DOJ Announces Seven Director Resignations from Five US Public Company Boards in the Most Recent Wave of Reinvigorated Clayton Act Section 8 Enforcement

Alert
|
8 min read

On October 19, 2022, the Antitrust Division of the Department of Justice announced that seven directors resigned from five different US public company boards of directors following DOJ concerns that their roles violated Section 8 of the Clayton Act, which prohibits interlocking directorates.1 Subject to certain de minimis exceptions,2 Section 8 prohibits persons from being an officer3 or director at competing4 corporations5 due to the potential for anticompetitive effects; the mere risk of anti-competitive harm justifies this conduct-agnostic ban in order to prevent the harm before it can occur.

These DOJ actions signal a departure from the earlier, somewhat dormant Section 8 enforcement. It has been more than 40 years since the FTC or DOJ has filed litigation under Section 8. DOJ Assistant Attorney General for the Antitrust Division Jonathan Kanter has recently said that DOJ is "ramping up efforts to identify violations" and that DOJ "will not hesitate to bring Section 8 cases to break up interlocking directorates."6 This is likely just the first announcement in a broader review:"[t]he Antitrust Division is undertaking an extensive review of interlocking directorates across the entire economy and will enforce the law."  In light of the DOJ's actions, companies should take a close look at the outside positions of their officers and directors and set up the necessary controls and procedures to prevent any Section 8 violations. 

Then and Now – New Heightened Section 8 Attention "Across the Entire Economy"

Historically, Section 8 has been a quiet area of antitrust law enforcement. The purpose of Section 8 is to prevent anticompetitive effects that could stem from an interlock, such as providing an opportunity for competitors to coordinate business decisions or exchange competitively sensitive information. 

Despite Section 8's passive history, there has been a notable uptick in enforcement in the past year by the DOJ, and companies and individual board members should expect more federal antitrust enforcer scrutiny of board overlaps. Since 2016, there have been only three public investigations or inquiries by the FTC or DOJ, however, there have likely been others that are not public.8

Remedies, Exposure. Remedies for Section 8 violations typically only require the director or officer to resign from one of the positions causing the interlock, or the director or officer may voluntarily resign. The FTC, DOJ, and private plaintiffs may also seek injunctive relief to prohibit future interlocks, but they must show that there is a danger of a recurrent violation, such as in the case of ongoing board appointment rights. Unlike the FTC and DOJ, private plaintiffs can seek monetary damages, but would need to quantify competitive harm, which would be difficult. We are not aware of any court awarding monetary damages for Section 8 violations. Additionally, private Section 8 lawsuits do arise in the context of proxy fights as an attempt to disqualify a board member.

Although Section 8 itself is essentially an injunctive relief remedy ("go and sin no more"), there are consequences to DOJ Antitrust Division scrutiny. Apart from the expense and nuisance of a government investigation, the scrutiny by the Division would be undesirable for many companies. It is not inconceivable that the Antitrust Division might seek a broader Section 1 investigation of two companies whose directors overlap.9

Yesterday's announcement follows DOJ's public statements of its intention to use Section 8 as a tool "to attack excessive consolidation plaguing our economy[,]" explaining its view that Section 8 can "provide an important complement to criminal enforcement."10 Consistent with DOJ's and FTC's recent aggressive stance in favor of litigation and emphasis on expanding the tools in their antitrust enforcement "toolbox," these recent statements suggest an appetite toward potentially litigating violations of Section 8 by US public companies and a significantly heightened risk of investigation. So far, the DOJ's current Section 8 review and enforcement appears to be initiated by a review of public SEC disclosures. 

The October 19 Announcements – Takeaways and Cautions

Corporate entities, particularly public companies and those with private equity representation (another hot target of current antitrust enforcement), should revisit and potentially increase Section 8 compliance protocols. In particular:

  • Review Outside Director and Officer Positions of your Company's Directors and Officers: Companies should be reviewing the outside director and officer positions of their existing and new directors and officers for potential issues under Section 8, given the DOJ's heightened focus on this area. Companies can integrate Clayton Act compliance as part of their existing processes to review information regarding their directors and officers for independence and disclosure purposes and may consider including a Clayton Act specific question in their D&O questionnaires. Companies should ensure they have a process in place to obtain information regarding these outside positions so that they can be reviewed for Clayton Act compliance. In particular, companies that are active across diverse business units must carefully scrutinize Section 8 issues. Where there is the potential for competitive overlap, companies should have a system in place to monitor competitive sales to ensure they remain within the de minimis exceptions.11
  • Private Equity Firms: Private equity firms often invest in multiple businesses in related sectors that may confer board rights that could bring Section 8 scrutiny. In fact, the FTC recently highlighted the issue in a post: "[p]rivate equity firms that acquire board seats across a diverse portfolio of companies may be particularly likely to encounter Section 8 issues via a merger or acquisition."12 In its October 19, 2022 enforcement announcement, DOJ renews its view that investment firms, themselves, are "persons" that can sit on multiple boards via their agents. Federal antitrust enforcers can target both private equity firms and the portfolio companies where the board members sit with Section 8 enforcement in these instances. 
  • Companies active in nascent or quickly evolving technology markets: New or quickly evolving technologies often have potential applications across various markets. Nimble firms seeking to take advantage of potential opportunities must be aware of potential interlocks if they change product offerings as they navigate an evolving landscape. Companies should periodically review developments within their own organizations and at the organizations where their directors and officers serve that could cause competition to exist where it did not previously, such as entering new lines of business.
  • Companies active in M&A: Frequent merger activity can lead a firm into Section 8 issues as they enter new or adjacent markets through acquisitions. Transacting parties should incorporate Section 8 diligence into the merger process that could cause competition to exist with the organizations where their directors and officers serve where it did not previously. 

See DOJ Press Release, Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates, October 19, 2022 (available here). The following companies unwound their interlocking directorates without admitting to liability: Definitive Healthcare Corp. and ZoomInfo Technologies Inc.; Maxar Technologies Inc. and Redwire Corp.; Littelfuse Inc. and CTS Corp.; Skillsoft Corp. and Udemy Inc.; and Solarwinds Corp. and Dynatrace, Inc.
2 Section 8 does not apply (i) if either corporation's competitive sales are less than $4,103,400 (adjusted annually), (ii) if either corporation's competitive sales are less than 2% of that corporation's total revenues for the most recent fiscal year, or (iii) if both corporations' competitive sales are less than 4% of each corporation's total revenues for the most recent fiscal year.
3 The term "officer" under the Clayton Act means an officer elected or chosen by the Board of Directors. There is limited guidance on the meaning of "officer." Private Equity firms that position executives in different portfolio companies and SPAC sponsors that use overlapping management teams should be particularly vigilant for officer overlaps.
4 "Competing" means horizontal competition (though the FTC has reserved judgment on whether it may challenge vertical interlocks). A practical test for whether companies are in competition is to ask whether the companies attempt to secure the same prospective customers, even if the products/services are not exactly equivalent.
5 While Section 8 prohibits interlocks between "any two corporations[,]" the FTC and DOJ have initiated Section 8 investigations into non-corporate entities, but have not brought any direct actions against them. Therefore, it is possible that the FTC or DOJ would continue to seek an enforcement action on non-corporate entities. See Rohit Chopra Dissent in Rent-to-Own Market Allocation Scheme, February 21, 2020 (available here) (noting that the FTC missed an opportunity to expand Section 8 enforcement to include non-corporate entities such as limited liability companies (LLCs)).
See Assistant Attorney General Jonathan Kanter Delivers Opening Remarks at 2022 Spring Enforcers Summit, April 4, 2022 (available here).
See DOJ Press Release, Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates, October 19, 2022 (available here).
8 Tullett Prebon-ICAP in 2016 (DOJ press release here), Comcast NBC Universal-Hulu in 2018 (Assistant Attorney General Makan Delrahim is reported to have mentioned DOJ's concerns to a Senate subcommittee in October 2018), and Endeavor Group Holdings-Live Nation Entertainment in 2021 (DOJ press release here). 
See ABA Interlocking Directorates Handbook Section III.A, co-edited by Rebecca H. Farrington, 2011 (citing Perpetual Fed. Sav. & Loan Ass'n, 90 F.T.C. 608, 622 (1977) (initial decision)) ("A director interlock 'may lead to trade restraints in violation of Section 1 of the Sherman Act' by creating an avenue for illegal agreements between competitors to arise.").
10 See Deputy Assistant Attorney General Richard A. Powers Delivers Keynote at the University of Southern California Global Competition Thought Leadership Conference, June 3, 2022 (available here). 
11 See footnote 2.
12 See Michael E. Blaisdell, FTC Bureau of Competition, Interlocking Mindfulness, June 26, 2019 (available here). 

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2022 White & Case LLP

Top