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DOJ focus on Interlocking directorates reflects ‘shot across the bow’ at PE – Analysis

The crackdown on interlocking directorates by the US Department of Justice’s Antitrust Division is forcing public companies to scrutinize their compliance with Section 8 of the Clayton Act, and hints at the agency’s broader ambitions to rein in perceived excesses by public equity, according to interviews with four antitrust attorneys.

Private equity has been a frequent target in the rhetoric of AAG Jonathan Kanter and FTC Chair Lina Khan, both of whom expressed concern about the impact on competition of the industry’s acquisition practices, as well as the presence of directors serving on boards of competing corporations, as has been reported.

While the move portends a boon for antitrust lawyers and a logical legal gap to close, less clear is how much the reinvigoration of Section 8 enforcement can actually impact the alleged growing market power by private equity that DOJ seeks to address, three of the lawyers said.

“This is a small shot across the bow in a larger effort to rein in what DOJ and FTC see as the adverse competitive effects of private equity,” said Jonathan Grossman, co-chair of the antitrust practice at Cozen O’Connor.

In October, DOJ announced the resignations of directors from the boards of five companies, following concerns raised by the Antitrust Division about potential Section 8 violations, as has been reported.

At the time of the resignations, Kanter said the agency would be “undertaking an extensive review of interlocking directorates across the entire economy.”

Later that month, Bloomberg reported that the DOJ was investigating whether Blackstone [NYSE:BX], Apollo Global Management [NYSE:APO] and KKR & Co. [NYSE:KKR], leverage overlapping board seats to influence corporations in violation of US antitrust laws. 

Section 8 questions arise relatively infrequently, often in the context of due diligence during transactions or joint ventures, Grossman explained.

He recalled maybe a couple of situations during his more than two decades as an antitrust lawyer where concern was significant enough to even consider removing a board member; and just one case in which a director ultimately stepped away, he said.

Preventing coordination and the exchange of competitively sensitive information through overlapping board seats is vital to fair competition, and Section 8 is “a good law” that contains appropriate exceptions and carve-outs, Grossman said. 

It’s not clear, however, to what extent the lack of Section 8 enforcement has resulted in improper coordination or other anti-competitive conduct, he said.

“I’m not inside the Antitrust Division so I can’t tell you for sure the answer to that, but we certainly haven’t seen an example of it yet,” Grossman said.

Most often, Section 8 cases are brought in conjunction with violations of Section 1 of the Sherman Act, two of the attorneys explained.

The lack of public examples of interlocking directorates resulting in high-profile enforcement cases makes it more difficult to judge the efficacy of the agencies’ new focus, they said.

“It’s hard to say,” Jeny Maier, a partner in the antitrust practice at Axinn, said of the prevalence of interlocking directorates on corporate boards.

She cited academic research that looked at the practice among life sciences companies.

“In that case, they found a pretty high percentage of interlocks and that has grown over the course of the last 20 years,” she said.

Targeting interlocking directorates reflects a relatively quick and easy win that is consistent with AAG Kanter’s vocal stance on proactive enforcement, particularly as it relates to private equity, Maier said.

The board resignations announced in October are what one might expect from companies facing even the suggestion of a Section 8 transgression, a per se violation for which no harm need be shown, she said.

Without fear of damages or other risk, businesses have incentive to simply remove the director or officer and eliminate the overlap, three of the lawyers said.

It remains to be seen whether any companies will opt to fight DOJ, particularly in cases where they disagree that a board seat qualifies as an interlock under Section 8, Maier said.

“We’ll see to what degree that litigation actually happens, but it sounds like that’s something that DOJ is sort of looking to do…to litigate to clarify the law and get published opinions on these questions,” she said.

It is not far-fetched to imagine situations where a company or private equity firm could find itself with an interlocking directorate for non-nefarious reasons, said one former DOJ enforcer, now an antitrust partner in private practice.

“You do a lot of different acquisitions, some of these deals are small, you have a minority investment and you get a board seat,” that attorney said.

Most large corporations are sensitive to Section 8 issues; problems arise in enterprises or investment firms where “they may not have monitored” and no one “does that diligence and checking on a regular basis,” according to that lawyer. 

“I think it was just designed to kind of scare people and I guess from that perspective, it’s good,” the attorney said of the new focus. “It’ll cause clients to listen and take it seriously now.”

Orrick partner James Tierney, another former DOJ enforcer now in private practice, agreed the agency is sending a message.

“DOJ is putting companies, particularly hedge funds, on notice that their antitrust compliance programs should include periodic reviews for Section 8 issues,” he said via email.