On April 4, 2022, Assistant Attorney General Jonathan Kanter announced that the Department of Justice would take steps “to break up interlocking directorates.” Six months later, the agency made good on that threat. On November 19, 2022, the DOJ announced that seven individuals had resigned from the boards of five companies due to allegations that they had violated Section 8 of the Clayton Antitrust Act.
Section 8 prohibits one person from serving as an officer or director of two competing corporations, with certain limited exceptions. The law has rarely been enforced, but Kanter noted that the DOJ will be “litigating cases using the whole legislative toolbox that Congress has given us to promote competition.”
On November 10, 2022, the Federal Trade Commission announced that it will be taking action against interlocking directorates that the Clayton Act doesn’t cover. The agency said it interprets Section 5 of the FTC Act, which prohibits unfair methods of competition, as granting it the authority to do so.
The Clayton Act prohibits interlocking directorates because they allow corporations to share competitive information and synchronize pricing and other business decisions. In light of that, interlocking directorates among competitors are per se (presumed) violations of the Clayton Act — regulators do not have to prove anticompetitive injury.
As originally enacted in 1914, Section 8 banned virtually all interlocking directorates. The threshold requirements were low: Any two corporations with “capital, surplus, and undivided profits” of more than $1 million that compete “by virtue of their business and location” may not share a board member or officer.
In 1990, Congress heeded calls for reform by raising the monetary threshold to $10 million and tying it to gross national product (GNP). The amount is adjusted every January and is currently $41,034,000. Congress further enacted three exceptions:
- Competitive sales of either corporation that are less than $1 million (also tied to GNP and currently $4,103,400);
- Competitive sales of either corporation that are less than 2% of that corporation’s total sales; or
- Competitive sales of each corporation that are less than 4% of that corporation’s total sales.
Furthermore, Section 8 provides a 1-year grace period if an interlock occurs because a corporation grows to exceed the monetary or competitive overlap thresholds. The grace period also applies if the corporations become competitors due to an acquisition or other change in business affairs.
The DOJ and courts have tended to interpret Section 8 broadly. The term “corporation” applies to public and private companies and foreign corporations with U.S. operations, with specific exclusions for banks, banking associations, and trust companies. The DOJ and FTC have advocated for including LLCs and other non-corporate entities within the ambit of the law.
“Person” is defined not only as a natural person but as a corporation or unincorporated entity. Through an agency theory, a private equity firm that invests in competing corporations can create an interlock by appointing two different individuals to serve on their boards — a so-called “indirect” interlock.
Companies are generally considered “competitors” if they produce similar products in similar ways for a substantially similar customer base and are considered competitors in the marketplace. In a 1981 case, however, the Ninth Circuit noted that companies in markets where products are still evolving can be considered competitors if they vie for the same customers. “Competitive sales” refers to the gross revenues for all competing products and services in the company’s fiscal year.
Section 5 of the FTC broadly prohibits “unfair methods of competition in or affecting commerce,” which includes practices that not only violate antitrust laws but also contravene the objective of maximizing consumer welfare. In 2015, the FTC announced that it would interpret Section 5 using the “rule of reason” test of the Sherman Antitrust Act. The test analyzes the competing products and their markets, the respective market power of the competitors, and the anticompetitive effects of any contract or conspiracy in restraint of trade.
When the FTC announced on November 10, 2022, that it would be pursuing interlocking directorates, it also stated that it would no longer use the rule of reason test. The agency noted that the FTC Act was not defined within the confines of the Sherman and Clayton Acts, so the rule of reason test was too limiting.
The FTC’s new policy defines “competition” as any direct or indirect action within the marketplace “as opposed to merely a condition of the marketplace.” “Unfair” refers to any action that “goes beyond competition on the merits,” including coercion, collusion, and predatory tactics. This policy gives the FTC broad latitude to pursue interlocking directorates that fall outside Clayton Act enforcement.
Companies should review their corporate governance to ensure they comply with Clayton Act and FTC Act requirements. Board appointment policies should include procedures to screen for potential interlocks and require that board members and officers report any new positions they accept. Companies that rely on Section 8’s de minimis exceptions should also conduct periodic compliance reviews, particularly as lines of business or financial conditions change.
Even if an interlock falls below Section 8’s monetary threshold or within its exceptions, it should be evaluated for potential violation of Section of the FTC Act. The DOJ and FTC have an interagency clearance process that virtually eliminates any conflicts between the two agencies when pursuing investigations. One agency will generally defer to the other based upon expertise and available resources.
Historically, the DOJ primarily pursued interlocking directorates within the context of merger reviews. The DOJ is now proactively enforcing Section 8 by examining the public filings of corporations to identify interlocks. The FTC is also taking aim at interlocks under a broad interpretation of the FTC Act. Organizations should examine whether their directorates violate these laws and update their corporate governance policies accordingly.
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