Last month a director on the board of SolarWinds, an application performance monitoring software company, resigned because he also sat on the board of Dynatrace, a competitor. The director had a connection to Thoma Bravo, a private equity firm that has a stake in both companies. Two other SolarWinds directors who were connected to Thoma Bravo also resigned.
The resignations stem from a new, proactive approach by the Department of Justice to identify and stop on antitrust grounds what it calls interlocking directorates — competing companies that share a board member.
Breaking up interlocking directors isn’t new; the prohibition is considered a per se violation of federal antitrust laws. What’s new is the aggressive posture DOJ is taking as part of the Biden administration’s stepped-up effort to promote competition by curbing the potential for collusion, whether it’s among companies in vertical or horizontal markets.
“Historically, interlocking directorates were issues that [tended to be] incidentally uncovered during merger or other transaction reviews,” Jan Rybnicek, an attorney with Freshfields, told Legal Dive. “‘Oh, we noticed this interlocking directorate. Go off and fix it.’ And that was the remedy: just remove the cross-directorship and that would be it.”
But that approach might not fly any more. The Biden administration in mid-October announced it was reaching out to companies and directing them to review the composition of their boards and break up any interlocking directorates or be subject to enforcement action under Section 8 of the antitrust Clayton Act.
“Competitors sharing officers or directors further concentrates power and creates the opportunity to exchange competitively sensitive information and facilitate coordination — all to the detriment of the economy and the American public,” Jonathan Kanter, DOJ’s antitrust chief, said in the announcement.
In addition to announcing the departures of the three directors from SolarWinds’ board, DOJ announced departures of board members at a handful of other companies because of their interlocking directorates, including at Redwire, a space technology company, and Udemy, a corporate education provider.
For private equity firms that have holdings in dozens of companies, many of them potentially competing with one another or otherwise integrated in a market, whether vertically or horizontally, DOJ’s posture could put them in a new kind of terrain.
“Unlike the prior administration, the current antitrust enforcers have an unfavorable view of private equity in an antitrust context,” Rybnicek said. “That’s brought private equity into the crosshairs, so to speak, and the interlocking directorates is an extension of that.”
Aggressive antitrust enforcement, by the Federal Trade Commission as well as DOJ, means proposed acquisitions could get snagged in much longer reviews if private equity firms don’t have a good picture of the markets their holdings are competing in.
“Deals come up quickly,” Rybnicek said. “When the agencies are proactively going out to look for these cross-directorships, it’s even more important to have a sense of what your portfolio looks like and make sure you’re not walking into a cross-directorship unintentionally.”
It’s possible a private equity firm that has a minority stake in one company and acquires a minority stake in another could overlook an interlocking directorate but that’s not a common scenario; more common, Rybnicek said, is a firm owning a company as part of a wide-ranging portfolio that moves into a new market that puts it into competition with another portfolio company. If the firm doesn’t have a good map of its holdings, the antitrust exposure can be missed.
“You might have acquired a company that was in space x, but during your time holding it, they expanded to y and z,” he said. “All of a sudden you’re in these other markets you didn’t know about.”
“It could be a vertical integration or a horizontal deal,” he said.
Rybnicek recommends firms work with antitrust counsel to create a comprehensive and updated picture of their holdings so they can identify companies in competing markets and break up any interlocking directors before they’re targeted by DOJ in an antitrust action or come up in an unrelated FTC merger review.
“A strategy here … is to take a less passive and more proactive approach,” he said. “Map [your holdings] out for purposes of flagging where you might have interlocking directorates.”
That could help stave off aggressive regulatory action should it come to that.
“I don’t think we’ve seen it yet, but it’s possible DOJ will try to force private equity firms into consent agreements that obligate them to promise to never do this same thing again or to have certain reporting requirements,” he said. “It just makes it a lot more onerous.”