The FTC Claims the Clayton Act’s Ban on Interlocking Directorates Applies to a Non-Corporate Entity and Continues Its Efforts to Expand Section 5 of the FTC Act

The FTC Claims the Clayton Act’s Ban on Interlocking Directorates Applies to a Non-Corporate Entity and Continues Its Efforts to Expand Section 5 of the FTC Act

September 6, 2023, Covington Alert

Alleging risks of harm to competition from information sharing and a board “interlock” that it claimed violated Section 8 of the Clayton Act, on August 16, 2023, the Federal Trade Commission (“FTC”) moved to unwind a set of arrangements between two natural gas businesses, QEP Partners, LP (“Quantum”) and EQT Corporation (“EQT”). This matter is of interest for at least three distinct reasons: (i) it marks the FTC’s first formal enforcement of Section 8 in four decades, (ii) it is apparently the first Section 8 enforcement action involving an entity that is not a corporation, and (iii) it continues the FTC’s practice of using consent decrees to pursue its expansive interpretation of the prohibition of “unfair methods of competition” in Section 5 of the FTC Act.

Section 8 Enforcement Trends

Section 8 of the Clayton Act prohibits the same person from serving simultaneously as an officer or director of two competing corporations. The U.S. enforcement agencies and some courts have interpreted the statute to apply also to situations where different individuals serve as officers or directors at two competing corporations as agents or representatives of the same person, or where a company has representation on the board of a competitor. It is a prophylactic statute designed to prevent potential harm to competition by limiting the risk of competitors sharing sensitive business information or otherwise coordinating their competitive activities. Section 8 has de minimis exceptions for interlocks involving very small corporations or where the “competitive sales” of the interlocked corporations represent a very small percentage of the companies’ total sales.

From the 1970s through the 2010s, enforcement of Section 8 was generally limited to situations in which the agencies uncovered evidence of an illegal interlock as part of an investigation into other antitrust issues (particularly in merger investigations). That approach has changed recently.

The shift became public last April with a statement by the DOJ’s AAG Jonathan Kanter that “[f]or too long our Section 8 enforcement has essentially been limited to our merger review process,” and that DOJ would be “ramping up efforts to identify violations.” AAG Kanter has described Section 8 as “probably the most effective way of deconcentrating the United States economy today,” and credits the agency’s investigations with board resignations at over a dozen different companies, most recently from Pinterest due to an interlock with Nextdoor. Notably, many of these resignations involve private equity firms with portfolio investments in many different companies in the same sector; these investments often include concomitant rights to appoint directors.

This renewed focus on interlocks is also woven into other competition policy and rule changes. For example, the DOJ and FTC recently proposed sweeping changes to the HSR pre-merger notification form and the related rules. One of those proposed changes is a requirement that all merging parties identify their officers, directors, and board observers (or equivalent individuals for non-corporate entities like LLCs), and all other entities on which those individuals serve similar roles. This disclosure requirement goes beyond the text of Section 8, which on its face applies only to officers and directors but not board observers, and which refers to “corporations” but not other types of business entities.

Similarly, last year the FTC expanded its interpretation of what constitutes an “unfair method of competition” under Section 5 of the FTC Act to include “[c]onduct that violates the spirit of the antitrust laws,” even if not “covered by the[ir] literal language.” One example listed by the FTC: “interlocking directors and officers of competing firms not covered by the literal language of the Clayton Act.”

Implications of EQT Case

The EQT case is both a continuation and expansion of these trends. EQT, a large natural gas producer and a corporate entity, sought to acquire certain natural gas assets from private equity firm and natural gas competitor Quantum Energy Partners, a limited partnership. In return, Quantum was to receive EQT stock—sufficient to become one of the corporation’s largest shareholders—and the right to a seat on EQT’s board. This transaction built off of a pre-existing joint venture between the two entities regarding purchases of mineral rights in the Appalachians.

The FTC alleged that the proposed transaction would have given Quantum the ability to influence EQT’s competitive decision making and to access EQT’s confidential business information, such as bids and future drilling plans. The agency resolved these concerns through a consent order with over a dozen pages’ worth of requirements on the two companies’ future activities for a period of ten years. Key provisions include:

• A prohibition on individuals affiliated with either company serving on each other’s’ boards, as officers, or in any other management or decision-making capacity;
• A requirement that Quantum divest the EQT shares it had acquired, act as a passive investor until the divestment is accomplished, and seek prior FTC approval for any future purchase of EQT shares;
• A prohibition on Quantum-affiliated individuals from serving as officers or directors of seven other natural gas producers, until Quantum divests the EQT shares;
• A prohibition on the two companies from entering into non-compete agreements with each other;
• The dissolution of the pre-existing joint venture between Quantum and EQT; and
• Various ongoing monitoring and reporting obligations, including a requirement to seek FTC pre-approval for certain share purchases, director/officer appointments, and transactions.

The EQT case has implications for the FTC’s future enforcement against both interlocking directorates and “unfair methods of competition” under Section 5, as highlighted in the statement issued by Chair Khan and joined by the other two Democrat-appointed commissioners.[1] 

First, this case reflects a shift from what has been both agencies’ usual practice of enforcing Section 8 somewhat informally—i.e., considering the matter resolved if the affected corporations eliminated the interlock—to the use of a formal consent decree, which is enforceable in court and contains various other obligations, including “prior approval” provisions.

Second, by applying Section 8 to an interlock involving a limited partnership, the case goes beyond the statute’s text, which refers only to interlocks involving “any two corporations,” to reach non-corporate entities as well.[2] This is apparently the first time either agency has pursued this view—which has not been tested in the courts—in an enforcement action.

Finally, this case continues the FTC’s approach of enforcing its expansive interpretation of Section 5 in consent decrees that do not require court approval. Chair Khan’s statement highlighted the FTC’s use of Section 5 rather than Clayton Act Section 7 (the typical vehicle for challenging acquisitions): “Today’s action . . . should remind market participants that transactions that might not strictly violate Section 7 can still pose a risk to competition that the FTC has a statutory obligation to address.” The FTC has yet to bring a standalone Section 5 case in court; when and if it does so, it may attempt to use these consent orders to support its newly expansive interpretation of that statute.

Practice Pointers

• When setting up a board of directors or appointing/hiring a new director or officer (or individuals with comparable authority in other non-corporate entities), conduct an assessment of any potential competitive interlocks, including whether the potential interlock meets one or more of the de minimis exceptions. Perform the same analysis prior to any merger or other collaboration that could create an interlock.
• Set up a regular—at least yearly—monitoring mechanism for existing directors and officers to catch Section 8 violations that could arise over time, particularly those that initially met a de minimis exception but subsequently may fail that test (for example, through increasing sales of a competitive product).
• Be mindful of the FTC’s continued aggressive interpretation of “unfair methods of competition” under Section 5 of the FTC Act, and in particular how it could be used to expand the scope of investigations to ensnare additional conduct that might not otherwise violate the antitrust laws.
• This case represents the FTC’s position on the scope of these statutes; and while this suggests the agencies may open investigations based on this interpretation, it remains to be seen how courts will interpret the statutes.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Antitrust/Competition practice.