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October 28, 2022

DOJ Requires Directors to Resign From Boards to Mitigate Antitrust Concerns

Advisory

The Department of Justice announced on October 19 that seven directors resigned their positions from five corporate boards to mitigate antitrust concerns.1 DOJ raised concerns that the directors’ simultaneous service on two separate corporate boards potentially violated the Clayton Act’s prohibition on interlocking directorates. Section 8 of the Clayton Act prohibits, subject to certain exceptions, a person from serving “as a director or officer in any two corporations . . . that are . . . competitors. . . .”2

This announcement follows a speech delivered earlier this year by Antitrust Division Assistant Attorney General Jonathan Kanter, who stated that DOJ is “ramping up efforts to identify violations . . . and [] will not hesitate to bring Section 8 cases to break up interlocking directorates.”3

This development highlights increasing antitrust scrutiny of interlocking directorates and underscores the need to maintain an effective antitrust compliance program to mitigate Section 8 risks in choosing directors or when existing corporate directors join other boards, as well as other issues that might arise from interlocking board service.

Clayton Act Section 8

Simultaneous service as an officer or director of two different competing companies may create antitrust risks through the improper disclosure of competitively sensitive information or coordination between the competitors.4 Section 8 of the Clayton Act is a prophylactic statute designed to prevent this type of conduct by prohibiting such dual service, subject to certain exceptions, regardless of whether any anti-competitive conduct actually occurs due to the interlock.

For Section 8 to apply to an interlock, the following jurisdictional thresholds must be met:

  • The combined “capital, surplus and undivided profits” (i.e., net worth) of each of the corporations exceeds $41,034,000 (indexed annually);5 and
  • Each corporation is engaged in whole or in part in interstate commerce; and
  • The corporations are competitors “by virtue of their business and location of operation . . . so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.”6

However, because certain interlocks are viewed to pose little risk of significant antitrust harm, interlocks are exempt from Section 8, where:

  • the competitive sales7 of either corporation are less than $4,103,400 (indexed annually);8 or
  • the competitive sales of either corporation are less than two percent of that corporation’s total sales; or
  • the competitive sales of each corporation are less than four percent of that corporation’s total sales.

While the text of Section 8 refers to service as an officer or director of a corporation, and does not cover interlocks implicating noncorporate entities such as LLCs, partnerships and sole proprietorships, the Federal Trade Commission (FTC) has used Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce,” to enforce the “spirit and policy” of Section 8, even where the challenged interlock was not explicitly prohibited by Section 8.9

A situation in which one corporation or entity has the right to nominate a director for the boards of two competing companies may also present Section 8 risk. DOJ and FTC have endorsed a “deputization” enforcement theory, accepted in several federal court decisions, that treats the appointing firm as the “person” who serves on the board of two competing corporations in violation of Section 8, even if it appoints different directors of the two firms such that no individual serves as a director of both competing firms.10

Importantly, even if an interlock is exempt under Section 8, companies and individuals can still be liable for anti-competitive conduct that might arise as a result of the interlock, such as Sherman Act Section 1 violations.

Recent Resignations Highlight Enforcement Risk

The recent DOJ announcement focused on alleged interlocks impacting the boards of ten technology/software companies.11 For four of the alleged interlocks, the director at issue resigned their position on one of the boards, resolving DOJ’s concerns.

The fifth alleged interlock involved two application performance monitoring software companies: Solarwinds and Dynatrace. DOJ noted that one individual served on both companies’ boards, representing investment firm Thoma Bravo. Thoma Bravo was also represented on the Solarwinds board by two additional directors. To ameliorate DOJ’s concerns, all three directors resigned their positions on the Solarwinds board.

Notably, DOJ did not require a consent decree or impose any settlement conditions on the companies. However, in the press announcement, DOJ characterized the investigations as the “first in a broader review of potentially unlawful interlocking directorates,” and that Section 8 enforcement will “continue to be a priority for the Antitrust Division.”12

Increased Attention to Section 8 Issues

Assistant Attorney General Jonathan Kanter characterized Section 8 as “an important, but underenforced, part of our antitrust laws.” Over the last several years, however, both DOJ and FTC have promised increased Section 8 scrutiny in speeches and policy announcements. For example, in September 2021, FTC authorized an omnibus resolution for compulsory process aimed at facilitating investigations of common directors and officers among competitor companies.13 And more recently, in April 2022 Assistant Attorney General Jonathan Kanter remarked that although Section 8 enforcement had in the past often been limited to the merger review process, DOJ “would not hesitate to bring Section 8 cases” in the future.

Implications

Companies are well advised to anticipate greater focus on Section 8 in the merger review context as well as independent investigations. Section 8 risks can arise at the election of a new director who simultaneously holds a director or officer position at a competitor company, in a situation where a current director joins an additional board, in the M&A context where new competitive overlaps are created, or if a company’s innovation or sales growth causes an existing interlock to no longer qualify for an exemption.

This recent announcement is a useful reminder that the antitrust authorities may raise Section 8 concerns in the context in which one company (such as an investment firm) holds rights to nominate a board member for two different competing companies, even if it appoints different individuals to serve on the two boards.

DOJ's recent focus on Section 8 is a good reminder for companies and counsel to do their due diligence regarding both the potential implications of any changes in board representation and ordinary-course monitoring of existing interlocks, to ensure continued compliance with Section 8.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. Department of Justice, Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates (Oct. 19, 2022).

  2. 15 USC § 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.”). In Bankamerica Corp. v. United States, 462 US 122, 129 (1983), the Supreme Court clarified that the exclusion regarding “two corporations (other than banks . . .)” means “two or more corporations none of which is a bank.” However, the Depository Institutions Management Interlocks Act, 12 USC §§ 3201–08, prohibits one person from serving as a “management official” of two depository institutions or depository holding companies, subject to certain exceptions.

  3. Jonathan Kanter, Assistant Attorney General, Dep’t of Just., Opening Remarks at 2022 Spring Enforcers Summit (Apr. 4, 2022), available here.

  4. Although the language of Section 8 refers to service on the boards of “two corporations . . . that are . . . competitors,” courts have also applied Section 8 where the competition involves a separately incorporated subsidiary where the parent closely controls the subsidiary. See, e.g., United States v. Crocker Nat’l Corp., 656 F.2d 428, 450-51 (9th Cir. 1981), rev’d on other grounds, 462 US 122 (1983); Square D Co. v. Schneider S.A., 760 F. Supp. 362, 366-68 (SDNY 1991).

  5. FTC Announces Annual Update of Size of Transaction Thresholds for Premerger Notification Filings and Interlocking Directorates (Jan. 24, 2022).

  6. 15 USC § 19.

  7. The term “competitive sales” is defined as “the gross revenues for all products and services sold by one corporation in competition with the other, determined on the basis of annual gross revenues for such products and services in that corporation’s last completed fiscal year.” Id.

  8. FTC Announces Annual Update of Size of Transaction Thresholds for Premerger Notification Filings and Interlocking Directorates (Jan. 24, 2022).

  9. See Kraftco Corp., 89 FTC 46 (1977). In addition, while the Second Circuit rejected application of Section 8 to an unincorporated sports league, it has suggested in dicta that the statute could apply to other “entities with directors.” North American Soccer League v. NFL, 670 F.2d 1249 (2d Cir. 1982).

  10. See, e.g., Reading Int’l, Inc. v. Oaktree Capital Mgmt., 317 F. Supp. 2d 301, 326-28 (SDNY 2003) (stating that Section 8 defendants may not “evade antitrust liability simply by designating agents to serve their bidding on the boards of competing businesses”).

  11. Department of Justice, Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates (Oct. 19, 2022).

  12. Id.

  13. FTC Streamlines Consumer Protection and Competition Investigations in Eight Key Enforcement Areas to Enable Higher Caseload (Sept. 14, 2021).