On August 16, the Federal Trade Commission (FTC) and Department of Justice (DOJ) announced two new enforcement actions targeting alleged interlocking directorates.
For the FTC, this action is the first formal Clayton Act Section 8 enforcement in nearly 40 years.1 The FTC announced a settlement resolving interlocking directorate concerns associated with a proposed transaction between Houston-based private equity firm Quantum Energy Partners (Quantum), whose holdings include Appalachian natural gas producer Tug Hill Corp. and pipeline operator Xcl Midstream, and natural gas producer EQT Corporation (EQT) based in Pittsburgh. The FTC alleged that the transaction ' which would have granted Quantum the right to nominate its CEO or another Quantum designee for election as a member of the EQT Board of Directors ' violated Section 8. As discussed in greater detail below, EQT and Quantum agreed to a variety of far-reaching commitments to resolve the FTCs concerns.
On the same day, DOJ announced that two directors at Pinterest Inc. resigned their positions on the Board of Directors of Nextdoor Holdings Inc., in response to DOJ concerns regarding the interlock.2 This announcement is the latest in DOJ's enforcement initiative focused on Section 8, which DOJ says has "led to fifteen interlocking director resignations from eleven boards."3
These enforcement actions follow pledges from both the FTC and DOJ to continue enforcement attention in this area4 and underscore the need for companies to maintain an effective antitrust compliance program to mitigate Section 8 risks, both when choosing new directors and when existing corporate directors join other boards. Interlocking directorates raise concerns not only under Section 8, but can be the basis for claims of anticompetitive information exchange and coordination under Section 1 of the Sherman Act, which ' unlike Section 8 ' raises the risk of substantial private damages actions.
Clayton Act Section 8 Background
Simultaneous service as an officer or director of two competing companies may create antitrust risks through potential access to and improper disclosure of competitively sensitive information or coordination between the competitors.5 Section 8 of the Clayton Act is a prophylactic statute designed to prevent this type of conduct by prohibiting such dual service, subject to certain exceptions, regardless of whether any anticompetitive conduct occurs due to the interlock.
Section 8 prohibitions apply to an interlock when the following jurisdictional thresholds are met:
- The combined "capital, surplus, and undivided profits" (i.e., net worth) of each of the corporations exceeds US$45,257,000 (indexed annually)6
- Each corporation is engaged in whole or in part in interstate commerce
- The corporations are competitors "by virtue of their business and location of operation ... so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws."7
However, because certain interlocks are viewed to pose little risk of significant antitrust harm, interlocks are exempt from Section 8 where:
- The competitive sales8 of either corporation are less than US$4,525,700 (indexed annually)9
- The competitive sales of either corporation are less than 2% of that corporation's total sales
- The competitive sales of each corporation are less than 4% of that corporation's total sales
Importantly, even if an interlock is exempt under Section 8, companies and individuals can still be liable for anticompetitive conduct that might arise as a result of the interlock, such as Sherman Act Section 1 violations. The FTC has also indicated that it may apply Section 5 of the FTC Act to interlocks that violate the "spirit and policy" of Section 8 even if not prohibited by the terms of the statute.
Quantum Energy Partners/EQT Corporation Proposed Acquisition
On September 6, 2022, EQT agreed to acquire Quantum-controlled Tug Hill and XcL Midstream for approximately US$5.2 billion, half of which would be shares of EQT common stock.10 EQT is a natural gas producer...
