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May 1, 2024

Antitrust Focus on Interlocking Directorates Raises Risk for Private Equity and Venture Capital Firms

Advisory

The federal antitrust authorities — the Federal Trade Commission (FTC) and the Department of Justice Antitrust Division (DOJ) — are both pursuing aggressive enforcement agendas. In particular, both agencies have specifically announced increased enforcement efforts around Section 8 of the Clayton Act, which prohibits, subject to certain exceptions, a person from serving “as a director or officer in any two corporations … that are … competitors….”1

Federal antitrust enforcers have highlighted both private equity and venture capital firms as enforcement targets. FTC Commissioner Lina Khan specifically noted the FTC’s intention to use Section 8 to challenge potentially illegal ownership structures involving private equity (PE) firms in the health care space,2 concerns which were underscored by the joint FTC, DOJ, and Health and Human Services announcement of a new portal design to aid reporting of anticompetitive practices in the health care sector.3 DOJ Assistant Attorney General for Antitrust Jonathan Kanter has also expressed enforcement focus on Section 8, noting DOJ is “continually looking for interlocking directorates imposed by private equity, venture capital, and corporate venture capital firms and others.”4

In light of these enforcement priorities, private equity investors should seek antitrust counsel to ensure any board rights or board appointments do not run afoul of Section 8’s restrictions and be particularly mindful of any such risks that might occur in the merger and acquisition context.

Renewed Focus on Section 8 Enforcement

Historically, Section 8 has only “rarely been enforced in the over 100 years since its passage, and even less so in the past four decades.”5 However, in recent years both DOJ and FTC have pledged to “ramp up efforts” in this area6 and “revitalize[e]” Section 8 enforcement.7

In 2023, FTC announced a settlement resolving interlocking directorate concerns associated with a proposed partial acquisition of natural gas producer EQT Corporation (EQT) by private equity firm Quantum Energy Partners (Quantum), which also held stakes in natural gas producer Tug Hill Corp. and pipeline operator Xcl Midstream. The FTC alleged that the transaction — which would have granted Quantum the right to nominate its own chief executive officer or another Quantum designee for election as a member of the EQT board of directors — violated Section 8.8 To resolve FTC concerns, Quantum and EQT agreed to several commitments, including requiring Quantum to forego any right to appoint a member of EQT’s board of directors and prohibiting Quantum from serving on the board of “any of the top seven Appalachian Basin natural gas producers” without prior FTC approval for 10 years.9 FTC is also reportedly scrutinizing the proposed acquisition of Subway IP LLC by Roark Capital Group, for potential interlocks that may occur between the acquired company and board seats held by Roark Capital Group at other food retail companies.10

DOJ has also required proposed transactions to be restructured to avoid concerns regarding interlocking directorates.11 And more recently, DOJ has also made clear it is investigating potential illegal interlocks independent of any pending merger or acquisition. DOJ Deputy Assistant Attorney General Andrew Forman noted that DOJ is acting proactively to identify and investigate potential Section 8 violations.12 Indeed, DOJ has credited its investigations over the last several years as unwinding or preventing “interlocks involving at least two dozen companies.”13

Clayton Act Section 8 Background

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.14 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 anticompetitive 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 US$48,559,000 (indexed annually).15
  • Each corporation is engaged in whole or in part in interstate commerce.
  • 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.”16

However, certain interlocks are exempt from Section 8, where the “competitive sales” of the interlocked companies are viewed as de minimis. Specifically, the exemptions cover interlocks where any of the scenarios below apply:

  • The competitive sales of either corporation are less than US$4,855,900 (indexed annually).17
  • The competitive sales of either corporation are less than 2% of that corporation’s total sales.
  • The competitive sales of each corporation are less than 4% of that corporation’s total sales.

“Competitive sales” are defined as “the gross revenues for all products and services sold by one corporation in competition with the other …”18 The statute does not offer a definition of “in competition,” but courts and the FTC have considered factors such as whether the products at issue perform the same function, whether the two companies vie for the business of the same purchasers, and industry perception of competition. 19

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 limited liability corporations, partnerships, and sole proprietorships, FTC has taken the position that its restrictions also extend to noncorporate entities.20

Section 8 may be enforced by the DOJ, FTC, and private plaintiffs, including state attorneys general. Typically, the remedy for a prohibited interlock is injunctive relief, but private parties also may seek treble damages.21 While damages are theoretically available to a private party enforcing Section 8 if injury could be shown, no case has yet resulted in damages. Importantly, both the interlocked corporations and the interlocking directors themselves can be found in violation of Section 8.22

Notably, even if an interlock is exempt under Section 8, companies and individuals can still be liable for anticompetitive conduct that might arise as a result of the interlock, such as Sherman Act Section 1 violations (like bid-rigging or price-fixing).

Risk Areas for Private Equity/Venture Capital Firms

While Section 8 risks can arise for any company (or individual) with interlocking directors, three areas in particular may raise enhanced risk for private equity and venture capital firms.

Enforcement Under the “Deputization” Theory

A situation in which one corporation or entity has the right to nominate a director for the boards of two competing companies can present Section 8 risk. Both DOJ and FTC have endorsed a “deputization” enforcement theory, accepted in several federal court decisions, which 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.23 In 2022, several of DOJ’s investigations focused on interlocks occurring through “deputization,” even though two different individuals had been nominated to the interlocking boards.24 This raises particular risk for investors (like PE or venture capital (VC) firms) that may seek board seats on portfolio companies as a way to monitor and grow their investment.

Risk in Industry Verticals

Overlapping directors among companies today may result from the desire of each company to seek the most qualified and experienced outside directors. An individual with extensive familiarity with a particular industry due to his or her professional involvement in that industry is frequently viewed as a desirable outside director for a second company in that industry.25 The same logic may underscore a PE/VC firm’s desire to make multiple investments in a particular industry segment. However, where PE/VC funds are not using a single platform company for all investments in a particular sector, multiple appointments or investments in the same industry can raise particular risk for a problematic interlock if made in two companies that are competitors.

For example, even if an interlock between two competing start-up companies falls into a Section 8 exemption because the start-ups do not yet have significant sales, these interlocks must be carefully monitored — not only for potential risk that may arise if the companies grow, but also for other antitrust risks that may arise between the two companies independent of Section 8.

Enforcer Focus on PE Firms

FTC and DOJ leadership continue to focus antitrust enforcement efforts on private equity firms.26 In a 2022 enforcement action, for example, Democratic FTC Commissioners warned that private equity firms’ business models “may in some instances distort incentives” or “hinder competition.”27 In response, the Republican Commissioners at the time critiqued the statement as reflecting “distaste for private equity as a business model, instead of the facts uncovered in the investigation.”28 However, DOJ has also focused on private equity as an area for antitrust scrutiny. At a recent conference, DOJ Deputy Assistant Attorney General Andrew Forman specifically highlighted Section 8 as an important statute for enforcement in industries “attracting a lot of investment.”29

This ongoing enforcement attention on investors (including PE and VC firms), along with a renewed attention to Section 8, is a good reminder for companies and counsel to do their due diligence regarding interlocking directorates and monitor any board rights or appointments for compliance with antitrust laws.

Please feel free to contact the authors of this post or your principal Arnold & Porter contact if you have any questions about interlocking directorates or antitrust compliance more generally.

© Arnold & Porter Kaye Scholer LLP 2024 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. 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.”).

  2. Remarks by Chair Lina Khan, Private Capital, Public Impact Workshop on Private Equity in Healthcare (March 5, 2024).

  3. Federal Agencies Launch Portal for Public Reporting of Anticompetitive Practices in the Health Care Sector (April 18, 2024).

  4. Remarks by DAAG Kanter, Private Capital, Public Impact Workshop on Private Equity in Healthcare (March 5, 2024), at 5.

  5. Statement of Chair Lina M. Khan, joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro Bedoya, In the Matter of EQT Corporation, File No. 221-0212 (Aug. 16, 2023).

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

  7. Statement of Chair Lina M. Khan, joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro Bedoya, In the Matter of EQT Corporation, File No. 221-0212 (Aug. 16, 2023).

  8. Complaint, In the Matter of EQT Corporation, File No. 221-0212 (Aug. 16, 2023).

  9. Analysis to Aid Public Comment, In the Matter of EQT Corporation, File No. 221-0212 (Aug. 16, 2023).

  10. Jimmy John’s-Subway Vulnerable Over Roark Board Seats, The Deal (Jan. 16, 2024).

  11. Tullett Prebon and ICAP Restructure Transaction after Justice Department Expresses Concerns about Interlocking Directorates (July 14, 2016).

  12. U.S. DOJ antitrust enforcers set sights on interlocking directorates among rival AI firms, mLex (April 10, 2024).

  13. Department of Justice, Two Warner Bros. Discovery Directors Resign after Justice Department Expresses Antitrust Concerns (April 1, 2024).

  14. 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).

  15. FTC Raises Both Hart-Scott-Rodino Premerger Filing and Interlocking Directorate Thresholds and Introduces a New Filing Fee Structure (Jan. 30, 2024).

  16. 15 USC § 19.

  17. FTC Raises Both Hart-Scott-Rodino Premerger Filing and Interlocking Directorate Thresholds and Introduces a New Filing Fee Structure (Jan. 30, 2024).

  18. Id. (“[D]etermined on the basis of annual gross revenues for such products and services in that corporation’s last completed fiscal year.”)

  19. See, e.g., TRW, Inc. v. Federal Trade Commission, 647 F.2d 942 (9th Cir. 1981); Borg-Warner Corp., 101 F.T.C. 863, at 929, modified 102 F.T.C. 1164 (1983), rev’d on other grounds, 746 F.2d 108 (2d Cir. 1984). 

  20. Analysis to Aid Public Comment, In the Matter of EQT Corporation, File No. 221-0212, at 5 (Aug. 16, 2023). Additionally, 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. 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).

  21. See Jicarilla Apache Tribev. Supron Energy Corp., 728 F.2d 1555, 1573 (10th Cir. 1984) (dismissing damage claim where no proof of injury).

  22. See TRW, Inc. v. FTC, 647 F.2d 942, 948-49 (9th Cir. 1981).

  23. 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”).

  24. 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).

  25. Mark A. Lemley et al., Analysis of Over 2,200 Life Science Companies Reveals a Network of Potentially Illegal Interlocked Boards, 2 (Stanford L. Sch., John M. Olin Program in L. & Econ., Working Paper No. 578, 2022) (“Within a market, interlocked directorates may form for a variety of reasons, including relationships between individuals (past personal interactions in society or business), and necessity (a limited supply of qualified individuals).”).

  26. See, e.g., Remarks of Chair Lina M. Khan Regarding the Request for Information on Merger Enforcement (Jan. 18, 2022); Stefania Palma and James Fontanella-Khan, Crackdown on buyout deals coming, warns top US antitrust enforcer, Financial Times (May 18, 2022).

  27. Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Avaro M. Bedoya, In the Matter of JAB Consumer Fund/SAGE Veterinary Partners, at 3 (June 13, 2022). 

  28. Concurring Statement of Commissioners Noah Joshua Phillips and Christine S. Wilson, at 1 (June 13, 2022).

  29. DOJ wary of sharing board members between AI companies, Bloomberg (April 10, 2024).