What Happened: The Federal Trade Commission (FTC) recently announced that three individuals resigned from the Board of Directors of Sevita Health following the FTC’s ongoing enforcement efforts targeting interlocking directorates under Section 8 of the Clayton Act. These resignations came after the FTC raised concerns that the directors simultaneously served on the boards of Sevita Health and Beacon Specialized Living Services. Both companies offer services to individuals with intellectual and developmental disabilities and have common private equity ownership.

The Bottom Line: The FTC’s press release says it is committed to enforcing Section 8 and encourages all firms to review their board memberships to avoid any overlaps with competitors. Companies should be aware of the FTC’s enforcement activity to avoid potential disruption and expense resulting from an investigation.

The Full Story: Section 8 of the Clayton Act prohibits directors and officers from serving simultaneously on the boards of competing corporations, unless certain de minimis exceptions apply based on the competitive sales volumes between the companies. For decades, Section 8 enforcement was rare, but beginning under the Biden administration, both the FTC and the Antitrust Division of the Department of Justice (DOJ) stated an intention to revive their focus on the law.

The DOJ has been active in securing resignations of directors, which were announced in October 2022, March 2023, and August 2023, among others. Eliminating the interlock through a voluntary resignation typically has been sufficient to remedy the concern. In some cases, the agencies may seek further concessions, such as requiring a company to relinquish board appointment rights that would allow it to place a director on the board of a company in which it has an ownership interest.

The FTC and DOJ have also broadened their scrutiny to include not just formal board appointments, but also observer rights and similar arrangements that could result in “common representation” among competitors. This extension is meant to address the issue raised by potential sharing of competitively sensitive information between firms that compete in the same geographic markets. The agencies have stated that companies can violate Section 8 when different individuals acting as “agents” of the company serve as directors of two competitors.  Also, the FTC and DOJ have taken the position that a Section 8 violation is not necessarily mooted if there is risk of recurrence or if sharing of competitively sensitive information has occurred. 

The agencies view Section 8 as applying to other non-corporate entities such as private equity (PE) firms despite the plain language of “corporations” in the statute.  The DOJ’s announcement in March 2023 makes this position clear.  One matter involved a PE firm whose representatives sat on three different software companies’ boards that were alleged to compete with each other.  A second matter involved the rights of a subsidiary of a PE firm to appoint a director of an insurance company that allegedly competed with a wholly-owned insurance company of the PE firm. And a third matter involved affiliates of a PE firm potentially sitting on the boards of two companies in the airline industry.    

The FTC’s action in Sevita Health follows the same approach as taken by the DOJ and shows some continuity under the Trump administration. In Sevita Health, the press release states that the director resignations made in response to the FTC’s enforcement efforts completely resolved the competition concerns raised by the three individuals serving as directors for both Sevita Health and Beacon Specialized Living Services simultaneously. The FTC’s Director of the Bureau of Competition noted, “[w]e encourage all firms to review their board memberships to avoid any overlaps with competitors—including when new board members are added as a result of investments by private equity firms or other new shareholders.”  Both Sevita Health and Beacon Specialized Living Services are owned by PE firms.  The FTC also praised the companies for working with the FTC to resolve the issue quickly.

Practical Guidance: In light of ongoing Section 8 enforcement, companies should take the following steps:

• Conduct annual reviews of directors’ and officers’ other board memberships to detect potential interlocks. D&O questionnaires should be drafted to elicit this information on an annual basis, but directors’ and officers’ other board memberships should be continually evaluated in the context of shifting business plans and M&A activity. 
• Consider potential interlocks when structuring investments that have board appointment rights or board observers, particularly in the context of the FTC and DOJ’s expansive view of Section 8, including PE funds’ ownership of portfolio companies and/or minority ownership of companies in the same industry.
• Engage antitrust counsel for guidance on the application of Section 8 and possible exemptions.

Section 8 is aimed at eliminating the opportunity for competitors to coordinate their conduct—explicitly or implicitly—through common directors. The potential antitrust concerns raised by an interlock are therefore broader than the scope of Section 8, and companies should be aware of these risks when reviewing their compliance with Section 8 and other antitrust law.