DOJ Antitrust Announces Five More Director Resignations from US Company Boards in Continued Aggressive Clayton Act Section 8 Enforcement, Increasing the Spotlight on Private Equity (PE) and Technology Firms
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The Antitrust Division of the US Department of Justice ("DOJ") continues to aggressively pursue alleged illegal interlocking directorates that violate Section 8 of the Clayton Act, and in particular, interlocks involving private equity ("PE") firms and technology companies.1 On March 9, 2023, DOJ announced that five more directors resigned from four US public company boards, and one PE firm declined to exercise its board appointment rights, in response to DOJ inquiries.2 Three of the four alleged interlocks came from the PE space and two were also associated with technology-related companies.
This news arrives on the heels of the DOJ's October 19, 2022, announcement, where the DOJ reported the resignation of seven directors from five different US public company boards.3
The DOJ is maintaining its commitment to prioritize enforcement of alleged Section 8 violations in 2023. In the March 9 announcement, the Assistant Attorney General of the Antitrust Division, Jonathan Kanter, noted that "[e]nforcement of Section 8 will continue to be a focus for the division just as Congress intended" and that "[the DOJ] will continue to enforce the antitrust laws when necessary to address illegal board interlocks."4
Antitrust Division Focus on Private Equity:5 Three of the four board of directors interlocks associated with the DOJ's March 9 press release involved PE firms' ownership and board appointment rights:6
- Scenario 1: The first scenario involved a PE firm whose representatives sat on three different software companies' boards that the DOJ alleged competed with each other.7
- Scenario 2: The second scenario involved PE-affiliated directors on the boards of two insurance companies. The PE firm and/or its subsidiary had the ability to appoint officers or directors at a wholly-owned insurance company, and the PE firm's subsidiary also had the contractual right to appoint one director to serve on a separate insurance company's board. The DOJ raised concerns after the PE subsidiary announced its intention to exercise that right, and consequently, the subsidiary withdrew its nomination to the separate insurance company's board.8
- Scenario 3: The third scenario involved affiliates of a PE firm potentially sitting on the boards of two companies in the airline industry. The PE firm appointed two affiliated individuals to serve on one company's board in which the PE firm held a minority ownership stake. When the PE firm proposed to acquire all of the outstanding shares of another company in the airline industry, it raised interlock concerns for the DOJ. The two PE-affiliated individuals resigned from the board of the company in which the PE firm currently holds a minority ownership stake.9
Continued Focus on Tech: Two of the allegedly illegal interlocks involved companies in technology-related industries. The DOJ described one interlock as two "software companies," and another as multiple companies active in "cloud security assessments, audit and compliance services, and firewall and monitoring products and services."10 These resignations are the latest enforcement move in the US antitrust agencies' continued focus on the technology sector. Just last month, the US Federal Trade Commission ("FTC") launched a new Office of Technology, designed to "strengthen the FTC's ability to keep pace with technological challenges in the digital marketplace" and bolster their "in-house skills needed to fully grasp evolving technologies . . . to tackle unlawful business practices and protect Americans."11
White & Case previously covered the DOJ's increased attention to Section 8 in October with practical takeaways for clients still relevant today, available here.
It is more important than ever for companies, including PE firms and technology companies, to actively review with counsel their existing ownership and appointment rights, and director and officer positions, to avoid Section 8 risk. Additionally, companies should consider trainings for their boards on this topic, and ensure robust compliance policies are in place when vetting potential board candidates and monitoring continued Section 8 compliance of current board members. This should include reviewing policies regarding employment to ensure directors are required to notify the company of any change in employment or director positions. As public companies prepare to publicly file proxy statements for 2023 annual shareholder meetings, they also should review the outside directorships of their current board members that will be disclosed and identify any potential Clayton Act issues in advance.
1 Section 8 of the Clayton Act prohibits interlocking directorates where persons serve as an officer or director at competing corporations, subject to certain de minimis exceptions. See prior White & Case client alert (available here).
2 See DOJ Press Release, Justice Department's Ongoing Section 8 Enforcement Prevents More Potentially Illegal Interlocking Directorates, March 9, 2023 (available here) (hereinafter "DOJ March 9, 2023 Press Release"). The following companies unwound their interlocking directorates without admitting to liability: Qualys, Inc., Sumo Logic, Inc., and F5, Inc.; N-able, Inc., Dynatrace, Inc., and SolarWinds Corp.; Brookfield Asset Management Inc. and American Equity Investment Life Holding Company (withdrew board nomination); and Sun Country Airlines Holdings, Inc. and Atlas Air Worldwide Holdings, Inc.
3 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., CTS Corp.; Skillsoft Corp. and Udemy Inc.; and Solarwinds Corp. and Dynatrace, Inc.; see also White & Case LLP, DOJ Announces Seven Director Resignations from Five US Public Company Boards in the Most Recent Wave of Reinvigorated Clayton Act Section 8 Enforcement, October 21, 2022 (available here).
4 See DOJ March 9 Press Release.
5 See White &Case LLP, "Antitrust scrutiny intensifies as DOJ and FTC step up enforcement," dated January 27, 2023 (available here).
6 See DOJ March 9 Press Release.
7 The FTC and DOJ take the position that Section 8 prohibits companies from having two different individuals serve as officers or directors of competing companies, referred to as a "deputization," or "agency" theory. See, e.g., United States v. CommScope, Inc. and Andrew Corporation, 72 Fed. Reg. 72,376 (Dec. 20, 2007) (proposed final judgment and competitive impact statement) (DOJ alleging that CommScope's participation on its own board of directors and a competitor's board of directors would violate Section 8); see DOJ March 9 Press Release.
8 See DOJ March 9 Press Release.
9 See id.
10 See id.
11 FTC Press Release, FTC Launches New Office of Technology to Bolster Agency’s Work, February 17, 2023 (available here).
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