Merger control: cross-shareholdings and directorships in the spotlight

As merger control review intensifies around the globe, EU and US authorities have cross-directorates and cross-shareholdings in their crosshairs. Cross-directorates (also known as interlocking directorates) arise when a director or officer of a company is on the board of a competing company. From a competition law perspective, this can give rise to concerns if it allows companies to exchange competitively sensitive information or even coordinate their behaviour. Similar concerns may arise when a company holds shares in its competitor(s) as this may give access to competitively sensitive information. 

In the U.S., Section 8 of the Clayton Act prohibits interlocking directorates (subject to certain exceptions). The EU does not have an equivalent explicit prohibition and to date scrutiny of interlocking directorates has primarily taken place in the context of a merger control review. 

On 1 September 2023, new notification forms (Form CO) in the EU introduced significant disclosure requirements for cross-directorates and cross-shareholdings. See our September 2023 briefing for details of the other changes introduced on 1 September 2023. In parallel, the U.S. Federal Trade Commission (FTC) has revived Section 8 of the Clayton Act in relation to directorships.

Key takeaways

• Consider the merger control implications early in the deal process when questions about directorships and minority shareholdings are still on the table.
• In the EU, consider the potential for these structures to extend the deal timetable for review and to invite significant questions.
• In the U.S., particular caution may be needed given the FTC's increasingly aggressive stance on these topics and willingness to intervene formally with tools outside of those traditionally used to challenge competitively concerning transactions.
• Private equity investors should be especially mindful and review their portfolios for minority shareholdings and cross-directorships that may raise questions or concerns for later transactions.

Context

Review of transactions by regulators on competition law grounds has been intensifying for several years. Growing concern has focused on deals that might fall under notification thresholds (including because of the small size of promising targets, so-called "killer acquisitions"), competition on innovation and portfolios of companies with common shareholders or directors that may raise so-called coordinated effects concerns (including through information exchange). 

Both the EU and U.S. regulators have recently responded on this last point. 

EU merger control reforms 

On 1 September 2023, the EU merger notification "simplification" package came into force. Although commentary has focused on the new "box-ticking" elements of the forms, they also include expanded information requirements. 

Both the short Form CO and the long Form CO include questions on interlocking directorates and shareholdings. For most filings parties must disclose whether: 

• Any of the parties to the transaction has significant non-controlling shareholdings (i.e., above 10%) or cross-directorships in companies active in the same markets as any of the other parties or in vertically related markets (e.g., the acquiring company has a non-controlling minority shareholding or common directors in a company active in the same market as the target company); or
• One or more of the parties' competitors have a significant non-controlling shareholding (i.e., above 10%) in any of the parties.

Such cross-shareholding / interlocking directorships are one of the (numerous) bases on which the European Commission can decline to use the simplified procedure to review transactions that do not otherwise give rise to significant overlaps or vertical relationships and so, traditionally, have received a lighter-touch review. Notably, the new Form CO does not specify whether a cross-directorship arises only where the same individual is present on the boards of multiple companies. It is unclear whether it is sufficient that one of the parties has appointed directors to the boards of multiple competing companies (even if those are different individuals, and even where internal ring-fencing controls are in place). It is reasonable to expect that the European Commission will follow the latter, more expansive, interpretation. 

This development has implications for all acquisitive companies but particularly for private equity investors and sectors which typically involve joint ventures between competitors, who will need to carefully review their portfolios for both minority shareholdings in competing companies and for cross-directorships. 

This may be particularly important as moving from the short form to the long form procedure is not simply a matter of review time or complexity of the notification documents. When the short form procedure is used, the European Commission issues a short decision, with limited public information about the relevant markets and the parties' / their rivals' positions in them and with no or limited outreach to the parties' customers and competitors. In contrast, under the "normal" procedure, the European Commission issues a detailed decision, with more significant precedential value and greater granularity. 

Acquisitive companies may have an incentive to avoid the issuance of long form decisions that can be the basis for further detailed review and establish precedents which can be relied upon in later deals. 

US regulators revive Clayton Act Section 8

On 16 August 2023, the FTC used Section 8 of the Clayton Act to deliver what it called "ground-breaking structural relief" via a consent order in the natural gas sector. Section 8 of the Clayton Act, subject to exceptions, prohibits interlocking directorates where a "person" is a director or officer of competing corporations at the same time. Such interlocking directorates are per se violations because of the potential for coordination and information exchange. 

This case marks the first formal enforcement of Section 8 since the 1980s. More recently, the FTC or Antitrust Division of the U.S. Department of Justice (DOJ) has resolved these issues by closing investigations without formal challenge where interlocks where removed. 

Natural gas producer EQT Corporation (EQT) proposed acquiring assets from Quantum Energy Partners (QEP). As part of the proposed transaction, EQT had to take "all necessary action to facilitate" the CEO of QEP (which would allegedly continue to sell natural gas in competition with EQT) being appointed to the EQT board. 

The FTC concluded that the transaction would involve an interlocking directorate that violated Section 8 of the Clayton Act. Under the consent order, there is an agreement blocking the alleged interlocking directorate and some future director and officer appointments are subject to FTC approval. 

Importantly, the FTC has reaffirmed its position that Section 8 of the Clayton Act can be engaged when the same corporation appoints two different people to serve on the boards of competitors. In a statement, Lina Kahn (Chairperson of the FTC) also affirmed that Section 8 applies regardless of the precise legal structure of the businesses concerned – capturing, for example, "limited partnerships or limited liability corporations". 

The FTC also found that the proposed transaction would violate Section 5 of the Federal Trade Commission Act for "unfair competition" because of the potential for information exchange resulting from a minority shareholding. As part of the transaction, QEP would have held around 11% of EQT's stock, allegedly giving it the opportunity to share competitively sensitive information or influence EQT's competitive behaviour (in addition to the potential for information exchange because of the interlock). A joint venture between the parties also gave rise to information exchange concerns.

U.S. consultation on HSR form 

In June 2023, the FTC proposed changes to the U.S. premerger notification form and the premerger notification rules implementing the Hart-Scott Rodino (HSR) Act which require parties to notify certain mergers to the FTC and DOJ in advance. The consultation closed on 28 August 2023. 

The proposed changes include more detailed information requirements on horizontal overlaps and existing / potential vertical relationships, expanded document production requirements and details of all officers, directors and board observers within the acquirer and the target. This last requirement is intended to facilitate the FTC and DOJ's analysis of any Clayton Act Section 8 issues. It reflects the comments made by Lina Kahn that the FTC and DOJ have been working to "reactivate Section 8 and effectively put market participants back on notice" and we can expect further enforcement action in future. 

Overall, the amendments are designed to enable the FTC and DOJ to review transactions more effectively and efficiently. 

Comment

Both EU and US lawmakers are increasing their focus on cross-directorships and cross-shareholdings, where interests short of control lead to structural and behavioural links between competing companies (or, in the EU, between those in related markets). 

Companies should consider the potential  merger control early in the deal process when questions about directorships and minority shareholdings are still being discussed. This will be of particular importance for private equity investors who will need to review their portfolios for minority shareholdings and cross-directorships that may raise questions or concerns for later transactions.