The United States Department of Justice (DOJ) announced last week that directors at several technology companies have resigned as a consequence of the agency’s renewed focus on overlapping board membership between competitors. This development follows Assistant Attorney General Jonathan Kanter’s announcement in April that DOJ would begin ramping up enforcement of Section 8 of the Clayton Act, which, with certain exceptions, prohibits a company’s officers and directors from concurrently serving on the boards of competing companies. “Competitors sharing officers or directors 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,” said Kanter in a statement designed to emphasize that DOJ efforts targeting unlawful interlocking directorates will continue. In doing so, according to Kanter, DOJ aims to “prevent collusion before it can occur.”
DOJ’s actions here should serve as a reminder to companies—particularly those in the tech and life sciences sectors—that ongoing diligence with respect to potential officer or director interlocks is necessary to avoid entanglements with federal antitrust authorities. They also signal federal antitrust authorities’ heightened scrutiny of the role played by venture capital (VC) and other private equity (PE) investment funds when they maintain investments in multiple companies in the same industry segment.
Section 8: Thresholds, Exceptions, and Enforcement
Section 8 prohibits any person or entity from serving simultaneously as an officer or director of two or more competing corporations (this includes different individuals serving as representatives of the same entity), thus eliminating certain opportunities for competitors to coordinate business decisions or exchange competitively sensitive information. This prohibition is only applicable when:
- (i) Each corporation has capital, surplus, or undivided profits totaling $41,034,000 or more, and
- (ii) the corporations are engaged in commerce such that a mutual agreement to eliminate competition would violate federal antitrust laws.
However, even if the companies are competitors and meet the minimum size threshold, certain de minimis safe harbors may be available. Section 8 would not
apply if the gross revenues for all competitive sales:
- (i) of either corporation are less than $4,103,4001;
- (ii) of either corporation are less than 2% of the corporation’s total sales, or
- (iii) of each corporation are less than 4% of that corporation’s total sales.
Violations of Section 8 are per se violations—i.e., a lack of actual anticompetitive coordination will not excuse parties from liability. However, the typical remedy for a Section 8 violation is simply to eliminate the interlock by having the officer or director resign from one of the companies. With respect to prospective interlocks that may arise from certain M&A or investment activity that triggers Hart-Scott-Rodino Act premerger notification filings, the investigating antitrust agency—either DOJ or the Federal Trade Commission (FTC)—will require the parties to restructure the transaction to eliminate the interlock, and may also subject the parties to ongoing prior notification/approval provisions regarding the appointment of future officers or directors.
The government’s current initiative regarding interlocking directorates is a significant departure from past practice. Before the current administration, enforcement actions involving Section 8 were sporadic, with overlaps often detected only as a result of an investigation not specifically aimed at an interlock (e.g., DOJ’s 2016 investigation of ICAP’s acquisition of 19.9% of competing financial services firm Tullett Prebon, which was allowed to proceed but only after it was restructured to eliminate ICAP’s right to nominate a board member). Other instances have simply been opportunistic actions involving high-profile companies. By contrast, DOJ’s current actions on interlocking directorates is indicative of what is likely the most determined and concentrated enforcement effort ever seen in this area.
DOJ’s Recent Actions, and the Implications for Private Equity
According to DOJ, its investigations resulted in the elimination of five alleged interlocks between competitors, four of which were between public tech companies: (i) Definitive Healthcare Corp. and ZoomInfo Technologies Inc. (go-to-market information and intelligence platforms used by third-party sales, marketing, operations and recruiting teams), (ii) Maxar Technologies Inc. and Redwire Corp. (providers of space infrastructure and communication services and products), (iii) Skillsoft Corp. and Udemy Inc. (providers of online corporate education services), and (iv) SolarWinds Corp. and Dynatrace Inc. (providers of application performance monitoring software). DOJ’s announcement also cited an alleged interlock between Littelfuse Inc. and CTS Corp., manufacturers of various electrical components used by original equipment manufacturers. DOJ’s intervention resulted in the resignation of seven directors, six of whom served on the boards of the tech companies.
Notably, five out of the seven resignations were of directors representing investment firms. Kanter and FTC Chair Lina Khan have both been quite vocal in their criticism of the influence of private equity, and guarding against anticompetitive “roll ups” of entire market segments by funds run by common managers. Interlocking directorates are seen as posing the same kinds of dangers, potentially giving private equity firms too much ability to coordinate competitive behavior in particular sectors. This has led Khan in particular to cite “life and death” consequences arising from alleged PE control of large segments of the economy.
While all of the companies targeted by DOJ were publicly traded (suggesting that detection of the alleged director interlocks was likely merely a matter of reviewing public filings), DOJ has reportedly also been seeking information that is outside the public domain, in part to ramp up scrutiny of PE. This is reportedly happening by DOJ sending written inquiries to numerous companies, and also by issuing certain other companies with compulsory process (civil investigative demands). These efforts appear to be at least partially aimed at “connecting the dots” between VC and other PE firms whose affiliations and other controlled investments may not be immediately evident.
Startups and other private companies should not expect to escape scrutiny.
Given the current enforcement climate, companies should reexamine existing compliance protocols to determine whether additional protections with respect to existing and future officers and directors may be warranted. Although Section 8 violations do not generally result in severe consequences, the risk of business disruption (either by loss of a director or investigation into potentially anticompetitive behavior) underscores the need for ongoing diligence in this area. Further, although DOJ’s actions were focused on public companies, private companies at all stages of growth should not expect to escape scrutiny, especially those in the tech and life sciences industries where VC and other PE investments are particularly prominent.
Companies should consider the following actions to help avoid issues with potential interlocks:
- Periodically reviewing current and potential directors’ service as an officer or director of any other company, and whether that company can be construed as a competitor; if the director is a representative of a PE or VC investor, the review should also include whether the investor also has a different representative on a competitor’s board.
- Taking stock of developments in the relevant market space(s) at least annually to determine whether:
- (i) companies that were not previously competitive may have become so as a consequence of either company’s entry or expansion into new areas of business, or
- (ii) the respective companies may have outgrown any previously applicable safe harbor.
(Note: in situations where a competitive relationship has evolved organically, or where company growth has exceeded safe harbor protections, Section 8 grants a grace period of one year from the precipitating event.)
- Expanding the directors’ and officers’ questionnaires used during preparation for an IPO, a registration statement on Form S-1, or the company’s Form 10-K and proxy statement to ensure they are sufficient to identify any potential interlock risks.
- Adding Section 8 diligence to potential transaction checklists before finalizing the deal structure and seeking assurances/representations from investors who have (or will have) the right to appoint a director that such appointment will not create an impermissible interlock.
- Establishing appropriate recusal and firewall policies, and training board members on what constitutes competitively sensitive information. This helps guard against the specific types of harms (improper coordination and information exchange between competitors) that Section 8 is designed to address, and to encourage better overall antitrust compliance.
Finally, in instances where it is not clear, consult antitrust counsel if there are questions about how to identify a competitor or how to classify competitive sales. Likewise, immediately contact antitrust counsel upon receipt of any relevant correspondence from one of the antitrust enforcement agencies.
This dollar threshold is adjusted annually.