United States: FTC And DOJ Continue Antitrust Enforcement Efforts Against Alleged Board Interlocks

On August 16, the Federal Trade Commission (FTC) and Department of Justice (DOJ) announced two new enforcement actions targeting alleged interlocking directorates.

For the FTC, this action is the first formal Clayton Act Section 8 enforcement in nearly 40 years.¹ The FTC announced a settlement resolving interlocking directorate concerns associated with a proposed transaction between Houston-based private equity firm Quantum Energy Partners (Quantum), whose holdings include Appalachian natural gas producer Tug Hill Corp. and pipeline operator Xcl Midstream, and natural gas producer EQT Corporation (EQT) based in Pittsburgh. The FTC alleged that the transaction — which would have granted Quantum the right to nominate its CEO or another Quantum designee for election as a member of the EQT Board of Directors — violated Section 8. As discussed in greater detail below, EQT and Quantum agreed to a variety of far-reaching commitments to resolve the FTCs concerns.

On the same day, DOJ announced that two directors at Pinterest Inc. resigned their positions on the Board of Directors of Nextdoor Holdings Inc., in response to DOJ concerns regarding the interlock.² This announcement is the latest in DOJ's enforcement initiative focused on Section 8, which DOJ says has "led to fifteen interlocking director resignations from eleven boards."³

These enforcement actions follow pledges from both the FTC and DOJ to continue enforcement attention in this area⁴ and underscore the need for companies to maintain an effective antitrust compliance program to mitigate Section 8 risks, both when choosing new directors and when existing corporate directors join other boards. Interlocking directorates raise concerns not only under Section 8, but can be the basis for claims of anticompetitive information exchange and coordination under Section 1 of the Sherman Act, which — unlike Section 8 — raises the risk of substantial private damages actions.

Clayton Act Section 8 Background

Simultaneous service as an officer or director of two competing companies may create antitrust risks through potential access to and improper disclosure of competitively sensitive information or coordination between the competitors.⁵ Section 8 of the Clayton Act is a prophylactic statute designed to prevent this type of conduct by prohibiting such dual service, subject to certain exceptions, regardless of whether any anticompetitive conduct occurs due to the interlock.

Section 8 prohibitions apply to an interlock when the following jurisdictional thresholds are met:

• The combined "capital, surplus, and undivided profits" (i.e., net worth) of each of the corporations exceeds US$45,257,000 (indexed annually)⁶
• Each corporation is engaged in whole or in part in interstate commerce
• The corporations are competitors "by virtue of their business and location of operation ... so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws."⁷

However, because certain interlocks are viewed to pose little risk of significant antitrust harm, interlocks are exempt from Section 8 where:

• The competitive sales⁸ of either corporation are less than US$4,525,700 (indexed annually)⁹
• The competitive sales of either corporation are less than 2% of that corporation's total sales
• The competitive sales of each corporation are less than 4% of that corporation's total sales

Importantly, even if an interlock is exempt under Section 8, companies and individuals can still be liable for anticompetitive conduct that might arise as a result of the interlock, such as Sherman Act Section 1 violations. The FTC has also indicated that it may apply Section 5 of the FTC Act to interlocks that violate the "spirit and policy" of Section 8 even if not prohibited by the terms of the statute.

Quantum Energy Partners/EQT Corporation Proposed Acquisition

On September 6, 2022, EQT agreed to acquire Quantum-controlled Tug Hill and XcL Midstream for approximately US$5.2 billion, half of which would be shares of EQT common stock.¹⁰ EQT is a natural gas producer operating in the Appalachian Basin. Quantum is a private equity investment firm, but the FTC alleged that Quantum competes with EQT because "[e]ntities held by Quantum's investment funds or supported by its private equity funds [beyond those EQT was acquiring] produce natural gas."¹¹ According to the FTC, the transaction would make Quantum one of EQT's largest shareholders.¹² In addition, EQT agreed to "take all necessary action to facilitate" the appointment of Quantum's CEO (or another Quantum designee) "to be included in a slate of director nominees" recommended for election to the EQT Board of Directors.¹³ The FTC argued that the transaction, as contemplated, represented (1) a violation of Section 8 by creating a board interlock between competitors — assuming that a Quantum-designee joined the EQT Board — and similarly, (2) a violation of Section 5 of the FTC Act as "facilitat[ing]" a violation of the antitrust laws through the exchange of non-public, competitively-sensitive information between the parties and Quantum's simultaneous exercise of influence over both companies.

The FTC also alleged that an unrelated, preexisting joint venture between EQT and Quantum formed in October 2020 for the purpose of negotiating and purchasing mineral rights in the Appalachian Basin "could reveal" sensitive information about EQT's potential exploration activities to Quantum,¹⁴ posing an "ongoing and incipient threat" of competitor communications.¹⁵ According to the FTC, the joint venture, The Mineral Company (TMC) receives competitively sensitive, non-public information about EQT's drilling plans so that TMC can determine (by virtue of a right of first refusal) whether to acquire mineral rights in a specified region that EQT is also considering acquiring. Furthermore, TMC's Board of Managers includes two Quantum employees, one of whom also participates in other Quantum natural gas businesses in the Appalachian Basin.¹⁶ As such, the FTC alleged that Quantum already "has easy access to confidential business information from a rival producer," including the "location of EQT's potential exploration activities and the pace of its mineral rights acquisitions."¹⁷ Referring to the EQT/Quantum proposed transaction, the FTC alleged that it would only "deepen the already cozy relationship" between the parties.¹⁸

The FTC complaint more broadly characterized the natural gas sector as one in which competitors have ample means and opportunity to access and share competitively sensitive information regarding drilling activity and future plans of potential rivals as a result of a "high degree of interrelationships between producers," such as co-investments, joint operations, and other methods of collaboration.¹⁹ While this creates substantial risks to competition, according to the FTC, the agency expressed particular concern over "signaling" behavior by which natural gas producers, including EQT, allegedly urge "capital discipline" across the industry during earnings calls — the result of which would be reduced output and higher prices.²⁰

Consent Agreement

To resolve the FTC's concerns, EQT and Quantum agreed to several commitments, including but not limited to:²¹

• Requiring Quantum to forego any exercise of appointment rights to EQT's Board of Directors for a period of 10 years
• Prohibiting Quantum from serving on the Board of Directors of "any of the top seven Appalachian Basin natural gas producers" without prior Commission approval for a period of 10 years
• Requiring Quantum to sell its EQT shares (prohibiting divestiture to any of the top seven Appalachian Basin natural gas producers without Commission approval) and rendering Quantum's shares a passive investment until the shares are sold
• Requiring Quantum and EQT to unwind TMC and any non-compete agreements
• Prohibiting any EQT directors, officers, agents, or representatives from serving in any management capacity within Quantum
• Prohibiting Quantum and EQT from entering into any non-compete agreements other than those in connection with and ancillary to the sale of a business

On August 16, EQT noted in a statement it was "pleased the FTC has completed its review" and was proceeding with the acquisitions of Tug Hill and XcL Midstream.²²

Pinterest Inc. and Nextdoor Holdings Inc.

Similarly, DOJ's recent investigation into purported interlocks between Pinterest and Nextdoor resulted in director resignations to resolve DOJ's concerns.²³ Pinterest is a San Francisco-based image-sharing and social media site, and Nextdoor is a hyperlocal social media network that connects neighborhood stakeholders also headquartered in San Francisco. Nextdoor identified Pinterest as a competitor in its March 15, 2022 10-K filing.²⁴ After DOJ raised concerns about two individuals serving on both companies' Boards of Directors, each resigned from the Nextdoor Board without admitting liability. In a filing, Nextdoor thanked the resigning directors for their "immense contributions" to the company.²⁵ DOJ touted the resignations as evidence of the Division's continued focus on and enforcement of Section 8.²⁶

Takeaways

The recent announcements from FTC and DOJ offer several notable takeaways:

Section 8 Risk to Non-Corporate Entities

The text of Section 8 refers to service as an officer or director of a corporation, and does not cover interlocks implicating noncorporate entities such as limited liability companies, partnerships, and sole proprietorships. Recognizing this limitation, the FTC has historically used Section 5 of the FTC Act, which prohibits "unfair or deceptive acts or practices in or affecting commerce," to enforce the "spirit and policy" of Section 8, even where the challenged interlock was not explicitly prohibited by Section 8.²⁷

In the EQT/Quantum matter, FTC brought claims under Section 8, despite the fact that Quantum's entities are organized under limited liability and limited partnership structures.²⁸ The FTC touted the settlement as making "clear" that "Quantum is subject to the prohibition on interlocking directors and officers under Section 8 of the Clayton Act, despite Quantum's limited liability and limited partnership corporate structure."²⁹ In a statement accompanying the complaint, FTC Chair Lina Khan and Commissioners Slaughter and Bedoya noted that the language of Section 8 was adopted prior to the widespread use of limited liability companies and pledged to "update [the] application of the law to match the realities of how firms do business in the modern economy."³⁰ The enforcers further noted that: "Today's action makes clear that Section 8 applies to businesses even if they are structured as limited partnerships or limited liability corporations."³¹ The FTC did not attempt to explain why the statute's language specifying service as an officer or director of a "corporation" was susceptible to an interpretation that would cover service as an officer or director of a non-corporate entity.

Focus on Corporate Representation

Another notable feature in the recent Section 8 enforcement actions has been the focus on corporate nomination rights as potential illegal interlocks: situations in which one company holds rights to nominate a board member for two different competing companies, even if it appoints different individuals to serve on the two boards. In the past, DOJ and the FTC have endorsed a "deputization" enforcement theory, accepted in several federal court decisions, that treats the appointing firm as the "person" who serves on the board of two competing corporations in violation of Section 8, even if it appoints different directors of the two firms such that no individual serves as a director of both competing firms.³²

Over the last year, DOJ has announced several director resignations which purportedly resolved DOJ concerns with interlocks under this "deputization" theory.³³ Similarly, the FTC's complaint and settlement in the Quantum/EQT matter echoes this focus: raising concerns not just with Quantum's potential appointment of its CEO to the EQT board, but the prospect that Quantum might have the right to appoint any designee to the EQT board.³⁴ This attention to corporate nomination rights — even if no single individual is serving simultaneously on the two interlocking boards — is likely to continue in the future.

Ongoing Scrutiny of Board Interlocks Likely to Continue

Finally, these developments show that antitrust scrutiny into interlocking directorates is continuing. FTC leadership has indicated they plan to actively investigate interlocking directorates (even those that may not violate Section 8) pursuant to the FTC's new Section 5 guidelines.³⁵ Likewise, DOJ has pledged to make Section 8 enforcement a priority, although this most recent announcement is the first since Assistant Attorney General Jonathan Kanter noted earlier this year that DOJ had almost 20 open Section 8 investigations.³⁶ Further, the FTC's and DOJ's proposed revisions to required Hart-Scott-Rodino filings, for example, require identification of officers and directors, including information about other boards on which they serve,³⁷ which may lead to additional investigations and enforcement actions in the future.

This ongoing focus on board interlocks is a good reminder for companies and counsel to do their due diligence regarding the potential implications of any changes in board representation, in order to ensure that such changes comply with Section 8.

Footnotes

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