Interlocking Directorates

April 21, 2017

Interlocking directorates (also called interlocks) occur where a person serves as an officer or a director of two corporations. While they generally are legal, interlocking directorates between two competing corporations are prohibited under the antitrust laws because of their potential to result in anticompetitive effects, such as allowing competitors to coordinate business decisions and exchange competitively sensitive information.

Interlocks are challenged generally under Section 8 of the Clayton Act (15 U.S.C. § 19) but the federal antitrust enforcement agencies may use other antitrust statutes to challenge interlocking directorates, including:

  • Section 5 of the FTC Act (15 U.S.C § 45).
  • Section 1 of the Sherman Act (15 U.S.C § 1).

Application of Section 8

Section 8 prohibits any person from serving simultaneously as an officer or a director of two competing corporations that are engaged in commerce, so that an agreement between them eliminating competition would violate the antitrust laws.

To determine if a Section 8 violation has occurred, counsel must evaluate whether:

  • The two corporations are engaged in commerce.
  • The two corporations compete with one another by virtue of their business or location so that an agreement between those two corporations eliminating competition violates antitrust laws.
  • A person serves as an officer, meaning an individual elected or chosen by the board of directors, or a director of the two corporations.

Case law has developed that interprets the elements of a Section 8 violation, such as what the nature of the competition must be between the two corporations and the definition of person.

Violations of Section 8 are per se, meaning that a lack of competitive injury does not excuse the parties from liability unless one of the de minimis exemptions in the statute applies.

Additionally, each corporation’s financial records must show it has capital, surplus, and undivided profits aggregating $32,914,000 or more, as adjusted annually by the FTC based on changes in the gross national product.

Remedies for a Section 8 Violation

Enforcement actions against interlocking directorates under Section 8 may be brought by:

  • Governmental enforcement agencies, such as the Federal Trade Commission (FTC) and the Department of Justice (DOJ).
  • State attorneys general.
  • Private parties.

The antitrust agencies or private plaintiffs may obtain an injunction for a Section 8 violation, including occasionally in the form of the prohibition of future interlocks. More frequently, antitrust agency or judicial relief consists of:

  • Elimination of the interlock.
  • Restructuring of the transaction to:
    • eliminate a board seat that creates an interlock; and
    • include prior notification or approval provisions regarding the appointment of future directors or officers.

For example, the agencies may require officers or directors to resign or those individuals may voluntarily resign to eliminate an interlocking directorate. In the FTC’s investigation of a potential interlock between Google and Apple, resignations from the companies’ boards eliminated the possible interlock. The Chairman of the FTC at the time, Jon Leibowitz, commended the companies for recognizing that their shared directors raised serious antitrust issues and for their willingness to resolve the agency’s concerns without litigation.

Learn more from the experts at Practical Law.