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FTC Issues Reminder Regarding Interlocking Directorates

The FTC recently reminded market participants to take steps to avoid violating the per se prohibition on interlocking directorates under Section 8 of the Clayton Act. The FTC referred to its previous post on Section 8, which urged firms to monitor market developments to ensure changes in the market do not create unexpected interlocks, and then highlighted two common transaction scenarios where Section 8 issues may arise: mergers and spin-offs.

Mergers or acquisitions can raise Section 8 issues when a company acquires or merges into a new business line if there are members of the acquiring or surviving board that also sit on the board or serve as officers of a now-competing company. Private equity firms that acquire board seats across a diverse portfolio of companies should be particularly mindful of potential interlocks.

Spin-offs also can result in an unlawful interlock if an officer or director retains roles with both the parent and the newly independent firm, if those two companies will continue to compete in a line of business.

Why does this matter?

Section 8 of the Clayton Act prohibits a “person” (i.e., an individual or a company) from simultaneously serving as an officer or director of two competing corporations, creating an interlocking directorate. Section 8 is a prophylactic statute designed to prevent unlawful collusion through the mechanism of an interlock. Accordingly, violations are per seunlawful, and a finding of liability does not require proof of actual or likely competitive harm.

Under the 2019 thresholds, Section 8’s ban on interlocks excludes corporations that have capital, surplus and undivided profits aggregating less than $36,564,000. In addition, there are three de minimis exceptions to the prohibition on interlocking directorates that permit horizontal interlocks for two companies with few overlapping products:

  1. the competitive sales of either corporation are less than $3,656,400,

  2. the competitive sales of either corporation are less than 2 percent of that corporation’s total sales, or

  3. the competitive sales of each corporation are less than 4 percent of that corporation’s total sales.

What happens if an interlock is discovered?

The Federal Trade Commission and the U.S. Department of Justice both enforce Section 8. While the agencies readily enforce Section 8, few claims reach litigation. The government is limited to injunctive relief, meaning it may only seek an order that eliminates the interlock to remedy a violation (e.g., the FTC closed its investigation into interlocks involving Google, Inc. and Apple, Inc. after a common member resigned from Google’s board and Google’s CEO resigned from Apple’s board). There is a one-year grace period to fix interlocks that subsequently arise (e.g., interlocks resulting from a merger or spin-off), although the interlocked individual is prohibited by Section 1 of the Sherman Act from using his or her role for anticompetitive purposes. The government does not assess civil penalties for Section 8 violations, nor are there criminal violations.

Private parties also may sue to enforce Section 8. Injunctive relief is the typical remedy, but private parties may obtain treble damages (if damages can be proven) and attorneys’ fees.

Firms should be mindful of and consult experienced antitrust counsel regarding Section 8 issues when considering potential restructurings or acquisitions. Companies with existing horizontal interlocks that are permissible due to Section 8’s threshold requirement or exceptions also should regularly monitor their compliance with Section 8 (e.g., monitor company’s assets and check annually against the jurisdictional threshold, track new products or offerings for the interlocked companies that may create new areas of competitive sales, etc.).

© Copyright 2020 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume IX, Number 183


About this Author

Ngoc Pham Hulbig, Cadwalader, coordinated competition filing attorney, high stakes transactions lawyer

Ngoc Pham Hulbig's practice focuses on counseling regarding U.S. and global premerger notification requirements. She has extensive experience in preparing filings under the Hart-Scott-Rodino Act and has coordinated competition filings around the world for complex and high-stakes transactions. She also counsels clients in the full range of antitrust matters, including mergers and acquisitions, joint ventures, and in connection with investigations by the U.S. Department of Justice and the U.S. Federal Trade Commission. Ngoc has experience representing clients in matters...

Joel Mitnick, Cadwalader Law Firm, New York, Finance and Litigation Law Attorney

Joel Mitnick is a partner in the Antitrust and Global Litigation groups. Joel’s practice focuses on antitrust matters on behalf of a wide array of financial market, life science, media, service industry and industrial clients. Joel represents clients in Federal and State antitrust investigations, antitrust class actions and merger clearance proceedings. He has tried merger cases to verdict and briefed antitrust class actions up to the United States Supreme Court. Joel also counsels some of the nation’s most prominent activist and passive hedge funds and private equity firms in terms of share accumulation and HSR filing strategies, board representation and antitrust/HSR compliance training. 

Joel began his career as a trial lawyer at the Federal Trade Commission. He was an Antitrust Group associate at Skadden, Arps, Slate, Meagher & Flom and, prior to joining Cadwalader, was the longtime Global Co-Head of Antitrust at Sidley Austin.

He has been selected as a leading lawyer in antitrust matters by Chambers USA, Benchmark Litigation (Litigation Star Award), The Best Lawyers in America, The Legal 500 US, Super Lawyers and Who’s Who Legal: Competition.

Joel appears regularly before federal and state antitrust enforcement agencies. A frequent speaker and author, Joel has lectured at enforcement programs sponsored by the Federal Trade Commission and the National Association of Attorneys General, and has served as an ABA Antitrust Trial Skills faculty member. In 2017, Joel moderated a panel addresing ‘‘Perspectives on Digital Markets: Platforms, Parity and Pricing in the United States, Europe and Beyond,’’ at the Fordham Competition Law Institute's 44th Annual Conference on International Antitrust Law & Policy.