Antitrust authorities have interlocking directorships and minority shareholdings in their sights

Issue

The Department of Justice (DOJ) and Federal Trade Commission (FTC) have increased enforcement in relation to “interlocking directorships” under Section 8 of the Clayton Act, which prohibits directors and officers from serving concurrently with competing businesses.

Section 8 is designed to prevent the sharing of sensitive information between rivals (and thus anticompetitive coordination), and until recently breaches have only been found in relation to the same individual holding seats on more than one board. The agencies’ current approach however has been to interpret the statute more broadly, covering situations where the same entity has appointed different directors to competing companies – bringing financial investors squarely into view.

Financial sponsors’ board appointments more likely to be challenged

The DoJ has revealed that its current crackdown, which began in 2022, has “unwound or prevented” at least 15 interlocks involving 11 companies. PE firms with portfolio assets in the social media, cyber security, insurance and aviation sectors have either asked appointees to resign from boards or declined to exercise their rights to add new directors.

In August, the FTC also announced it had barred a private equity firm from installing a director one of its investee companies for the first time since the 1980s.

It is worth pointing out that interlocks are only relevant in relation to non-controlling investments, but with sponsors increasingly pursuing minority stakes they are more likely to see their board appointments challenged.

Elsewhere, the head of the Australian competition authority has also flagged potential concerns over PE firms holding minority shareholdings in rival businesses, arguing that despite not being in control, it is often sponsors who make the most “competitively significant decisions”.

Solution

Sponsors need to be alive to the risk that minority stakes could be viewed unfavourably by antitrust authorities, especially where their portfolios already include assets whose activities overlap with those of the target. Robust antitrust analysis is required from the outset of any deal process to assess and mitigate risk.

Section 8 is a “per se” provision, meaning there are no remedies that can keep the director in place if the prohibition is found to apply. If a sponsor is seeking access to company information rather than strategic influence it may be possible to test whether a non-voting directorship might be acceptable – but where this isn’t the case, sponsors will need to consider their options if they cannot nominate directors to protect their minority rights.