Interlocking directorates (or interlocks) arise when a director of one company also sits on the Board of Directors (Board) of a competing company. For example, Mr. A serves on the Boards of competing companies, X Private Limited and Y Private Limited (like Coke and Pepsi).
The concept of interlocks also extends to directors appointed by a common investor to the Boards of competing companies. For example, a private equity investor, has investments in competing companies X Private Limited and Y Private Limited, appoints Mr. A and Mr. B on the respective Boards, which leads to interlocks.
One of the factors that drives competition in the market is uncertainty or lack of transparency which drives innovation, as companies want to stay ahead of each other. Interlocks can raise competition concerns by facilitating exchange of sensitive information between companies related to prices, business strategies, sales quantities, product plans etc. which reduces market transparency and results in subsequent collusion between companies, thereby dampening competition. Thus, as a result of interlocks, the competitive force of uncertainty will not be as strong as it was.
In India, the Companies Act, 2013, does not prohibit a director from serving on the Boards of competing companies. As per section 165, a director can serve on the Boards of up to 20 companies and, section 166 requires a director to act in the best interest of the company, without being involved in a situation where the interest of the company is conflicted.
With respect to the Competition Act, 2002 (Competition Act), there is no specific provision that proscribes interlocks; however, the Competition Act prohibits cartels i.e., competitors cannot jointly fix prices, share markets, decide quantities etc. Thus, any exchange of sensitive information between competitors through interlocks leading to cartelisation, will fall within the ambit of the Competition Act.
The Competition Commission of India (CCI) has analysed the potential impact of interlocks in few of its decisions. In Re: Meru Travel Solutions and ANI Technologies, the CCI inter alia discussed the effect of common ownership including interlocks in competing cab aggregators (i.e., Ola and Uber) on competition in the Indian market. In this case, Softbank (amongst others) was a common investor and had directors on the Boards of both Ola and Uber. The CCI noted that interlocks could lead to potential harm to competition in terms of coordination among competitors and exchange of sensitive information which could facilitate price collusion or capacity or volume restriction. While the CCI found no such evidence of price sharing or collusion in the case, it observed that it would not hesitate in taking action if it did.
It appears that the CCI did not take any action against the cab aggregators as the case related to abuse of dominance and anti-competitive agreements and dismissed it due to lack of evidence. In such cases, the CCI undertakes an ex-post review i.e., it analyses the impact on competition after the implementation of the conduct. However, in case of mergers, the CCI carries out an ex-ante review i.e., it analyses the impact on competition before implementation of a merger, to ensure that these do not harm competition in the future. So far, the CCI has considered the impact of interlocks in a few merger decisions and in all these cases, the parties have offered voluntary modifications as a pre-emptive measure to alleviate potential competition concerns arising from interlocks.
In Northern TK / FHL, the CCI noted that the acquirer (through a joint venture company (JV)) and target were competitors in the healthcare services market in India. The acquirer had an existing director in the JV company and post the proposed acquisition, would have a director on the Board of the target. To address competition concerns arising out of such an interlock, the parties offered certain commitments including to ensure that: (a) the acquirer did not appoint the same director on the Board of the target as that of the JV company's (i.e., no common director); and (b) no exchange of any sensitive information took place between the JV company and target. Additionally, the parties also offered to put in place a punishment mechanism in the event of violation of information exchange rules.
In Nippon / Kawasaki, the parties offered similar commitments to eliminate competition concerns that would arise from the interlocks between the parties and a joint venture set up by them, that was engaged in the same business as the parties.
The most recent decision on interlocks is ChrysCapital/Intas. In this case, ChrysCapital, a private equity investor proposed to increase its shareholding from 3 per cent to approximately 6 per cent in Intas, a pharmaceutical company and acquired a right to nominate a director on its Board. The CCI noted that ChrysCapital already has shareholding, voting rights as well as directors on the Boards of Intas' competitors (i.e., Mankind, GVK and Curatio). By virtue of such common interest (i.e., interlocking directorates and veto rights), Intas and its competitors will have the ability to pursue anti-competitive goals such as allocation of product or geographic market, or customers; streamlining innovation efforts; price arrangements. To address these concerns, ChrysCapital offered certain commitments including: (a) removing its existing director from the Board of Mankind; and (b) ensuring that the director nominated by ChrysCapital to the Board of Intas has no association with Mankind.
Much like India, in the European Union (EU) interlocks are assessed on a case-to-case basis. To address concerns arising from interlocks, companies have offered different commitments including, giving up their shareholding in companies with interlocking directorates. For instance, in AXA/GRE, AXA proposed to acquire sole control over GRE and its subsidiaries. Le Foyer (an entity belonging to another group altogether) in which GRE had shareholding, and a member on its Board, was in direct competition with AXA in one market. The European Commission (EC) permitted the merger subject to the sale of GRE's shareholding in Le Foyer, to eliminate concerns arising from the interlock.
In yet another case, Olivetti/Digital, the EC permitted Digital's acquisition of minority shareholding (i.e., only 8 per cent) in Olivetti (a competitor of Digital) along with appointment of Board member which led to the creation of interlocks between Olivetti and Digital. The transaction was approved after modifications, including the delegation of all the operative functions of Olivetti's Board to the chairman and general manager. Thus, Digital's director had no say in the operations of Olivetti. This made co-ordination of business behaviour and anti-competitive information flows unlikely.
In contra distinction to India and the EU, in the United States (US), interlocking directorates are prohibited under the competition law (i.e., Section 8 of the Clayton Act). The US Federal Trade Commission (FTC) particularly scrutinised Google and Apple for sharing two directors on their Boards – Mr. Eric Schmidt and Mr. Arthur Levinson. Resultantly, Mr. Eric Schmidt, the CEO of Google, stepped down from Apple's Board and Mr. Arthur Levinson, resigned from Google's Board, to address the FTC's concerns.
The jurisprudence on interlocks is still nascent in the Indian jurisdiction and this possibly explains why the CCI did not have any issues with interlocks in previous cases involving similar facts. With the CCI offering some guidance and closely scrutinising interlocks, companies ought to ensure that adequate measures are put in place to sufficiently deal with potential anti-competitive effects that can arise from interlocks. This is particularly significant in the context of private equity firms as they have shareholding and board representations in portfolio companies engaged in competing businesses.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.