July 22, 2016

DOJ Requires Transaction to Be Restructured to Avoid Director Interlock

Arnold & Porter Advisory

On July 14, 2016, the Department of Justice (DOJ) required ICAP and Tullett Prebon, two competing brokerage companies, to restructure their proposed US$1.5 billion transaction to address DOJ concerns that the proposed transaction would violate the antitrust laws. One of DOJ's concerns related to Clayton Act Section 8 (Section 8),1 which forbids, except under certain narrowly defined safe harbors, a person from serving "as a director or officer in any two corporations...that are...competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws."2

This settlement serves as an important reminder that Section 8 is not only a compliance issue, but also an important consideration in mergers and acquisitions and other areas that may affect the composition of a board of directors.

ICAP/Tullett Prebon Merger

Tullett Prebon and ICAP are two British securities brokerage businesses, both offering a variety of brokerage services, including voice- and electronic-based brokering. In November 2015, Tullett Prebon announced it planned to acquire ICAP's voice brokerage businesses.3 In return, ICAP would have received: (1) a 19.9% stake in Tullett Prebon and (2) the right to nominate one member of Tullett Prebon's board of directors.4 In addition, ICAP shareholders would have received a 36.1% stake in Tullett Prebon.5 Following the transaction, ICAP – although it would have exited the voice brokerage business – planned to remain active in electronic trading brokerage.6

Because ICAP would still be competing for electronic brokerage business against Tullett Prebon, DOJ alleged that ICAP's right to nominate one member of the Tullett Prebon Board of Directors would violate Section 8. Although the text of Section 8 prohibits a "person" from simultaneous service for two competing companies, courts and the antitrust authorities have interpreted this to also prohibit corporations from holding the right to nominate shareholders or directors at competing corporations.7 As a result, DOJ required ICAP and Tullett Prebon to restructure the transaction such that ICAP would not retain any right to nominate a Tullett Prebon director.

In addition, DOJ required the parties to restructure the transaction such that ICAP shareholders would receive 56% stake in Tullett Prebon (as opposed to ICAP receiving 19.9% and ICAP shareholders receiving 36.1%, as originally agreed). Partial acquisitions such as the one originally contemplated can sometimes raise antitrust concerns, particularly if DOJ believed that following the acquisition: (1) ICAP would be able to influence Tullett Prebon's competitive conduct, (2) ICAP's incentives to compete with Tullett Prebon might be reduced, or (3) ICAP might gain access to Tullett Prebon's competitively sensitive, non-public information.8 Thus, restructuring the transaction to allow ICAP shareholders, but not ICAP itself, to hold the additional 36.1% stake helped to resolve DOJ concerns regarding the potentially "cozy relationship among competitors."9


As the ICAP/Tullett Prebon merger demonstrates, compliance with Section 8 is an important consideration in mergers and acquisitions. This is especially true if the merging parties are negotiating for the rights to nominate officers or directors as part of a transaction or where a buyer is acquiring a seller's interest in another entity or a portfolio company, which could grant the seller rights to nominate directors or officers.10

Section 8 issues can also arise for companies outside of an acquisition context. For example, if shareholders elect a new director who simultaneously holds another officer or director position at a competitor, this could implicate Section 8. Or, an interlock that once fell within Section 8's safe harbor might become problematic if one company's sales in competition with the second company increases, whether through product innovation or sales growth.11

DOJ's recent focus on Section 8 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.

  1. Tullett Prebon and ICAP Restructure Transaction after Justice Department Expresses Concerns about Interlocking Directorates (July 14, 2016), {hereinafter DOJ Press Release}.

  2. 15 U.S.C. § 19 ("No person shall, at the same time, serve as a director or officer in any two corporations (other than banks, banking associations, and trust companies) that 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.").

  3. Building the World's Best Operator in Hybrid Voice Broking and Information Services, at 11, Tullett Prebon plc (Nov. 11, 2015).

  4. Id. at 10.

  5. Id.

  6. DOJ Press Release.

  7. Reading Int'l v. Oaktree Capital Mgmt., 317 F. Supp. 2d 301 (S.D.N.Y. 2003); United States v. Cleveland Trust Co., 392 F. Supp. 699 (N.D. Ohio) 1974), aff'd mem., 513 F.2d 633 (6th Cir. 1975).

  8. US Dep't of Justice & Federal Trade Comm'n, Horizontal Merger Guidelines, at 34 (2010).

  9. DOJ Press Release.

  10. For example, in US v. Commscope Inc., DOJ required two parties to restructure their transaction, due to concerns that the Buyer's acquisition of the Seller's interest in a third company would violate Section 8. 2008 WL 2978124 (D.D.C. 2008). DOJ required the Buyer to forgo certain rights in the third company, including the right to appoint directors. Id.

  11. In the second scenario, where a legal interlock becomes illegal under Section 8 through sales or revenue growth, Section 8 allows for one year to "cure" the violation. See, e.g., 15 U.S.C. § 19(5)(B) ("When any person elected or chosen as a director or officer of any corporation … is eligible at the time of his election or selection to act for such corporation in such capacity, his eligibility to act in such capacity shall not be affected by any of the provisions hereof by reason of any change in the capital, surplus and undivided profits, or affairs of such corporation from whatever cause, until the expiration of one year from the date on which the event causing ineligibility occurred.").

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