Directors of companies often serve on multiple boards or are officers of other companies. When these directors serve in multiple roles they create a link between companies commonly referred to as an interlock, or interlocking directorates. Although interlocking directorates are generally legal, interlocks between competing corporations may be prohibited under antitrust laws due to their potential to result in harm to competition by, for example, allowing competitors to synchronize business decisions and exchange competitively sensitive information.
In April of 2022 the head of the Antitrust Division at the U.S. Department of Justice, Jonathan Kanter, signaled that the agency would be ramping up investigations of interlocking directorates as potential violations of Section 8 of the Clayton Act. Kanter stated: “[W]e are committed to litigating cases using the whole legislative toolbox that Congress has given us to promote competition. One tool that I think we can use more is Section 8 of the Clayton Act. … We are ramping up efforts to identify violations across the broader economy and we will not hesitate to bring Section 8 cases to break up interlocking directorates.” The DOJ made good on Kanter’s promise on October 19, 2022 and March 9, 2023, announcing that at least thirteen directors had resigned from at least ten boards in response to investigations of potential Section 8 violations. In the accompanying press releases, the DOJ warned “[c]ompanies, officers, and board members should expect that enforcement of Section 8 will continue to be a priority for the Antitrust Division” which will “continue to enforce the antitrust laws when necessary to address illegal board interlocks.”
Section 8 of the Clayton Act has been part of the U.S. antitrust enforcement toolbox for over a century but until recently has rarely been enforced. It prohibits any person from serving as a director or board-appointed officer of two or more competing corporations if (i) the corporations are “by virtue of their business and location of operation, competitors …;” and (ii) certain monetary thresholds are met. Section 8 is a preventative tool intended to avert collusion before it occurs.
Violations of Section 8 are per se violations, meaning that a lack of competitive injury will not excuse the parties from liability unless one of the safe harbors in the statute applies. The usual result of Section 8 liability is an order to cease the overlapping director or officer positions. While Section 8’s liability standard does not carry automatic monetary penalties, investigations can be expensive, and there is always a possibility that an investigation may determine an interlock caused a reduction of competition —for which damages could be imposed under other antitrust statutes. Damages may also be sought by private plaintiffs under Section 16 of the Clayton Act, although no court appears to have awarded these damages yet.
Does my Interlock Violate Section 8?
To determine whether Section 8 applies to an interlocking directorate, companies must evaluate whether the two corporations are engaged in commerce; compete with one another by virtue of their business; any person serves as an officer or a director of the two corporations; and each corporation’s financial records show that it has capital, surplus, and undivided profits totaling more than $41,034,000.
While this evaluation appears straightforward, there is a considerable gray area around its application. For example, what constitutes competition between corporations? Some courts rely on a market definition analysis, which would consider cross-elasticity of demand and whether the corporations’ products are interchangeable. Other courts perform a broader analysis and analyze (1) the extent to which the industry and its customers recognize the products as separate or competing; (2) the extent to which production techniques for the products are similar; and (3) the extent to which the products can be said to have distinctive customers.
Additionally, while Section 8 applies only to corporations on its face, the enforcing agencies have previously advocated that its coverage should be extended to other structures, such as LLCs. Furthermore, the federal antitrust agencies and some courts have interpreted the word “person” in Section 8 to apply to representatives sitting on competing boards under an agency theory.
Corporations should be particularly mindful when determining if an interlock exists and may choose to preempt any concerns by foregoing board seats or otherwise eliminating questionable interlocks.
Is there a Safe Harbor for my Interlock Available?
Section 8 only applies to horizontal interlocks and provides a one-year grace period following an event that creates an interlock. If a company determines it has an interlock outside the one-year grace period, it will need to determine if one of three de minimis exceptions apply. Section 8 does not apply if any of the following is true: (1) either corporation’s competitive sales are under a dollar threshold (currently $4,103,400, but adjusted annually), (2) either corporation’s competitive sales are less than 2 percent of that corporation’s total sales, or (3) where each corporation’s competitive sales are less than 4 percent of its total sales. If a corporation is unable to rely on one of these three de minimis exceptions for an existing interlock, then it should take steps to eliminate the interlock to comply with Section 8 of the Clayton Act.
Given the recent enforcement efforts in this area, companies should anticipate greater focus on Section 8, both in the context of merger reviews and potentially in independent investigations. Companies should be mindful of Section 8 as they make governance decisions going forward and consider existing board memberships by company directors and employees for potential Section 8 exposure. Steps that companies may take include reviewing director and officer questionnaires to identify existing interlocks, creating a policy addressing interlocks, and require notice to, or pre-approval by, the board (or a committee of the board) of any new positions that may result in interlocks.
If you have questions about interlocking directorships or would like assistance in developing appropriate corporate governance policies to mitigate the risks associated with interlocking directorships, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets or Corporate/Mergers and Acquisitions teams.
1. Jonathan Kanter, Assistant Attorney General, Dep’t of Just., Opening Remarks at 2022 Spring Enforcers Summit (Apr. 4, 2022), https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers.
2. https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially; https://www.justice.gov/opa/pr/justice-department-s-ongoing-section-8-enforcement-prevents-more-potentially-illegal
3. Id.
4. 15 U.S.C. §§ 19(a)(1) and (2).
5. FTC, Revised Jurisdictional Thresholds for Section 8 of the Clayton Act, 87 Fed. Reg. 3540 (Jan. 24, 2022) (this amount is adjusted annually by the FTC based on changes in the gross national product).
6. See, e.g., American Bakeries Co. v. Gourmet Bakers, 515 F. Supp. 977, 980-81 (D. Md. 1981); United States v. Crocker Nat’l Corp., 422 F. Supp. 686, 703-04 (N.D. Cal. 1976).
7. TRW, Inc. v. FTC., 647 F.2d 942, 948 (9th Cir. 1981).
8. See, e.g., Reading Int’l Inc. v. Oaktree Capital Mgmt., 317 F. Supp. 2d 301, 327-28 (S.D.N.Y. 2003); Square D Co. v. Schneider S.A., 760 F. Supp. 362, 364 (S.D.N.Y 1991); Michael E. Blaisdell, Interlocking Mindfulness, FTC (June 26, 2019).
9. Horizontal interlocks are interlocks between competitors. By contrast, vertical interlocks are between suppliers and customers.