Antitrust Enforcers Take a Seat in the Boardroom

by Wendy Arends and Blake Heyer

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Antitrust Enforcers Take a Seat in the Boardroom

by Wendy Arends and Blake Heyer

The DOJ and FTC are taking a much closer look at interlocking boards, and now, you should too.

The Biden Administration’s antitrust enforcers have set their sights on yet another target – interlocking boards of directors that may be illegal under Section 8 of the Clayton Act. In 2021, President Biden issued the Executive Order on Promoting Competition in the American Economy to address perceived consolidation in various industries. The U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) have a mandate to use all tools at their disposal to carry out a “whole of government” approach to antitrust enforcement. One underutilized tool—until recently—is Section 8 of the Clayton Act (15 U.S.C. § 19) (Section 8). DOJ and the FTC have reinvigorated enforcement under Section 8 of potentially anticompetitive and often overlooked board interlocks. Given the antitrust agencies’ renewed focus on interlocking boards, companies should consider internal compliance programs, ongoing monitoring, and antitrust counsel’s guidance to ensure seated directors and future board appointments comply with Section 8.

WENDY ARENDS
is a Partner with Husch Blackwell LLP.

BLAKE HEYER
is an Associate with Husch Blackwell LLP.

A Renewed Focus on Interlocking Directorates

Section 8 prohibits illegal interlocking directorates which may occur when a person simultaneously serves as an officer or director of two competing companies. An illegal interlocking directorate is a per se violation—which ignores the degree of, if any, anticompetitive effects. Three de minimis safe harbors provide exceptions to a Section 8 violation:

Competitive sales of either corporation are less than $1,000,000 (presently adjusted on annual basis to $4,855,900).
Competitive sales of either corporation are less than 2% of that corporation’s total sales.
Competitive sales of each corporation are less than 4% of sales of that corporation’s total sales.

Additionally, Section 8 includes jurisdictional thresholds that require both corporations to have a net worth over $10,000,000 (presently adjusted on annual basis to $48,559,000).

Resignations Follow Increased DOJ Actions Under Section 8

Largely ignored outside of merger investigations until the issuance of the Executive Order, Section 8 challenges have surged by DOJ, the FTC, and private plaintiffs. In a 2022 statement, Assistant Attorney General Jonathan Kanter of the DOJ’s Antitrust Division said that the DOJ’s “Section 8 enforcement has essentially been limited to our merger review process,” but that the DOJ “will not hesitate to bring Section 8 cases to break up interlocking directorates.”

Sticking to President Biden’s enforcement agenda, Mr. Kanter reiterated nearly a year later that “[e]nforcement of Section 8 will continue to be a focus for the division, just as Congress intended,” to address interlocking boards.

Recent DOJ enforcement actions have resulted in unwound interlocks or blocked board members:

Brookfield Asset Management Inc. (Brookfield) and American Equity Investment Life Holding Company (AEL) – AEL and a wholly-owned Brookfield subsidiary are both insurance companies. Brookfield could appoint officers or directors to its subsidiary, while the subsidiary had a contractual right to appoint a director to the AEL board. After the Brookfield subsidiary exercised its contractual right, the DOJ intervened, and the subsidiary withdrew its AEL director nomination.
N-able, Inc. (N-able), Dynatrace, Inc., and SolarWinds Corp. (SolarWinds) – Representatives of a private equity (PE) firm sat on the board of all three software companies. Following the DOJ’s concern about an alleged interlock, the PE firm’s representatives resigned from the boards of SolarWinds and N-able.
Pinterest Inc. (Pinterest) and Nextdoor Holdings Inc. (Nextdoor) – Pinterest and Nextdoor are both social network companies headquartered in San Francisco. Following the DOJ’s enforcement efforts, two directors who served on the boards of both companies resigned from Nextdoor’s board.
Qualys, Inc. (Qualys), SumoLogic, Inc., and F5, Inc. (F5) – Three cloud security service providers had a director serve on the boards of all three companies. After the DOJ’s enforcement involvement, the interlocking director resigned from Qualys’ board and declined reelection to F5’s board.
Sun Country Airlines Holdings, Inc. (Sun Country) and Atlas Air Worldwide Holdings, Inc. (Atlas Air) – Both Sun County and Atlas Air provide services to domestic freight routes. The DOJ intervened after an investment group proposed acquiring Atlas Air’s outstanding shares while having two affiliated persons on Sun County’s board resulting in the two affiliated directors resigning from Sun County’s board.

The remedy sought by DOJ in each case was to either unwind the interlock or decline certain board rights—actions touted by the DOJ in press releases as the number of director resignations proliferates.

The FTC Amps Up Its Section 8 Scrutiny

Consistent with DOJ’s revitalization of Section 8, the FTC is also using Section 8 as a tool to seek additional remedies in its investigations of mergers and acquisitions. FTC Chair Lina Khan noted in a statement regarding the FTC’s action against EQT Corporation (EQT) that Section 8 “has rarely been enforced in the over 100 years since its passage[.]” In its first formal Section 8 enforcement action in nearly 40 years, the FTC challenged natural gas producer EQT's proposal to acquire certain natural gas assets from Quantum Energy Partners, LP (Quantum), a PE firm. Along with $2.6 billion in cash and 55 million shares, EQT offered Quantum a seat on its board of directors.

The FTC expressed concern under Section 8 that the offer would result in an illegal interlocking directorate and lead to the potential for the exchange of competitive and confidential information. In what Chair Khan noted as an expansion of Section 8’s reach, the Consent Order the FTC challenged a future interlocking board and applied Section 8 to LLCs. Although the text of Section 8 only prohibits interlocking directorates “in any two corporations,” Chair Khan said that the FTC’s challenge against Quantum, an LP with LLC affiliates, “puts industry actors on notice that they must follow Section 8 no matter what specific corporate form their business takes.”

In addition, the FTC sought expansive remedies, requiring Quantum to forego electing a director to EQT’s board to prevent the formation of an interlocked board, and prohibiting Quantum from serving on the board of “any of the top seven natural gas producers in the Appalachian Basin,” absent approval by the FTC for ten years. On May 2, 2024, the FTC issued a Consent Order conditionally approving ExxonMobil Corporation’s (Exxon’s) $64.5 billion acquisition of oil producer Pioneer Natural Resources (Pioneer). The Order prohibited Exxon from appointing former Pioneer CEO Scott Sheffield to Exxon’s Board of Directors or serving on Exxon’s Board of Directors or management in any advisory capacity.

Excluding certain identified Pioneer representatives, the FTC’s order also barred all other Pioneer employees and directors from serving on Exxon’s board. Both bans are effective for five years. For ten years, Exxon must fulfill certain attestation and reporting obligations under Section 8.

In support of the FTC’s 3 to 2 vote, Chair Khan wrote that Mr. Sheffield believed he could persuade competitors “to join him in colluding to restrict output and raise prices,” after noting numerous “troubling” statements made by Mr. Sheffield. Among other allegations, the FTC raised that Mr. Sheffield’s appointment, who also serves the board of directors of The Williams Companies, Inc., a competitor in the oil and gas industry and specifically with Exxon, would result in a board interlock.

Again, the FTC’s board ban remedy in exchange for merger clearance demonstrates enforcement agencies’ various antitrust regulatory tools available and unconventional enforcement techniques that antitrust enforcers can use as part of their investigations and actions.

Finally, on September 27, 2024, it was reported that the FTC is going to bar John Hess (of Hess Corporation) from joining the board of Chevron Corporation, relating to the proposed $53 billion merger.

Private Equity Firms Are Scrutinized

Private equity (PE) and venture capital (VC) firms remain subject to intense scrutiny from antitrust enforcers, including under Section 8’s enforcement resurgence. These firms invest heavily across various industries in their portfolios, and vertically along industry segments. The investments in competing portfolio companies could result, as shown in the Sun Country action, in multiple board appointments that may result in an allegedly illegal interlocking directorate.

DOJ and FTC also support the “deputization” theory of enforcement that considers an appointing firm as the violating “person” under Section 8, even if different individuals from the firm are serving on the boards. Chair Khan said that “[t]he Commission has long held that Section 8 applies to corporations as well as to individual directors,” in the FTC’s action against EQT and Quantum. Although firms are not specified in the text of Section 8, DOJ also compelled resignations in the Brookfield and SolarWinds actions indicating its alignment with the deputization theory.

How You Can Mitigate the Risk of Heightened Enforcement

With the expanded arsenal of enforcement remedies available to the DOJ and FTC, companies should consider implementing a way to monitor current board and officer composition and proposed changes to ensure compliance with Section 8’s prohibitions, safe harbors, and jurisdictional thresholds. Similarly, companies should conduct the same assessment prior to a merger. Because the de minimis exceptions involve competitive sales that are constantly evolving (and because antitrust enforcers may take a different view of what they deem “competitive sales”) companies should consider instituting a monitoring program to prevent a potential Section 8 concern that may arise over time. LLCs are now a potential target that should evaluate their board appointment rights in accordance with Section 8. PE and VC firms should also consider their representatives nominated to competing company boards and remain mindful of the potential disruption caused by an interlock challenge.

Adhering to the Biden Administration’s clear directive, the FTC and DOJ have taken action to enforce Section 8 and continue to explore all possible remedies. Companies should continue to monitor their board compositions to avoid the expanding antitrust reach of enforcers. ■