The Federal Energy Regulatory Commission (FERC) and the Department of Justice (DOJ) recently issued orders and statements demonstrating concerns related to director positions and potentially interlocking directorates. These actions together signal greater attention paid to the identities and affiliations of directors serving on corporate boards. Going forward, companies should carefully review the composition of their (and their upstream owners’) board of directors to confirm they are in compliance with FERC and DOJ regulatory requirements.
FERC Broadens Its Affiliate Policy to Include the Appointment of Nonindependent Directors
On 20 October 2022, FERC issued a pair of orders that signal a significant change in its policy on affiliates for the electric industry. FERC’s regulations under the Federal Power Act state that entities with less than 10% of common ownership, or where one entity holds less than a 10% ownership in voting securities of another entity, are subject to a rebuttable presumption that they are not affiliates. In the face of concerns raised by Public Citizen, Inc. about activist investors escaping regulatory oversight, FERC announced a new affiliation policy that would overcome this rebuttable presumption. Under this new FERC policy, a person (no matter the level of ownership, control, or holdings of voting securities) will be considered an affiliate of a FERC-jurisdictional public utility if such person has appointed a nonindependent director to a company in the utility’s upstream ownership chain.
In Evergy Kansas Central, Inc.,1 the executive chairman of an activist hedge fund, Bluescape Energy Partners, LLC (Bluescape), took a nonindependent director seat on the board of directors of Evergy, Inc. (Evergy). Evergy was the parent company of several FERC-jurisdictional public utilities (collectively, the Evergy MBR Sellers). Based on this relationship, FERC found that Bluescape was deemed an affiliate of each Evergy MBR Seller for FERC purposes. FERC made this finding even though a Bluescape affiliate owned only 1.1% of Evergy’s outstanding shares of common stock.
As FERC explained:
Board membership confers rights, privileges, and access to non-public information, including information on commercial strategy and operations. Where an investor’s own officer or director, or other appointee accountable to the investor, is appointed to the board of a public utility or holding company that owns public utilities, the investor itself will have those rights, privileges, and access, and thus the authority to influence significant decisions involving the public utility or public utility holding company. Accordingly, we find that, where an investor’s non-independent director, such as its own officer or director, or other appointee accountable to the investor, is appointed to the board of a public utility or public utility holding company, that appointment functions to rebut the presumption of lack of control under section 35.36(a)(9)(v).2
Whether a director is independent or not was crucial to FERC’s analysis. FERC limited its expanded affiliation policy to the appointment of nonindependent directors. While FERC acknowledged that another hedge fund, Elliot Management Corp. (Elliot), had similar investment arrangements in Evergy as did Bluescape, FERC focused on the difference in boards of directors’ appointments in finding only Bluescape to be an affiliate of the Evergy MBR Sellers. Elliot (the nonaffiliate) appointed two independent directors to the Evergy board of directors, whereas Bluescape (the affiliate) appointed one nonindependent director to the Evergy board of directors.
This expanded affiliation policy will affect a FERC-jurisdictional public utility’s market power analyses—potentially linking together companies and accompanying assets considered previously to be unaffiliated. Along with launching the relational market-based rate database by FERC earlier this year, this policy is part of a broader FERC effort to better track relationships between entities in the electric power sector. To ensure they comply with this new FERC affiliation policy, public utilities should evaluate the composition of their upstream owners’ boards of directors, both now and on an ongoing basis. Public utilities will need to determine if they must report any additional affiliations to FERC or have any additional FERC compliance obligations, such as needing FERC’s preapproval under Section 203 of the Federal Power Act,3 which are triggered by proposals for certain nonindependent board of directors’ appointments.
DOJ Announces Director Resignations in Light of Interlocking Directorate Concerns
FERC’s increased interest in director positions appears to align with DOJ’s increased attention to interlocking directorate positions held in violation of Section 8 of the Clayton Antitrust Act.4 On 19 October 2022, DOJ issued a press release announcing that directors from five companies resigned due to concerns that their positions may create interlocking directorates.5 Each of the five pairs of companies engaged in similar products and markets, and each had at least one director in common.
Subject to specific de minimis exceptions,6 Section 8 prohibits persons from being an officer7 or director of a competing8 corporation9 in order to prevent anticompetitive effects.
DOJ explained that an interlocking directorate “further concentrates power and creates the opportunity to exchange competitively sensitive information and facilitate coordination ˗ all to the detriment of the economy and the American public.”10 DOJ further indicated that interlocking directorates will continue to be a priority for their Antitrust Division.
These actions brought by DOJ signal a departure from the largely dormant Section 8 enforcement of the past 40 years. DOJ Assistant Attorney General for the Antitrust Division Jonathan Kanter signaled earlier this year 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.”11 To ensure they do not run afoul of this waking enforcement, companies should review the outside positions of their officers and directors and set up appropriate guardrails to prevent any Section 8 violations.
Conclusion
Both FERC and DOJ are employing their regulatory oversight to focus on the composition of boards of directors and the ability of individual directors to assert influence over corporate actions. Companies should therefore be aware of this new focus and ensure their regulatory compliance policies extend to the composition of their (and their upstream owners’) board of directors.
1 181 FERC ¶ 61,044 (2022) (“Evergy Order”).
2 Evergy Order at P 45.
3 16 U.S.C. § 824b.
4 15 U.S.C. § 19.
5 Press Release, U.S. Dep’t of Just., Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns About Potentially Illegal Interlocking Directorates (Oct. 19, 2022), https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially.
6 Section 8 does not apply if: (i) either corporation’s competitive sales are less than US$4,103,400 (adjusted annually), (ii) either corporation’s competitive sales are less than 2% of that corporation’s total revenues for the most recent fiscal year, or (iii) both corporations’ competitive sales are less than 4% of each corporation’s total revenues for the most recent fiscal year.
7 The term “officer” under the Clayton Act means an officer elected or chosen by the board of directors.
8 “Competing” has historically meant horizontal competition.
9 While Section 8 prohibits interlocks between “any two corporations,” the FTC and DOJ have initiated Section 8 investigations into noncorporate entities. No direct action has been brought to date. See Fed. Trade Comm’n, Dissenting Statement of Commissioner Rohit Chopra (Feb. 21, 2020), https://www.ftc.gov/system/files/documents/public_statements/1567201/dissenting_statement_of_commissioner_rohit_chopra_in_the_matter_of_rent_own_store_swaps_1910074.pdf (noting that the FTC missed an opportunity to expand Section 8 enforcement to include noncorporate entities such as limited liability companies).
10 Press Release, supra note 5.
See Jonathan Kanter, 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.
