Last week I said the changes to the thresholds under Section 8 of the Clayton Act were a topic for another day. Guess what? It’s another day.
But before we talk about the thresholds themselves (which really aren’t that interesting), let’s talk briefly about what Section 8 is. This little tidbit from the Clayton Act prohibits a person from serving as an officer or director of two competing companies, if certain conditions apply. The notion is pretty simple. If the all the competitors in an industry have the same directors, it would be pretty easy for them to coordinate their competitive conduct, so we’re going to make sure they don’t have “interlocking directorates.”
Unless you’re an antitrust professional, I wouldn’t be surprised if you’ve never heard of it. For me, anyway, it doesn’t come up that often (although I bet those who do a lot of Silicon Valley venture capital and private equity work think about it more often).
The fun part is that these are the only Section 8 enforcement I’m aware of during my time as an antitrust practitioner.
So, yeah, about those thresholds. Section 8 doesn’t apply to all companies or even all competitors. Under the revised thresholds announced the other day (Congress directs the FTC to revise them annually), companies are subject to Section 8 if each of them has “capital, surplus, and undivided profits aggregating more than” $31,084,000. Even where that condition is met, however, there is a de minimis exception if the competitive sales of either corporation are less than $3,108,400. Those are the aforementioned thresholds.
While Section 8 seems generally pretty straight-forward, there is an important wrinkle to keep in mind, especially in the private equity world. At least according the DOJ and FTC, when corporations are involved, the interlock need not necessarily be an single individual. The agencies have taken the position that a corporate investor that appoints two different people to serve on the board of two competitors can violate Section 8 because the corporation itself is the “person” that creates the interlock.
Perhaps we can finish with quick example. Let’s say Company A is a global conglomerate with annual sales of $13 billion. Annually, it sells $157 million in retro-spinning neon widgets. Company B is a niche supplier of specialty retro-spinning neon widgets, with annual sales of $34.2 million. The CEO of Company A serves on the board of directors of Company B. Do we have a Section 8 problem?
You’d answer yes, wouldn’t you? But you’d be wrong, because I tricked you. The relevant size thresholds are met, but there are two further exemptions in Section 8, one of which applies here. The prohibition on interlocks does not apply where the competitive sales of one entity are less than 2% of its total sales or if the competitive sales of each entity are less than 4% of each entity’s total sales.
Here Company A’s retro-spinning neon widgets are less than 2% of its total sales (1.2%), so Section 8 does not apply. I guess we just assume that retro-spinning neon widgets do not matter enough to a company that is as big as Company A.