and In re Borg-Warner Corp., 101 F.T.C. 863, 925, modified, 102 F.T.C. 1164 (FTC 1983).
8 See e.g., DOJ, Press Release, Tullett Prebon and ICAP Restructure Transaction after Justice Department Expresses Concerns about Interlocking Directorates (July 14, 2016) and DOJ, Press Release, Endeavor Executives Resign from Live Nation Board of Directors after Justice Department Expresses Antitrust Concerns (June 21, 2021).
9 “Officer” is defined as an “officer elected or chosen by the Board of Directors.” 15 U.S.C. § 19(a)(4). The authors would like to thank Milinda Yimesghen (TO) for her contributions to this article.