Interlocking Mindfulness

The wellness strategy of the moment is mindfulness: focusing on the present and being completely aware of your situation. Even in the corporate sphere, there are good reasons for anyone in governance to take a self-assessment. Am I living in the now, what is my position in the world, am I currently violating the per se prohibition on interlocking directorates under Section 8 of the Clayton Act?

That’s right, mindfulness is important in antitrust as well. Based on a couple recent scenarios to play out during our merger reviews, there are unexpected restructuring and acquisition circumstances through which companies and their boards can wake up one morning to find themselves in a potentially problematic interlock situation.

Section 8 of the Clayton Act protects against potential information sharing and coordination by prohibiting an individual from serving as an officer or director of two competing companies.

We covered the outlines of Section 8 in a previous post, noting that firms must monitor market developments to ensure that changes in the market do not create unexpected interlocks. That’s because 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.

In both the merger and spin-off scenarios, Section 8(b) provides a one-year grace period for the individual to resign from one of the problematic positions. But even during this grace period, Section 1 of the Sherman Act prohibits the interlocked director from using his or her dual role for anticompetitive ends. Note that if a Section 8-prohibited interlock exists at the time of the individual’s appointment to one of the boards this grace period would not apply.

As one more area of antitrust compliance that needs attention during certain M&A scenarios, counsel should be mindful of Section 8 when considering potential restructurings or acquisitions. They should educate officers, directors, and in-house counsel on Section 8 and, if operating under an exception, should review compliance annually to ensure that the exception continues to apply.