Interlocking Directorates May Pose Risk for Tech, PE Firms

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By Eleanor Tyler

Sept. 9 — The recent departure of Alphabet Inc.'s chief legal officer from Uber Technologies Inc.’s board highlights how a little-noticed prohibition against interlocking directorates can cause problems for technology firms and private equity groups.

Enforcement of the Clayton Act §8 prohibition against interlocking directorates among competitors is infrequent. But the threat that private plaintiffs might use overlaps to support a Sherman Act conspiracy claim means companies must be careful, particularly as increasing tech market complexity and growing private equity investment increase the risk of unnoticed interlocks, antitrust practitioners said.

“When you have overlapping directors, it could support an inference that there was control and information sharing, and that is a real problem,” said Stuart Plunkett, a Baker Botts LLP partner in San Francisco.

Given the stakes, companies should regularly review their board composition as part of good corporate hygiene, practitioners told Bloomberg BNA.

In Alphabet's case, Chief Legal Officer David Drummond stepped down from Uber’s board because the two companies are moving further into each other’s markets, Bloomberg News reported Aug. 29.

In July, the Justice Department required Tullett Prebon Group Ltd. and ICAP Plc to restructure their $1.5 billion transaction because it would otherwise result in an interlocking board. Both companies provide electronic brokerage services and are headquartered in the U.K., but operate in the U.S.

As originally envisioned, ICAP would have the right to appoint a member of Tullett Prebon's board after closing. DOJ, however, required ICAP to restructure the deal so it wouldn't have an ownership interest in Tullett Prebon as a result of the transaction, according to a DOJ statement.

Interlocks Forbidden

Section 8 of the Clayton Act says no “person shall, at the same time, serve as a director or officer in any two corporations” that are competitors, and was intended to prevent collusion among rivals.

The Federal Trade Commission and the Justice Department, which enforce the statute, apply it to both individuals and companies. That means a violation can arise not only when one person sits on the boards of two competing companies, but also when one firm appoints two different people to sit as its agents on the boards of two competing companies.

There is a safe harbor in the law for small companies, small competitive overlaps and where the area of competitive overlap matters little to the companies' bottom lines.

The agencies don't often file actions under Section 8, but they do force companies to restructure deals and boards, J. Todd Hahn, counsel in Goodwin Proctor's New York office, told Bloomberg BNA.

Usually the agencies seek only to secure the resignation of the interlocking director. Most enforcement actions are informal, although DOJ or the FTC may seek a court order if needed.

Infrequent enforcement is not indicative of the DOJ’s lack of concern about the statute, however. “When we see problems, we will enforce the statute,” a DOJ official who didn't wish to be named told Bloomberg BNA.

Rather, enforcement is infrequent because good antitrust counsel usually spot violations or developing problems under the statute before they come to the agencies' attention, another DOJ official speaking on condition of anonymity told Bloomberg BNA. When problems do come to the attention of antitrust authorities, it might be from a merger filing, from publicly available information, or through information from a competitor or customer of the violating companies, the officials agreed.

Litigation Risk

While the agencies can seek only to remove one of the overlapping directors from one of the boards, “a greater risk is the potential for a claim under Section 1 of the Sherman Act based on allegations that the companies are coordinating their business activities or sharing competitively sensitive information via the common director,” Antonia Sherman, counsel in Linklaters New York office, told Bloomberg BNA. That’s a bigger threat, and related to the competitive threat Section 8 is aimed at preventing, she said.

As a litigator, Plunkett told Bloomberg BNA that he would expect to see plaintiffs in Sherman Act cases taking a careful look at defendants’ board membership in hopes of possibly including a Section 8 claim to buttress their Section 1 or Section 2 conspiracy claim.

As an example, Plunkett pointed to an antitrust class complaint by high-tech employees alleging that the biggest Silicon Valley employers agreed not to poach each others' employees. That complaint explicitly mentioned, in alleging a conspiracy between Apple Inc. and Google Inc. to fix wages for their employees, that one person sat on the boards of both Apple and Google when the conspiracy allegedly occurred. That case sought around $9 billion in damages and settled for $415 million after four years of litigation.

High-Tech Reach

Two trends in the U.S. market make the chance of interlocking directorate violations more likely, Andrea Murino, co-chair of Goodwin Proctor LLP's antitrust group in Washington, told Bloomberg BNA.

First, as private equity funds and other investors spread money around an industry, they are increasingly likely to acquire the right to appoint at least one member to two rival boards. That right is typically tied to a percentage of ownership, ensuring proportionate representation on the board in question.

Second, as high-tech firms innovate and reach into more areas, they are “starting to look more and more alike,” she said. Increasingly, these firms compete with each other on multiple levels for information and data or selling the same services or products.

Sherman agreed that the minority holdings of tech companies are a potential for Section 8 violations that the parties might not recognize on their own. When a company is buying a minority stake in a competitor, the potential for a board overlap is fairly obvious; but in cases where a single private equity firm holds minority stakes in several companies in the same industry, it can be less apparent that their ability to appoint a board member to each board might violate the statute.

Mergers

When a merger requires clearance through the antitrust agencies to close, the parties disclose minority ownership interests on the required forms, Hahn said. The agencies may then discover interlocking directorate issues that had previously gone unnoticed and resolve them through changes to the deal. Merger clearance is therefore a pressure point where enforcement actions arise, he said.

In 2006, The Carlyle Group and Riverstone Holdings LLC were required to remove representatives from the board of Magellan Midstream Partners LP to complete their deal to take Kinder Morgan Inc. private. The parties entered a consent agreement with the FTC to remedy alleged anticompetitive affects from control of the oil and gas storage assets of both companies (17 DER A-18, 1/26/07).

Among the consent order's requirements, the funds had to cede active control of Magellan to another investor and remove their representatives from Magellan's board.

Notification Not Required

But companies shouldn't bank on escaping enforcement by not having to seek merger clearance, because the antitrust agencies have a wealth of publicly available information to consult in spotting board interlocks, Hahn said.

Google Inc., in particular, has had several run-ins with the interlocking directorate statute as it expanded into new businesses and gained new competitors even without a merger filing.

In May 2009, the FTC announced an investigation into board interlocks between Apple and Google. Apple announced in August 2009 that Eric E. Schmidt, CEO of Google, would step down from Apple's board. Shortly thereafter, Arthur Levinson, a director at Apple, resigned from Google's board, putting to rest the regulatory probe.

Having the two serve on both boards triggered antitrust scrutiny because the companies were increasingly competing in the same markets, Bloomberg News reported at the time.

Risks in Focus

While there is natural tension between finding expert board members and steering clear of conflicts and interlocks, Murino said companies should be aware of the risks and include board review in routine compliance measures.

Plunkett agrees that corporations should proactively review their board membership periodically to prevent violations. “Whenever there is a transaction, definitely take a good look at not just the target and acquirer but also any subs and parent corporations,” he said.

Murino recommends looking at board membership annually. If a company's business has changed substantially, and its board hasn't, it's time to take a close look at whether any of the board's other obligations present issues under Section 8, she said. “It's just good corporate hygiene.”

“Good antitrust counsel can help companies ensure that they don’t run afoul of Section 8,” DOJ officials said.

To contact the reporter on this story: Eleanor Tyler in Washington at etyler@bna.com

To contact the editor responsible for this story: Tiffany Friesen Milone at tmilone@bna.com

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