Investigating nested directions has become a heightened priority for government authorities. Many corporations may soon find their officers and directors under the microscope. Companies should consider whether the Clayton Act Section 8 prohibition against a person serving as an officer or director of two competing companies may apply to them, and consult with an antitrust attorney to determine ensure that their directions do not violate Section 8 of the newly revitalized Clayton Act.

Section 8 of the Clayton Act prohibits any person from simultaneously serving as an officer or director of two competing companies.1 Federal antitrust enforcement authorities and private parties may bring enforcement actions to challenge nested directions under Section 8.

Although nested directorates are generally legal, nesting between competing companies may be prohibited. Antitrust laws may prohibit such agreements between competitors because of their potential to harm competition, for example by allowing competitors to exchange competitively sensitive information and synchronize business decisions.

In his introductory remarks During the 2022 Spring Enforcers Summit, the current head of the DOJ’s antitrust division, Assistant Attorney General Jonathan Kanter, told the audience that “[o]One tool I think we can use more is Section 8 of the Clayton Act,” explaining that the purported benefit of Section 8 is that it prevents collusion before it happens.2 He continued: “We are stepping up our efforts to identify violations across the economy, and we will not hesitate to bring cases under Section 8 to break up interlocking directions.”3

It was not an empty threat. On Oct. 19, the DOJ announced that directors had resigned from the boards of five companies in response to Justice Department investigations into possible Section 8 violations. In the accompanying statement, the DOJ warned that “[t]his announcement is the first in a broader examination of potentially illegal nested directions” and “[c]Companies, executives and board members should expect that Section 8 enforcement will continue to be a priority for the Antitrust Division.4

Violations of Article 8 are in itself violations, which means that the absence of competitive harm will not exempt the parties from liability unless one of the de minimis statutory exemptions apply (see below). To determine whether Article 8 applies to a nested direction, companies should assess whether:

  • the two corporations trade;
  • the two companies compete with each other by virtue of their business;
  • any person acts as an officer or director of both companies; and
  • each company’s financial records show that it has capital, surplus and retained earnings totaling more than $41,034,000.5

Article 8 does not apply to all entities. It applies to corporations. Even though the Section 8 prohibition on its face does not apply to unincorporated entities, the agencies have previously advocated that its coverage be extended to other structures, such as LLCs. Moreover, this limitation does not mean that private equity funds and other financial investors should not be affected. Private equity and other funds can still breach Section 8 by appointing board members of their holding companies. In addition, federal antitrust agencies and some courts have interpreted the word “person” in section 8 to apply to representatives serving on competing boards under an agency theory.6

Companies must be particularly careful when entering a new product market. Companies can choose to pre-empt any concerns by giving up board seats or otherwise eliminating the lockdown.

Despite the broad scope of Article 8, there are a limited number of safe harbors and exceptions to its prohibitions. For example, in addition to limiting the types of entities to which it applies, Section 8:

  • provides for a one-year grace period following an event that creates a lockdown7;
  • only applies to horizontal interlocks; and
  • contains de minimis exceptions: (1) when sales by competitors of either company are below a dollar threshold (currently $4,103,400, but adjusted annually), (2) when sales by competitors represent less than 2% of either company’s total sales, or (3) when each company’s competitive sales represent less than 4% of its total sales.8

[5] Identifier.; FTC, Revised Jurisdictional Thresholds for Section 8 of the Clayton Act, 87 Fed. Reg. 3540 (January 24, 2022) (this amount is adjusted annually by the FTC based on changes in gross national product).

[6] See, for example, Reading Int’l Inc. v. Oaktree Capital Mgmt., 317 F. Supp. 2d 301, 327-28 (SDNY 2003); Square D Co. c. Schneider AG, 760 F. Add. 362, 364 (SDNY 1991); Michael E. Blaisdell, Mindfulness InterconnectionFTC (June 26, 2019).

[8] Identifier. at § 19(a)(1),(2); 87 Fed. Reg. 3540.