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US regulators raise pressure on board members at competing companies

Washington / New York, August 20, 2023

Federal Trade Commission joins Department of Justice antitrust division in scrutiny of ‘interlocking directorates’

US antitrust agencies are taking a harder line on directors who sit on the boards of competing companies, signalling a broadening crackdown in cases that violate federal law.

So-called interlocking directorates at competing groups are prohibited in the US in most cases, as they raise the risk of illicit co-ordination across businesses. The Department of Justice this week announced that two directors at Pinterest had stepped down from the board of social media platform Nextdoor in response to agency scrutiny, taking the number of board resignations triggered by its antitrust unit to 15.

The Federal Trade Commission this week joined the DoJ’s policy push when it barred private equity firm Quantum Energy Partners from taking a board seat at EQT, the largest US natural gas producer, in connection with a $5.2bn deal between the two. The FTC cited section 8 of the 1914 Clayton Antitrust Act, which disallows interlocking directorates.

It was the FTC’s first formal section 8 enforcement action in nearly four decades.

“Over the past year, our colleagues at the [DoJ] antitrust division have sought to reactivate Section 8 and effectively put market participants back on notice,” Lina Khan, FTC chair, said on Wednesday, adding that her agency’s action on EQT and Quantum “build[s] on that effort”. 

Khan and Jonathan Kanter, head of the DoJ antitrust division, are part of a new generation of progressive antitrust officials appointed by President Joe Biden who are taking aim at what they view as instances of excessive corporate power in the economy. 

The pair have argued that lax antitrust enforcement in recent decades has allowed anti-competitive conduct to proliferate across US business. Kanter told the Financial Times that enforcing section 8 “is an ongoing and permanent enforcement priority”.

Khan said she was concerned that a years-long “decline” in enforcement had “led to under-deterrence and that corporate actors are not sufficiently appreciative of section 8’s prohibitions”.

Charles Rule, a partner at law firm Rule Garza Howley, argued that a DoJ and FTC request for more information on company directors in revised merger notification rules proposed last month underscored their stance. They would not have proposed this change “if they didn’t intend . . . even beyond this administration, to focus on that. [It is] an expression of what their long-term enforcement interests are.”

Interlocking directorates have also been an area of focus in antitrust agencies’ heightened scrutiny of private equity firms rolling up significant segments of American industry. Executives from a buyout group at times sit on the boards of multiple, competing companies that they own or control. 

Since Kanter’s arrival at the DoJ in late 2021, seven private equity executives have stepped down from corporate boards: four from Thoma Bravo, two from Apollo Global Management and one from Prosus. Thoma Bravo and Apollo declined to comment. Prosus did not immediately respond to a request for comment.

“I think what the DoJ and FTC are principally focused on is private equity portfolio companies,” said Rule. “If you are an investor in portfolio companies that have competitive sales, you generally have rights to have certain directors. How do you carry out those rights consistent with section 8?”

Interlocking directorates were less of a concern for “well-counselled” public companies, Rule said. “Most Fortune 500 companies are pretty careful along those lines.”

A lawyer who works predominantly with private equity groups that carry out scores of deals every year said his clients were studying the situation. 

“We’ve seen this coming for some time. Kanter’s comments about private equity made it clear he’s coming after the industry,” he said. “The whole debate around interlocking boards is just a pretext to come after us.”

A senior executive at a buyout group said his firm was not too concerned about section 8 enforcement, but added that it would try to avoid antagonising the DoJ.

“Private equity has always been the solution to most antitrust problems caused by large companies buying their rivals. We used to buy assets that the regulator forced to sell. Now, they decided we are the problem. It makes no sense, but we’ll just avoid having our guys sit on too many boards.”

No company or director involved in resignations triggered by the DoJ has admitted liability. Pinterest did not immediately respond to a request for comment. Nextdoor said the resignations were not “the result of any disagreement”.

EQT said in a statement that the company was “pleased” the FTC had completed its review and it was able to close the deal. Quantum declined to comment.

[The Financial Times]

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