August 16, 2019

Antitrust: Interlocking Directors in M&A

In late June, the FTC blogged some guidance about compliance issues arising under Section 8 of the Clayton Act, which prohibits an individual from serving as an officer or director of two competing companies.  This prohibition on interlocking directorates isn’t an antitrust issue that’s usually front & center in the M&A context, but this excerpt from the guidance makes it clear that it sometimes needs to be:

Section 8 is a strict liability provision, meaning violations are per se and do not depend on actual harm to competition. It prohibits not only a person from acting as officer or director of two competitors, but also any one firm from appointing two different people to sit as its agents as officers or directors of competing companies, subject to a few limited de minimis exemptions. Here are two transaction scenarios that require extra mindfulness to ensure compliance with Section 8.

– Mergers or acquisitions can implicate Section 8 when a company is acquiring or merging into a new business line. The new business line may create an interlock if there are members of the acquiring or surviving board that also sit on the boards or serve as officers of a now-competing company. Private equity firms that acquire board seats across a diverse portfolio of companies may be particularly likely to encounter Section 8 issues via a merger or acquisition.

– Spin-offs can pose Section 8 problems where an officer or director retains roles with both the parent and the newly independent firm, if those two companies will compete in a line of business going forward.

The good news is that there is a one year grace period for the individual to resign from one of the positions creating the interlock – but even during this grace period, the individual can’t use the position for anti-competitive ends.

John Jenkins