DOJ Probe of Overlapping Board Members Fuels Governance Concerns

Companies with directors sitting on competitors’ boards have found it easier to part ways with those members rather than fight the Biden administration’s aggressive probe of board overlaps for potential antitrust violations.

The Department of Justice announced last week that five board directors at three companies stepped down after the antitrust division asked them about their “interlocking” directors. The resignations were at Qualys Inc., software firm N-Able Inc., and Sun Country Airlines Holdings Inc.

The DOJ isn’t stopping there: in a speech earlier this month, antitrust chief Jonathan Kanter said the department has 17 active investigations into possible overlapping board violations.

The recent action from the Justice Department should be “a wake-up call to companies,” said Yaron Nili, a corporate law and securities professor at the University of Wisconsin-Madison. “Once the DOJ is approaching them, they will choose the path of least resistance,” he said adding that “the logical thing” is for a director to step down rather than to fight the alleged antitrust violations.

The DOJ’s latest moves follow efforts late last year to scrutinize firms over whether placing executives on boards of companies in the same sector harms competition. The DOJ announced in October that directors at five public tech companies resigned after enforcers raised concerns.

Blackstone Inc., Apollo Global Management Inc. and KKR & Co. are also among private equity firms that face a DOJ investigation, according to Bloomberg News. The DOJ sent letters to a swath of private equity companies at the time, the report said.

Companies should take notice of the DOJ’s persistence on this issue, lawyers said. “After the first round back in the fall, maybe companies took a ‘wait-and-see’ approach,” said Andrew Sumner, a partner at Alston & Bird who specializes in corporate defense. “With the second round now, companies are going to start taking this a bit more seriously.”

Companies run the risk of reputational harm with the public if they engage in a prolonged fight with the DOJ over perceived wrongdoing from their senior leadership, Nili said. The University of Wisconsin corporate law professor has had his eye on overlapping boards for years. He published a paper in 2019 on what he calls “horizontal directors,” noting that little attention had been paid to directors who sit on boards of multiple companies within the same industry.

Nili said it’s fairly common to have overlapping directors in the same industry. And while it makes sense for boards to want directors with industry specific knowledge, doing so raises potential anticompetitive concerns. “From a governance perspective, there are tradeoffs here,” he said.

The DOJ’s antitrust division said last week that its actions have “unwound or prevented” at least 13 interlocking directors on 10 boards overall. Directors sitting on competing companies’ boards could violate Section 8 of the Clayton Act, a law from 1914.

“What I advise my clients is, ‘Do you have a process when you add directors to do a Section 8 analysis? And do you have a requirement that existing directors must report or have advance permission before joining another board?’” said Francesca Pisano, a senior associate at Arnold & Porter who assists clients with civil antitrust litigation.

Further Risk

The DOJ isn’t the only federal agency paying attention to overlapping boards. The Federal Trade Commission also asserted its authority on interlocking directors in a November policy statement.

And there’s pressure from other stakeholders aside from the government. Around the time of the DOJ’s March 9 action against Qualys and others, worker advocacy group United for Respect, urged the Department to investigate BC Partner Holding Ltd.’s PetSmart LLC and Chewy Inc. over concerns that the retailers’ overlapping directors could violate antitrust law.

Boards could also face investor lawsuits, either before or after an enforcement action, said Sumner. He said investors could bring derivative claims on behalf of the company trying to force a director to resign or to recover legal costs.

It might not be immediately clear which director positions could cause a problem, Nili said. He said general counsel should also consider whether their directors sit on other boards that could be considered a competitor in the future. In some more innovative industries, “who your competitor is is kind of a moving target,” he said.

Because the DOJ probe isn’t going away, some lawyers say companies should preemptively try to anticipate any overlapping issues by looking into their current directors’ positions and vetting any new hires.

“This can be a highly sensitive issue,” Pisano said.