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Feature
Caveat Director: Don’t Get Tripped Up by Section 8 The government and private litigants are stepping up enforcement of the Clayton Act’s prohibitions on interlocking directorates. By Robert B. Bell Due to the recent heightened scrutiny of interlocking directorates, several major companies have announced director resignations and other actions. In April 2010, Sears Holdings Corp. announced that, in order to settle a shareholder lawsuit alleging a violation of Section 8 of the Clayton Act, which prohibits corporate directors from sitting on competitors’ boards, one Sears board member would vacate his seat, and another would not participate in any discussions about the company’s women’s clothing business because she also sits on the board of Jones Apparel Group Inc. In addition, well-known venture capital investor John Doerr, who sits on the board of Google, will not stand for re-election to the board of Amazon.com Inc., reportedly as a result of a Federal Trade Commission investigation into interlocking directorates. That same investigation previously led to resignations of two directors who sat on the boards of both Apple Inc. and Google — Google CEO Eric Schmidt resigned from Apple’s board and Arthur Levinson resigned from Google’s board. In addition, Genzyme Corp. has pointed out that Carl Icahn’s attempt to place four directors on its board raises questions under Section 8 because two of his four nominees currently serve as directors at competitor Biogen Idec Inc. Now that Section 8 has become the subject of renewed enforcement, it is important to understand how it operates. What does Section 8 prohibit, and what is its purpose? Section 8 prevents a single person from serving as an officer or director of two competing corporations, and it also prevents an entity (such as a private equity firm) from placing two different representatives on the boards of competing companies. The purpose of the statute is to prevent interlocking officers and directors from facilitating collusion between two companies, such as price fixing or market division, by serving as a conduit for competitively sensitive information. Who can enforce Section 8? Section 8 can be enforced by the Department of Justice, the Federal Trade Commission, state attorneys general, and private parties. Both the Federal Trade Commission and the Department of Justice are actively investigating possible Section 8 violations, and, as noted above, Sears was the target of private litigation. What is the remedy if a violation is found? Section 8 is violated if there is a prohibited interlock, even if there is no proof of any harm to competition or any intent to coordinate prices, output, or other business decisions. The typical remedy under Section 8 is an injunction prohibiting the offending interlock and future interlocks. Treble damages are available to private plaintiffs, but no court has ever awarded damages under Section 8. What are the limitations on Section 8? There are two important limitations on Section 8. First, it does not apply to interlocks involving wholly owned subsidiaries. Second, it contains several de minimus exceptions. The most important are exemptions where the competitive sales of either corporation are less than $2,5484,100 (a figure that is adjusted annually), the competitive sales of either corporation are less than 2 percent of that corporation’s total sales, or the competitive sales of each corporation are less than 4 percent of that corporation’s total sales. What are the implications for boards? Avoiding interlocks that violate Section 8 is a basic board duty. Board nominating committees should carefully inquire about other positions prospective nominees hold, determine whether any of the companies where prospective nominees serve as officers or directors are competitors, and if so, decide after consulting counsel whether there would be a Section 8 violation if the person were elected to the board. Moreover, boards should monitor Section 8 compliance on an ongoing basis, and not just when new directors are nominated. For example, officers and directors of a corporation should be required to disclose to the board their intention to serve as an officer or director of another corporation before assuming such a position. Acquisitions and new product introductions should be tracked, because they can give rise to an interlock by putting two firms into competition with each other. Apple and Google were not significant competitors — and were exempt from Section 8 — until Google introduced Nexus One, a direct competitor to Apple’s iPhone. |
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| Robert
B. Bell is a partner in Kaye
Scholer’s Washington, D.C., office, where he practices antitrust
law, and is co-chair of the firm’s Antitrust Practice Group. He
regularly represents clients in antitrust litigation and Department of
Justice and Federal Trade Commission investigations, and provides
antitrust counseling on a wide range of issues, including Section 8. A summa cum laude graduate of Dartmouth College and Stanford Law School, he is a former law clerk to Supreme Court Justice Byron R. White. He can be contacted at robert.bell@kayescholer.com. Copyright © 2010 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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