On October 19, the DOJ Antitrust Division announced that seven directors have resigned from board positions in ten companies after the Division raised concerns that the directors' roles violated the Clayton Act's prohibition against “interlocking directorates.”1 The move aligns with DOJ warnings that enforcement of this prohibition is “a priority for the Antitrust Division.”2
The Statute
The Clayton Act prohibits an individual from serving as a director or officer of two or more corporations if the corporations are “by virtue of their business and location of operation, competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws” – a fact-specific inquiry in which the agencies look to the nature of the business and geographic location of the two corporations.
The interlock also can be indirect, such as when the same private equity firm appoints different representatives to sit on the boards of competing companies. The remedy for a violation is removal of the overlapping director and private plaintiffs may seek monetary damages.
How the Agencies Identify Potential Violations
The DOJ's announcement does not specify how the interlocks came to the agency's attention. In the past, antitrust agencies have learned about potential violations during unrelated conduct or merger investigations. Recently, however, the agencies have undertaken a more proactive search for potential violations. While public information on potential interlocks such as U.S. Securities and Exchange Commission (SEC) filings have long been available, the DOJ's latest actions show a willingness to commit agency resources to rooting them out. In addition, the recently enacted Corporate Transparency Act (CTA) also may provide a source of information about potential interlocks.
Targeted Focus on Private Equity
Both the DOJ Antitrust Division and FTC have signaled increased scrutiny of private equity funds, generally, and “interlocking directorates” will be a primary focus of their enforcement.3 Traditional parent companies have been found to be incapable of conspiring with subsidiaries.4
Key Takeaways
The antitrust agencies are likely to continue to make the elimination of interlocking directorates a focus of this administration and have communicated their intention to do so proactively. Companies concerned about potential exposure can take steps to understand and minimize risk, including:
- Revise board appointment policies to ensure compliance with antitrust laws.
- Review existing board memberships for potential antitrust violations and ask board members to list other companies where they sit as a director. Ask board members to update this information regularly.
- Be especially cautious in the private equity context, where the antitrust agencies have signaled specific interest.
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Footnotes
1 Press Release, DOJ Antitrust Division, Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates, https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially.
2 Id.
3 Deputy Assistant Attorney General Andrew Forman, https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-andrew-forman-delivers-keynote-abas-antitrust; Chris Cumming, “Antitrust Regulators Fix Their Sights on Private Equity,” The Wall Street Journal (Sep. 30, 2021), https://www.wsj.com/articles/antitrust-regulators-fix-their-sights-on-private-equity-11632999600; Siri Bulusu, “Private Equity Firms Facing More Questions in FTC Merger Reviews,” Bloomberg Law (Jan. 13, 2022), https://news.bloomberglaw.com/antitrust/private-equity-firms-facing-more-questions-in-ftc-merger-reviews.
4 Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984).
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