WHAT HAPPENED

• Seven directors resigned from corporate boards following promises of enforcement of Clayton Act Section 8 (15 U.S.C. § 19) by the US Department of Justice (DOJ), Antitrust Division (the Division), the Division announced Wednesday.

• The directors served on the boards of corporations that the DOJ asserted competed in a variety of sectors, including information technology, software, and manufacturing.

WHAT’S THE LEGAL CONCERN

• Section 8 prohibits “interlocking directorates” (per se violation), which occur when the same individual serves simultaneously as an officer or director of two competing companies (direct interlocks) or when different individuals on boards of competing companies act on behalf of and at the direction of a single firm (indirect interlocks through deputization). In its press release, the DOJ noted that some of the interlocks arose because a private equity firm appointed different personnel to the boards of competing companies.

• The goal of Section 8 and the DOJ action is to decrease potential opportunities for the exchange of sensitive information between competitors and the risk of anticompetitive conduct more generally.

• Exemptions might apply. There are de minimis exemptions if a) the competing sales are less than $4.1 million (threshold updated annually); b) the competing sales of either corporation represent less than 2% of its total sales; or c) the competing sales of each corporation are less than 4% of its total sales. A careful analysis (similar to that done in merger analysis) is necessary to determine whether an exemption might apply.

• Not just corporations? While the plain language of Section 8 refers to interlocks involving “corporations,” the DOJ has stated its view that Section 8 also covers interlocks between non-corporate entities, such as LLCs (this is an open area of law).

• Not just the same person? While the plain language of Section 8 states that it applies when the same “person” sits on the board or acts as an officer of two competitors, the DOJ interprets Section 8 broadly to mean that two different individuals appointed by a common entity cannot serve on boards of competitors because the entity is a “person” and is serving on the boards through its designees.

WHAT ARE THE RISKS

• Interlocks can create significant antitrust risk. While the DOJ’s concerns with interlocks seem to be assuaged with the quick removal of the Corporate Director identified, interlocks have served as the factual underpinning for antitrust conspiracy claims. Therefore, companies should be proactive in eliminating problematic interlocks, as the interlock combined with parallel action by competitors in an industry could serve as the factual basis for long and costly conspiracy investigations or litigation and could support complaint allegations to defeat a Twombly-based motion to dismiss.

ANTICIPATE CONTINUED ENFORCEMENT

• While the resignations are not novel, they represent a major amplification of corporate responses to what Assistant Attorney General Jonathan Kanter has described as “an extensive review of interlocking directorates across the entire economy” and a promise by the Division to “enforce the law.”

• The Federal Trade Commission (FTC) stated in 2017 that it generally relies on “self-policing” with regard to identifying interlocks; the recent messaging and action by the DOJ marks a clear departure in the enforcement of a historically quiet area of the law.

• Enforcement in this area is anticipated to continue. We understand the DOJ has tasked its paralegals with reviewing HSR filings and public statements by companies to “connect the dots” to find and investigate potentially problematic interlocks. The Division signaled in its press release that it will continue aggressively pursuing Section 8 claims: “Companies, officers, and board members should expect that enforcement of Section 8 will continue to be a priority for the Antitrust Division.”

• Private equity and venture capitalists, in particular, should remain vigilant for potential indirect or deputization interlocks if they appoint directors at competing companies, whether publicly traded or privately held, which could create liability under a deputization theory of harm.

Glenna Siegel also contributed to the following article.