Antitrust regulators have made it clear that they intend to take a hard look at potential violations of Section 8 of the Clayton Act, which prohibits director interlocks, and that private equity firms may find themselves in the crosshairs of these actions. But a recent WilmerHale memo says that any DOJ or FTC enforcement push will have to address a number of unanswered questions about the statute — and that the agencies are almost certain to take a hard line. This excerpt addresses three key unresolved definitional issues:
Person: Even the most basic premise of Section 8—that a “person” cannot, in principle, serve on the board of competing corporations—is fraught with uncertainty. Does “person” mean “individual,” such that two separate designees of the same corporation could serve on competing boards without violating the statute? Or does “person” refer to the parent entity that has designated the two individuals, such that the interlock is captured by Section 8? The U.S. antitrust agencies have long favored the latter position, but the question remains unresolved in the courts.
Competition: Section 8 captures interlocks between corporations that are in competition with each other, but the definition of what constitutes competition remains a gray area. Some courts rely on the market definition analysis used by the Sherman and Clayton Acts generally, which would consider cross-elasticity of demand and whether the products are interchangeable. Other courts perform a broader analysis and analyze (1) the extent to which the industry and its customers recognize the products as separate or competing; (2) the extent to which production techniques for the products are similar; and (3) the extent to which the products can be said to have distinctive customers.
Corporations: Section 8 prohibits interlocks between “two corporations.” Does this mean that the same person could serve on the board of competing entities, if at least one of them is an unincorporated entity (such as an LLC)? It appears so. The Supreme Court in BankAmerica Corp. v. United States suggested that Congress deliberately chose statutory language that “selectively regulates interlocks with respect to … different classes of business organizations.” Other antitrust laws in close subject matter proximity to Section 8 also distinguish corporations from unincorporated entities. Nonetheless, an aggressive DOJ or Federal Trade Commission might attempt to use Section 8 to challenge interlocks involving non-corporate entities, such as LLC.
The memo recommends a number of actions that companies should take in light of regulators’ likely aggressive enforcement approach. These include reviewing existing board memberships by company employees and reviewing board service policies — and assuming that a very broad definition of the term “competitor” will apply when conducting that analysis.
— John Jenkins, DealLawyers.com, September 16, 2022