Antitrust Laws Impose Restrictions on Investors’ Ability to Serve on Boards of Competing Firms
Financial investors regularly acquire the right to designate or appoint members of the board of directors as part of their
investment in portfolio companies. The antitrust laws, however, impose important restrictions and limitations on the ability
of investor representatives to serve on the boards of competing corporations. Specifically, Section 8 of the Clayton Act
prohibits a person from serving as a director or a board-appointed officer of two or more competing corporations if each corporation
has capital, surplus, and undivided profits of more than $22,761,000.
It is important to keep in mind that the prohibition against interlocking directorates may apply even if the two corporations
of which an individual is a director or officer are not themselves competitors, but have subsidiaries that compete. In addition,
even if the investor entity appoints different individuals to serve on the boards, the antitrust agencies have taken enforcement
action in these situations since the two individuals essentially represent the same legal entity or person.
There are also several important exceptions to the rule against interlocking directorates. For instance, interlocks are permitted
when:
- The competitive sales of either company are less than $2,276,100 or 2% of the company’s total sales; or
- The competitive sales of each company are less than 4% of total sales; or
- The competing entities are not corporations, or the corporations are banks, banking associations, or trust companies.
Private equity investors need to be aware of the restriction on interlocking directorates (and the exemptions from this rule)
when making investments in corporations and acquiring rights to appoint board members.
