On October 19, 2022, the Antitrust Division of the Department of Justice (“DOJ”) issued a press release heralding the resignation of seven directors from ten companies’ boards of directors in response to the government’s expansive interlocking directorate investigations.1 As first highlighted to clients in Polsinelli’s June 8, 2022 Client Insights Alert,2 Assistant Attorney General Jonathan Kanter gave notice to the corporate community that the DOJ would be more vigilant in enforcing a “bright line rule” by “ramping up efforts to identify violations across the broader economy” by bringing “Section 8 cases to break up interlocking directorates.”3
The purpose of Clayton Act Section 8(a)(1) (“Section 8”) is to prevent anticompetitive information exchanges and the potential for collusion that may occur when a person simultaneously serves as an officer or director of two competing corporations. Generally, Section 8 applies only if certain financial thresholds are triggered and no exceptions apply.4 Violation of the interlocking directorate rule, barring any exceptions, is a per se violation that can be enforced by the antitrust regulators, as the DOJ recently engaged in, as well as by private litigation.
The DOJ enforcement action impacted a broad range of industries ranging from sales and marketing platforms, communications products, transportation products and technologies, online education software, and application performance software. Although none of the companies admitted to liability, they all took efforts to unwind the interlocks, in response to the respective investigations, through the resignation of a dual director, and three directors involved with a private equity firm resigned from one company’s board because that firm already had representation on the competitor company’s board. It is unlikely that this is the end of the government’s enforcement efforts with regard to interlocking directorates; in fact, the DOJ has expressly stated that it “will continue to be a priority.”5 Moreover, the government’s investigative reach will likely expand and impact additional industry sectors.
Even where Section 8 does not apply, companies may face risk under Section 1 of the Sherman Act when their officers, directors, or employees work with two or more competing firms. To ensure compliance with Section 1, companies may need to implement information firewalls or other safeguards to limit the potential for anticompetitive effects that may result from company personnel having dual roles at competing firms. Unlike Section 8 of the Clayton Act, there is no grace period under Section 1 of the Sherman Act. Also, unlike in Section 8 cases, private plaintiffs in cases brought under Section 1 are frequently awarded treble damages.
The latest enforcement action is yet another clear and prominent warning to clients engaged in frequent acquisitions and spinoffs — especially private equity and health care firms — to be mindful of the aforementioned corporate governance prohibition since transactions in these spaces could potentially result in competitor interlocks. Now, more than ever, there is a risk management imperative to conduct a thorough internal review and implement good corporate governance controls with respect to the placement of individuals as officers or directors of other entities in order to avoid an improper interlocking directorate. The Polsinelli Antitrust team can assist clients with a review of their corporate governance and organization charts to ensure optimal legal compliance.
1Department of Justice, Office of Public Affairs, “Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates,” available https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially
2A. Kar, M. Raup, H. Allen, M. Hans, “Clients Should Review Their Corporate Governance Compliance Guidelines in Light of Threatened Enforcement Action Against Interlocking Directorates” available at https://www.polsinelli.com/publications/clients-should-review-their-corporate-governance-compliance-guidelines-in-light-of-threatened-enforcement-action-against-interlocking-directorates
3Jonathan Kanter, Opening Remarks, at 2022 Spring Antitrust Enforces Summit, available at https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-deliv-ers-opening-remarks-2022-spring-enforcers
4The 2022 Interlocking Directorate thresholds can also be found at https://www.federalregister.gov/docu-ments/2022/01/24/2022-01215/revised-jurisdictional-thresholds-for-section-8-of-the-clayton-act
5See fn 1.
