On July 14, 2016, the US Department of Justice (DOJ) announced that the restructuring of a planned $1.5 billion transaction between Tullett Prebon Group Ltd. (Tullett Prebon) and ICAP plc adequately addresses the DOJ’s concerns that the transaction would violate Section 8 of the Clayton Act by creating an interlocking directorate. The parties restructured their transaction after the DOJ issued a Second Request to adequately investigate the parties post-closing ownership structure. The DOJ’s investigation of this transaction should serve as a warning for companies considering transactions with competitors where the parties will continue to compete post-merger: the antitrust agencies are going to extensively review any corporate governance structures which could be seen as creating a “cozy relationship” between competitors.

Section 8 of the Clayton Act generally prohibits representatives of a corporation from serving on the board of directors of a competitor corporation. This provision of the Clayton Act, which seeks to prevent the sharing of competitively sensitive information through director communications, continues to be rigorously enforced by the antitrust agencies since the FTC’s 2009 investigation of individuals serving on the boards of multiple large technology companies.

Last year, Tullett Prebon agreed to purchase ICAP’s global hybrid voice broking and information business. Voice broking involves speaking to clients on the phone to negotiate prices and facilitate business. The alternative to voice broking is electronic broking where prices are put on a platform and customers can transact without the need for a human broker. Voice broking is typically used for illiquid assets, whereas electronic broking is used more often in highly liquid markets. By selling its voice broking business, ICAP sought to focus on its electronic trading services.

As originally structured, the transaction would have resulted in ICAP owning 19.9 percent of Tullett Prebon and having the right to nominate one member of Tullett Prebon’s board of directors. This structure was problematic for the DOJ due to the fact that ICAP and Tullett Prebon would continue to compete post-merger in non-voice broking platforms. This led to the DOJ issuing a Second Request, which was focused on post-closing shareholding and governance arrangements.

After the restricting of the transaction, ICAP will not retain any ownership in Tullett and will not have the ability to appoint any directors. This new structure will allow the parties to be “actually independent of each other” according to Principal Deputy Assistant Attorney General Renata Hesse. “As originally proposed this deal would have violated [a] core principle – creating a cozy relationship among competitors.”

Companies considering transactions with competitors where the parties will continue to compete should exercise caution in their ownership structures and corporate governance post-closing. Any arrangements which can be interpreted as allowing the parties to share information or create a conflict of interest will be closely examined by antitrust regulators and may lead to extended reviews.