Interlocking directorates are per se illegal, which means that they are unlawful regardless of whether there has been competitive harm.
The Antitrust Division of the Department of Justice (DOJ) has indicated a recent interest in enforcing Section 8 of the Clayton Act, which prohibits individuals from serving on boards of competing corporations, known as “interlocking directorates.” (See 15 U.S.C. § 19.) Assistant Attorney General Jonathan Kanter has called Section 8 an “important but underenforced” antitrust law. After DOJ announced a focus on Section 8, the agency reported that seven board members announced their resignations in response. Since then, DOJ has continued its focus on Section 8, issuing civil investigative demands and confidential investigation letters to firms, including private equity funds and investors. Life sciences companies, and companies that invest in the life sciences industry, should be on the lookout for interlocking directorates, as there is empirical evidence suggesting that the industry is particularly at risk of a Section 8 investigation.
Interlocking directorates are per se illegal, which means that they are unlawful regardless of whether there has been competitive harm. According to DOJ, this is because “competitors sharing officers or directors further concentrates power and creates the opportunity to exchange competitively sensitive information and facilitate coordination.” The remedy for Section 8 violations is injunctive relief―requiring resignation of the interlocking board position. In addition, a violation of Section 8 carries a risk of further civil or criminal investigation by the federal antitrust agencies―the DOJ and the Federal Trade Commission (FTC)―to determine whether additional antitrust laws have been violated as a result of the opportunity to share information.
Section 8 states that two corporations are competitors if the “elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.” Though this requires an analysis of the various relevant product and geographic markets that the corporations are involved in, at a basic level it means that if corporations sell the same type of product or service to the same type of customer in the same geographic area, they may be construed as competitors. Firms should keep in mind that this analysis can shift as corporations enter new markets or acquire new companies or product lines.
Life sciences companies should pay particular attention to this enforcement trend. A study done by Stanford Law School attempted to quantify the interlocking directorate phenomenon, and used clinical trial information and company self-reporting to identify which firms were “competitors.” In assessing overlaps in the board membership of 2,241 public life sciences companies since 2000, the study found that at any given time, 10 percent to 20 percent of board members are interlocked, and the number of interlocks has more than doubled since 2000. In particular, the study found interlocking directorates are prevalent in oncology, neurology, immunology and respiratory disease related firms.
Section 8 does not apply to all entities―the statute limits its applicability to “corporations.” Nevertheless, the DOJ has previously indicated that it might seek to enforce Section 8 as to noncorporate entities. Further, the following “safe harbor” exemptions apply:
- Section 8 does not apply to any corporation that has less than $41,034,000 in total capital, surplus and undivided profits.
- Section 8 also does not apply if:
- the competitive sales of either corporation are less than $4,103,400;
- the competitive sales of either corporation are less than 2 percent of the corporation’s total sales; or
- the competitive sales of each corporation are less than 4 percent of the corporation’s total sales.
- Note that these jurisdictional requirements are adjusted each year. There is also a one-year “grace period” for events that create an interlock.
The increased attention on Section 8 interlocking directorates is part of a larger antitrust enforcement focus on private equity funds. Given the Stanford study discussed above, this could signal increased risk for private equity firms focused on the life sciences industry. In the last six months, both Assistant Attorney General Kanter and FTC Chair Lina Khan have been quoted as saying that repeated private equity acquisitions in the same industry are a concern for both agencies and may be harmful to competition, even if not reportable under the Hart-Scott-Rodino Act. Both agency heads called for sharper enforcement tools and scrutiny of private equity firms.
For More Information
If you have questions about this Alert, please contact Sean P. McConnell, Christopher H. Casey, Sarah O'Laughlin Kulik, any of the attorneys in our Antitrust and Competition Group, any of the attorneys in our Life Sciences and Medical Technologies Industry Group, any of the attorneys in our Private Equity Group or the attorney in the firm with whom you are regularly in contact.
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