US Antitrust Regulators Continue to Crack Down on Interlocking Directorates, and the FTC Expands Scope of Clayton Act to Noncorporate Entities

On August 16, 2023, the Federal Trade Commission (FTC) announced an agreement with natural gas producer EQT Corporation (EQT) and private equity firm Quantum Energy Partners (Quantum) to resolve concerns stemming from alleged competitive harms in connection with EQT’s acquisition of two entities from Quantum. As part of the resolution, Quantum was required to surrender its rights to an EQT board seat and to agree not to sit on the board of seven other natural gas producers in the future without the FTC’s consent, as well as various other commitments. This represents the FTC’s first formal enforcement action on the basis of the Clayton Act Section 8 prohibition on interlocking directorates in approximately 40 years, and it serves as renewed notice to all companies that board membership on competing firms will be scrutinized and potentially challenged moving forward, particularly in the merger context. Notably, the FTC’s action involved a limited partnership in Quantum and thus purports to expand the scope of Section 8 of the Clayton Act, which is limited by its text to corporations only.

Agencies Rediscover Section 8 in Their Enforcement Toolbox

Interlocking directorates arise when an individual serves as an officer or director of two or more competing firms, which is presumptively illegal under Section 8 of the Clayton Act.¹ The FTC, the Antitrust Division of the Department of Justice (DOJ), state attorneys general, and even private plaintiffs have the authority under the Clayton Act to seek injunctive relief against interlocks, and such relief can include the forced removal of directors from a board. The FTC and DOJ justify these actions with the theory that individuals sitting on boards of competing firms may facilitate anticompetitive agreements or the exchange of competitively sensitive information, possibly resulting in competitive harms, including higher prices to consumers or lower wages to employees. Section 8 does not require that the interlock results in any actual competitive harms. Rather, showing that parties are engaged in commerce, are competitors, and exceed certain revenue thresholds is sufficient to prove a Section 8 liability (as discussed in a previous Goodwin alert). Section 8 provides three potential safe harbors from liability:

• The competitive sales of either party are less than 2% of that party’s total sales.
• The competitive sales of each party are less than 4% of that party’s total sales.
• The competitive sales of either party are less than $4,525,700 as of 2023.

Passed by Congress more than a century ago, Section 8 of the Clayton Act has been enforced infrequently and had not been the basis for an enforcement action by the FTC since the 1980s. The FTC and DOJ’s hands-off approach to interlocking directorates has been jettisoned recently because those agencies have adopted increasingly aggressive approaches to all aspects of merger enforcement. In this new era of heightened scrutiny, the FTC and DOJ are keenly focused on information sharing and data access, which are key issues in the interlock context.

Beyond Section 8, the FTC and DOJ may claim additional statutory authority to review interlocks. The FTC has asserted that it has authority under Section 5 of the FTC Act, which prohibits “unfair methods of competition,” to take action against interlocks.² As such, the FTC may rely on Section 5 of the FTC Act to address interlocks that fall outside of the tests outlined in Section 8.

In 2022, the DOJ began to send letters to companies and private equity firms it believed to be in violation of Section 8, threatening legal action if the companies did not voluntarily resolve any identified issues. These letters began informal processes that have resulted in more than 15 director resignations from 11 boards. Most recently, the DOJ announced that two directors that held positions with both Nextdoor and Pinterest agreed to resign from Nextdoor. The DOJ has made clear that it intends to vigorously continue to pursue Section 8 enforcement, with Andrew Forman, deputy assistant attorney general, declaring that “Enforcement involving interlocking directorates will continue to be one of the top priorities of the Antitrust Division.”³

The FTC Takes Action to Expand Section 8’s Reach to Noncorporate Entities

Not to be outdone, the FTC has brought its own enforcement action on Section 8 grounds against EQT’s proposed acquisition of natural gas assets from Quantum. This represents the FTC’s first formal challenge under Section 8 in four decades.⁴ As part of the $5.2 billion transaction, EQT acquired two natural gas entities—Tug Hill (allegedly the 11th largest natural gas producer in the Appalachian Basin) and XcL Midstream (which processes and transports natural gas produced at Tug Hill). In exchange, EQT agreed to provide Quantum with $2.6 billion cash, 55 million shares of EQT, and a seat on the EQT board, making Quantum one of EQT’s largest shareholders. The FTC asserted that this transaction was illegal because Quantum and EQT are both natural gas producers in the Appalachian Basin and are, therefore, competitors. In addition, the FTC alleged that Quantum’s acquisition of an EQT board seat would facilitate the sharing of competitively sensitive information between direct competitors and, therefore, reduce competition.

To resolve the FTC’s Section 8 concerns and clear the proposed transaction, EQT and Quantum entered into a formal consent decree that materially altered the terms of their purchase agreement.⁵ In a statement joined by Commissioners Rebecca Slaughter and Alvaro Bedoya, FTC Chair Lina Khan announced that the FTC would return to these types of formal agreements in part because “informal settlements [we]re not producing an adequate level of compliance.”⁶

Key terms in the consent decree include the following:

• Quantum is prohibited from serving on EQT’s board (and vice versa).
• Quantum is prohibited from serving on the boards of any of the other top seven Appalachian Basin natural gas producers without prior FTC approval.
• Quantum is required to divest its shares in EQT and not acquire any additional shares without FTC approval.
• EQT and Quantum are required to unwind their pre-existing joint venture that sought to acquire mineral rights.
• EQT and Quantum are prohibited from entering into certain types of agreements, including noncompete clauses.
• EQT and Quantum are to implement antitrust compliance programs overseen by a monitor.

As is typical in consent decrees, EQT and Quantum must abide its conditions for a term of 10 years and submit periodic compliance reports.

Key Takeaways

All companies, and private equity firms in particular, should be particularly mindful of board composition and consult with counsel to consider potential Section 8 board composition issues when evaluating transactions and other combinations. The FTC’s latest action has illuminated the FTC and DOJ’s thinking in several ways:

1. The FTC will focus on Section 8 as part of the merger review process.

The FTC is likely to focus on Section 8 interlock issues that may arise in connection with its regular review of reported transactions. Moreover, the FTC’s enforcement action here demonstrates its willingness to seek aggressive remedies under Section 8. Voluntary resignations by directors to resolve interlock concerns alone are unlikely to satisfy FTC concerns, in contrast to stand-alone Section 8 investigations, i.e., those that arise outside of the merger context and which the DOJ has recently pursued. In the context of the EQT–Quantum consent decree, the FTC sent a clear message that it will seek binding consent decrees that impose a far more significant burden on the transacting parties. For example, the EQT–Quantum consent decree will be in effect for 10 years and extends beyond the transaction at issue, most notably prohibiting Quantum from seeking board seats on a number of additional competitors without pre-approval. In addition, the parties must provide periodic reports to the FTC to report on their compliance with the terms of the consent decree.

2. FTC purportedly expands scope of Section 8 to apply to a broader number of entities, including noncorporations.

By enforcing Section 8’s prohibition of interlocks against Quantum, which is organized as a limited partnership, the FTC announced that “Section 8 applies to businesses even if they are structured as limited partnerships or limited liability corporations.”⁷  The FTC’s interpretation thus expands the text of Section 8, which is limited to “corporations” and makes no mention of other types of entities, including partnerships or limited liability corporations. Despite this textual limitation, the FTC asserts that the complicated financial and corporate structures of the modern economy require that Section 8 apply to a broader set of entities, pointing out that many structures did not exist at the time the statute was written. While it remains unclear if courts will adopt this interpretation, private equity firms should be aware that the FTC and DOJ may attempt to apply Section 8 to firms and portfolio companies regardless of their entity structure.

3. Some industries may receive greater scrutiny than others.

The FTC has indicated it is particularly concerned about interlocks in tight-knit, high-collaboration industries with a history of inappropriate information exchanges and entanglements, arguing that harms from interlocks are more likely to arise in these types of markets. Consistent with that position, the FTC alleged that the natural gas industry, in which EQT and Quantum participate, was particularly susceptible to harm from information exchanges. Chair Khan characterized the industry as featuring a “dense and tangled web of co-investments, joint operations, and other methods of coordination between and among natural gas producers and investors” with “a tight-knit set of players rife with entanglements and a history of suspicious ventures and information exchange.”⁸  Firms should be even more cautious of director interlocks in other, similarly tight-knit industries.

4. Section 8 compliance in the current regulatory environment.

Companies should take reasonable steps to regularly identify any potential overlaps and monitor board membership to ensure compliance with Section 8. This can include tracking board seats and conducting surveys of board members to determine if they serve on any additional boards of potentially competing companies. Firms should identify any potential interlocks and then, as necessary, determine whether any safe harbors are met. In addition, firms that have numerous board seats, or the ability to appoint leaders across multiple investments, should evaluate whether these companies could be considered competitors. Private equity firms in particular should expect the FTC and DOJ to continue to look beyond the individuals who sit on a board of directors and instead look to the companies appointing them and/or whether those directors have affiliations that might trigger Section 8 interlock scrutiny.

^[1] 15 US Code Section 19: “No person shall, at the same time, serve as a director or officer in any two corporations … that are—(A) engaged in whole or in part in commerce; and (B) by virtue of their business and location of operation, competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.” 
^[2] 15 US Code Section 45(a)(1); FTC, “Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro Bedoya In the Matter of EQT Corporation Commission File No. 221-0212,” August 16, 2023.
^[3] Department of Justice, “Two Pinterest Directors Resign from Nextdoor Board of Directors in Response to Justice Department’s Ongoing Enforcement Efforts Against Interlocking Directorates,” August 16, 2023.
^[4] In re Hughes Tool Co., 130 F.T.C. 17 (1984); In re Big Three Indus., Inc., 103 F.T.C. 24 (1984).
^[5] This agreement also resolved an enforcement action by Pennsylvania, which had raised similar interlock concerns as the FTC.
^[6] FTC, “Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro Bedoya In the Matter of EQT Corporation Commission File No. 221-0212,” August 16, 2023.
^[7] FTC, “Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro Bedoya In the Matter of EQT Corporation Commission File No. 221-0212,” August 16, 2023.
^[8] FTC, “Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro Bedoya In the Matter of EQT Corporation Commission File No. 221-0212,” August 16, 2023.