DOJ Pursues Active Enforcement Against Interlocking Directorates
Seven directors resigned from their corporate board positions last week following a recent increase in enforcement of Section 8 of the Clayton Act by the Department of Justice’s (“DOJ”) Antitrust Division. Section 8 of the Clayton Act prohibits individuals from simultaneously serving as a director or officer of two or more competing corporations. Individuals are at risk if the two corporations involved meet all of the following requirements:
- Both corporations are engaged in interstate or foreign commerce;
- The combined capital, surplus, and undivided profits of the two corporation exceed $41,034,000;
- The two corporations are competitors; and
- The corporations are not both banks, banking associations, trust companies, and/or common carriers.
If all of these elements are met, and none of the exemptions below apply, the directorial interlock is per se illegal, and is prohibited regardless of whether the interlock has actually harmed competition.
The purpose of Section 8 is to avoid potential violations of antitrust laws resulting from a director serving on boards of competing companies and using their position to collude, thus harming competition and consumers. With companies diversifying to meet their customers’ needs, it is becoming more likely that a company will have competing lines of revenue with another company (even if the major areas of revenue within the company do not overlap). Section 8 applies to directors of companies interlocking with these competing lines of revenue, as well as the more obvious interlocking of competing companies occupying the same market.
Exceptions and Safe Harbors
Notably, Section 8 does not specifically apply to non-corporate entities such as limited liability companies and partnerships. There are also a few safe harbor exceptions for companies if the competing revenue is small enough. These three safe harbors are as follows: (1) if the competing revenue of each corporation is less than 4% of the corporation’s total sales; (2) the competing revenue of either corporation is less than 2% of that corporation’s total sales; or (3) the competitive revenue of either corporation is less than $4,103,400. This last threshold is adjusted yearly by the FTC, based on the change in gross national product.
The DOJ asserts that this recent increase in enforcement of Section 8 is due to the potential risk of anticompetitive collaboration or sharing of sensitive information that could result from an individual serving on the board of two competing companies. And while the DOJ and FTC’s only recourse to break up directorial interlocks is an injunction, the Section 8 investigation could potentially lead to more costly and lengthy investigations if the agencies choose to look for evidence of other antitrust violations. There are no civil or criminal penalties associated with government’s enforcement of Section 8, however should a private party choose to sue to enforce the statute, they may seek treble damages.
Private equity continues to be a target for DOJ and FTC investigations, and as such, private equity firms should take extra precautions to ensure they are not at risk for violating Section 8. Of the seven recent resignations, two notable examples involved directors serving on the boards of two competing companies simultaneously, on behalf of private equity firms. These recent investigations can serve as a warning to other private equity firms with directors in similar positions.
Private equity firms are particularly at risk of running afoul of Section 8 due to their minority investments in a wide variety of businesses which increases the possibility of competition and interlock. With the Section 8 thresholds changing annually, private equity firms should institute a compliance program to monitor their investments in companies with potential interlock. Such a compliance program should:
- Monitor the interlocked companies’ assets each year to determine if their capital, surplus, and undivided profits remain under the adjusted threshold amount.
- Monitor the interlocked companies which utilize the safe harbors each year, to ensure increases in competing revenue have not pushed the companies outside the safe harbor thresholds.
- Track new products or offerings for each interlocked company to determine if any compete; assess the new areas of competition to conclude if the competing revenue falls under the safe harbor thresholds.
- Assess future acquisitions to determine if appointing a board member to the new target company will create an interlock.
- Analyze divestitures of the company to ensure the loss in total revenue does not increase the percentage of competitive revenue above the safe harbor thresholds.
Should a company’s change in assets, revenue, business offerings, or holdings push the company into a state of noncompliance, the firm has a one-year grace period to remedy this noncompliance. Generally, the interlocked director representing the private equity firm will need to step down from one of the companies in order for the company to become compliant.
The resignations were likely the result of letters from the DOJ, inquiring into potential director or management interlocks. The resignations included the following public corporations:
- Definitive Healthcare Corp. and ZoomInfo Technologies Inc. – Both companies operate go-to-market information and intelligence platforms used by third-party sales, marketing, operations, and recruiting teams.
- Maxar Technologies Inc. and Redwire Corp. – Both companies are providers of space infrastructure and communications products and services.
- Littelfuse Inc. and CTS Corp. – Both companies are manufacturers of components and technologies for use in transportation applications, including sensors and switches for use in passenger and commercial vehicles.
- Skillsoft Corp. and Udemy Inc. – Both companies are providers of online corporate education services. Here, a director represented Prosus, an investment firm, on both boards.
- Solarwinds Corp. and Dynatrace, Inc. – Both companies are providers of Application Performance Monitoring (APM) software. A director representing the investment firm Thoma Bravo served on both boards. Two additional directors also represented Thoma Bravo on the Solarwinds boards, and also resigned in response to the DOJ’s inquiry.
In each of these scenarios, the directors only stepped down from the board of one company and continued to serve on the other.
Section 8 of the Clayton Act prohibits interlocking directorates, which occurs when an individual serves as a director of two competing corporations concurrently. Given the DOJ’s recent inquiries into potential interlocking directorates, you may want to evaluate whether any of your existing directors, managers, or officers serve competing corporations. Additionally, it is recommended that private equity firms institute a compliance program to regularly asses each company’s changes in assets, revenue, business offerings, and holdings, as the many changing data points open up firms to an increased risk of violating Section 8. If an interlock is discovered, the general solution is for that person to resign from the board of one of the involved companies.
Special thanks to Morgan Herchenbach, Koley Jessen Summer Associate, for her contributions on this article.