The renewed interest in taking a fresh look at how antitrust can apply to tech has generated any number of "Hipster Antitrust" theories of harm. With the US Federal Trade Commission announcing a new Tech Task Force this spring, the FTC has signaled it will be actively shaping this issue. Last week, the FTC took another step in this direction with a blog indicating that one area of focus will be on deals resulting in interlocking boards of once-complementary companies.
Innovation depends in great part on collaboration. Long gone is the day when a brilliant tinkerer works in isolation to invent an industry, if that ever was the case. Today's constant invention and reinvention derives as much from internal collaboration as on collaboration across companies. Yet, the latter form of collaboration can also be a source of great antitrust risk.
The FTC has recently highlighted in Section 8 of the Clayton Act one such area of risk that has not received much attention. It is the idea that the cross-fertilization of ideas through board representation is a competition problem:
"Section 8 of the Clayton Act protects against potential information sharing and coordination by prohibiting an individual from serving as an officer or director of two competing companies."1
The role of antitrust in M&A between competitors is well understood. It is also important to remember, though, that the antitrust laws in the US and globally also apply to many other types of strategic deals. In 2018, for example, the US Department of Justice tried and failed to block the merger of AT&T and Time Warner in federal court on the ground that the combined company would leverage market power in one market to dictate harm competition in another market. And earlier this year, the FTC imposed firewall conditions as a prerequisite to permitting the acquisition by retailer Staples of a wholesale supplier of office supplies. Both cases were brought on the basis that Section 7 of the Clayton Act prohibits mergers and acquisitions where the effect "may be substantially to lessen competition."2
Deal situations flagged for Section 8 scrutiny
Section 8 of the Clayton Act's prohibition is both narrower and broader that the Clayton Act's merger prohibition. On the one hand, it can only apply to a situation where a person "at the same time, serve[s] as a director or officer in any two corporations" and that are competitors.3 On the other hand, Section 8 is applied broadly as "a strict liability provision, meaning violations are per se and do not depend on actual harm to competition," in the words of the FTC's latest alert. This paraphrasing necessarily omits a series of critical elements and exceptions to the statute's application. But it is sufficient for the purpose of flagging for counsel to deal-makers an important predicate question: Is your deal going to result in the placement of a representative on the board of a corporation that is a competitor, or as a part of its executive team?
The FTC's latest alert flags two such situations that the agency is being "mindful" of and is asking "anyone in governance to take a self-assessment." The first type of transaction "that require[s] extra mindfulness" arises when a "company is acquiring or merging into a new business line." The concern here is that an officer or director of the acquiring company many be on another company's board that didn't compete before an acquisition, but that is now a competitor after the acquiring company's entry into a new market. The second type involves spin-offs, where an officer or director retains such a role in both companies after a spin-off that creates a newco that competes with the original business. Of these two situations, the former presents a more likely area of potential risk for tech deals.
Takeaway for strategic investments
For strategic investors, it is important to remember that the Section 8 problem raised by the FTC would not necessarily be limited to a 100 percent acquisition. A company may make a tiny strategic investment that includes board representation to enable the investor to monitor tech trends and provide its own insights and experience on how to develop and commercialize new technology. The deal many never give the investor any ability to control the other company. Yet, that mechanism for collaboration can be targeted for investigation under the Clayton Act even if the underlying investment and acquisition of shares itself is not sufficient.
Notwithstanding the FTC alert and the greater interest today in finding new ways to apply antitrust tech, it is important to assess risk by going back to the basics. The FTC alert omits some critical technical considerations that must be accounted for before Section 8 can be applied to a given board member or officer. Notably, the language of Section 8 plainly only applies to "corporations" that compete. The determination that two corporations "compete" is, moreover, critical and sometimes unclear. Also, importantly, Section 8 only applies where the "competitive sales of either corporation" exceed certain dollar thresholds that are subject to adjustment annually. This latter consideration is an important exception for investments in an innovator with no sales.