The U.S. Department of Justice Antitrust Division (DOJ) recently announced the resignation of seven directors from five companies in the latest round of DOJ challenges to interlocking directorates.
What Is an Interlocking Directorate?
Interlocking directorates occur when an individual serves as a director or officer on two companies that are “by virtue of their business and location of operation, competitors.” And although interlocking directorates are not always illegal, Section 8 of the Clayton Act, 15 U.S.C. § 19, makes these arrangements per se illegal when the companies meet certain financial and business thresholds (meaning the interlock is illegal regardless of any procompetitive justifications). For more information on the business threshold, review our prior client alert.
Recent Resignations
The recent resignations resulted from DOJ investigations and signal DOJ’s commitment to aggressively enforce the Clayton Act’s prohibition against anticompetitive board designations. Antitrust Division Chief Jonathan Kanter stressed the importance of these challenges in DOJ’s press release and made clear more challenges against interlocking directorates are forthcoming. This round of interlocking directorate challenges follows the 2021 resignations of two top executives of a talent and media agency after similar DOJ pressure.
DOJ appears to be targeting all industries, with resignations coming from information and software platform companies to education services and the space industry. Life science companies also may be particularly vulnerable: The Social Science Research Network recently released a study of the overlapping board members of 2,241 public life science companies since 2000. The investigation uncovered that, at any given time, 10–20% of board members are interlocked, and the interlocked board member tenures are 50% longer than other, non-interlocked directors. This number has grown drastically in the last two decades in the life science industry.
And private equity firms are facing focused DOJ investigations into their interlocking directorates after Kanter warned the firms earlier this year that DOJ will subject them to a tougher review. Given their business structure, private equity firms often are responsible for choosing executives for company boards in the same sector. But when the same executive sits on multiple boards of directors, interlocking directorate issues can arise. Kanter expressed that this “business model” is “very much at odds with the competition we’re trying to protect.”
Next Steps to Consider
Now that DOJ has assured the public that Section 8 enforcement is a priority, companies should identify any interlocking directorates on their boards; determine whether the thresholds are met; and decide what actions, if any, would mitigate the risk of a DOJ challenge. Thus far, it appears DOJ has successfully forced resignations in all challenged interlocking directorates. Because Section 8’s sole remedy is an injunction, companies will need to decide whether resignation is the best option. Directors often serve on a company board because of their skill and expertise, and a company may choose instead to contest DOJ’s allegation and force suit. But when a challenged interlocking directorate is brought to light, there is potential risk of enforcement agencies or private plaintiffs investigating whether improper information exchanges, or even anticompetitive agreements, have occurred as a result of the interlocking directorate.
Accordingly, companies may benefit from understanding the interlocking directorates on their boards, whether or not they meet the threshold requirements for a per se illegal challenge. As Kanter noted, DOJ seeks to limit the concentration of power that could lead to anticompetitive behavior. Even if not per se illegal, interlocking directors can still be a stepping stone for establishing civil or criminal liability for anticompetitive conduct — including the exchange of competitively sensitive information — resulting from board overlap.
