Board Focus: Identifying Interlocking Directorates and Avoiding Potential Liability

U.S. antitrust agencies closely monitor corporations that share common board members and may take enforcement action where appropriate.  Whenever companies are vetting a new director candidate, considering whether a current officer or director can serve on another company’s board, or reviewing director independence and other qualifications under applicable listing standards, they also should be mindful of the limitations imposed by antitrust laws, particularly Section 8 of the Clayton Act.  Interlocking directorates (also known as interlocks) occur where a person serves as an officer or a director of two corporations.  Interlocking directorates between competing corporations are generally prohibited under the Clayton Act due to their potential to result in anticompetitive effects, such as allowing competitors to coordinate business decisions and exchange competitively sensitive information.

Companies should be vigilant because potentially prohibited interlocks may also arise under circumstance that would not ordinarily prompt a company to re-assess a director’s continuing eligibility to serve on the board.  For example, a prohibited interlock could result due to a company’s expansion into a new product area in which it was not previously competing, or from the company or a subsidiary taking a minority stake in another company that is a competitor.  Antitrust laws also should be considered when a director or officer is asked to join the board of another company that may be a competitor, or whenever the employment of a director changes.

It may also be prudent for companies add Section 8 compliance into their overall compliance program given the variety of circumstances that can trigger an interlocking directorate.  Such review could include an assessment of applicable thresholds for exemptions, recent geographic expansion, new product offerings or innovation and/or recent acquisitions, any of which could have resulted in new or expanded competitive overlaps.

The accompanying article, written by Weil Antitrust partner Laura Wilkinson, discusses the limitations on interlocks imposed by Section 8 in further depth, providing guidance for companies on avoiding potential liability under antitrust laws and crafting policies to resolve these issues when they arise.

A recent posting by the Federal Trade Commission also provides useful guidance.