Interlocking Directories and the Antitrust Laws

• Publication year: 1997
• Pages: 53
• Citation: Vol. 26 No. 3 Pg. 53

26 Colo.Law. 53 Colorado Lawyer 1997.

1997, March, Pg. 53. Interlocking Directories and the Antitrust Laws

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53

Vol. 26, No. 3, Pg. 53

The Colorado Lawyer
March 1997
Vol. 26, No. 3 [Page 53]

Specialty Law Columns
Business Law Newsletter
Interlocking Directories and the Antitrust Laws
by Gale T Miller

Column Ed.: David P. Steigerwald of Sparks Dix, P.C Colorado Springs - (719) 475-0097

This newsletter is prepared by the Business Law Section of the CBA to apprise members of the Bar of current information concerning substantive law. This month's article was written by Gale T. Miller, Denver, a partner of Davis, Graham & Stubbs LLP, (303) 892-9400

Dr. K., a well-known physician, is a nominee for the boards of two nonprofit hospitals in the Denver area. Professor Zinc, a world-renowned Colorado School of Mines metallurgy authority, serves on the boards of two gold-mining companies one in Australia and the other with mines in Colorado and Idaho. Although both individuals are well-meaning, law-abiding pillars of their community, they are flirting with potential antitrust violations by virtue of holding "interlocking directorates." (More about Dr. K and Prof. Zinc later.)

The frequency of these relationships is hardly surprising, given the logic of choosing directors with knowledge and experience in a corporation's business. The problem is that when an individual simultaneously serves as an officer or director of two competing companies, he or she stumbles into a prime opportunity for collusion - for example, coordination of pricing, marketing, or production plans of the two companies. If such coordination occurs, both of the competing corporations and the interlocking director (or officer) could face serious criminal and treble-damage civil liability for price fixing or similar offenses under § 1 of the Sherman Antitrust Act.1

Even if there is no collusion or coordination, the corporations and director may find that they have innocently violated § 8 of the Clayton Antitrust Act.2 Fortunately, § 8 violations do not involve imprisonment, fines, or (ordinarily) damages. On the other hand, who wants to invite a federal antitrust investigation by the Federal Trade Commission or Department of Justice, with the attendant disruption, legal fees, and risks that something worse might be uncovered in the process? Accordingly, corporate counselors can make their clients' lives easier by watching out for potential interlock problems.

Historical Background

Early in this century, Louis Brandeis wrote a series of magazine articles exposing the rapid growth of interlocking relationships among competing industrial companies and financial institutions.3 President Wilson campaigned against these "trusts" during the 1912 election and asked Congress to ban interlocks.4 Congress responded by enacting § 8 of the Clayton Act in 1914. Since then, § 8 has been the primary enforcement tool to prevent anticompetitive collusion resulting from interlocking directorates. While largely unchanged since 1914, the law was updated in 1990 to plug some loopholes and create some safe harbors, discussed below.5

Prima Facie § 8 Case

There are four basic elements to a § 8 violation, as set forth in subsection (a)(1):

1. The same person must serve as either a director or officer of two corporations (other than in certain regulated industries, which, as discussed below, are covered by other statutes) at the same time. Under § 8(a)(4), the only "officers" covered are those elected by the board of directors.

2. Both corporations must be engaged, in whole or in part, in interstate commerce.

3. The two corporations must be competitors by virtue of the nature of their business and the location of their operations.

4. Each of the corporations concerned must have net worth aggregating more than $13,813,000.6 In calculating the aggregate net worth, only the corporate entities themselves are considered; the net worth of parents, subsidiaries, and other affiliates is not included.7

The most disputed element of § 8 is whether the two...