DOJ Reinvigorates Scrutiny Of Interlocking Directorates

• Published date: 08 November 2022
• Subject Matter: orporate/Commercial Law, Antitrust/Competition Law, M&A/Private Equity, Corporate and Company Law, Directors and Officers, Antitrust, EU Competition
• Law Firm: Steptoe & Johnson
• Author: Mr Damon J. Kalt and Sean Aasen

Last month, the U.S. Department of Justice's (DOJ) Antitrust Division announced that seven directors from the boards of five companies resigned in response to concerns that the directors' roles violated the prohibition against interlocking directorates under Section 8 of the Clayton Act.¹ These resignations follow previous statements by the DOJ that it intended to "reinvigorate" Section 8 enforcement, including a speech delivered earlier this year by Assistant Attorney General (AAG) Jonathan Kanter, who made clear that the Antitrust Division would be closely scrutinizing interlocking directorates.² This development highlights the need for companies to maintain an effective antitrust compliance program that carefully monitors board memberships and appointment policies to mitigate Section 8 risks.

Legal Background: Clayton Act Section 8

Subject to certain de minimis exemptions, Section 8 of the Clayton Act prohibits "interlocking directors," which occur when a "person" simultaneously serves as a director or officer of two or more competing corporations. Section 8 is'in effect'a prophylactic statute designed to eliminate the possibility of anticompetitive effects that could arise from competitors coordinating their business decisions or exchanging competitively sensitive information. As such, the prohibition applies only to interlocks involving corporations that are competitors "by virtue of their business and location of operation...such that elimination of competition by agreement between them would constitute a violation of any of the antitrust laws."³ Unless an exemption applies, an interlock that violates Section 8 is unlawful per se (i.e., there is no consideration of whether the interlock results in anticompetitive effects).

To remedy a Section 8 violation, the antitrust agencies or private plaintiffs can seek injunctive relief to require the removal of the overlapping director to eliminate the interlock. Private plaintiffs may also seek damages, although we are not aware of any court that has awarded damages for a Section 8 claim.

Exemptions and Exclusions

Because certain interlocks are deemed to pose minimal risk of competitive harm, Section 8 does not apply where:

• The combined total capital, surplus, and undivided profits of either corporation is less than $41,034,000 (indexed annually); or
• The competitive sales of
  • either corporation are less than $4,103,400 (indexed annually);
  • either corporation are less than 2% of the corporation's total sales; or
  • each corporation are less than 4% of the corporation's total sales.⁴

Further, Section 8 provides for a one-year grace period following an intervening event that creates an interlocking directorate violation.⁵ The grace period applies where the officer or director was eligible to serve in that position at the time of appointment (i.e., the appointment did not violate Section 8), but becomes ineligible for that position due to an intervening event that makes continued participation unlawful under Section 8 (e.g., their competitive sales grow above the de minimis thresholds). The officer or director has a one-year grace period from the date of the intervening event to resign from that position.

Application to Other Entities, Definition of Person, and Indirect Interlocks

While the language of...