Antitrust’s Interlock Dilemma: Should the same person sit on boards of competing companies?

Interlocks can be direct when the same person sits on the boards of competing companies.

In the early 2000s, the US antitrust agency investigated major tech companies for potential violations of a somewhat little-known and obscure provision of antitrust/ competition law – Section 8 of the Clayton Act – which makes it illegal in certain circumstances for the same person to serve as a director of competing companies, often described as “interlocking directorates” or interlocks. This led to the resignation of Google CEO Eric Schmidt from Apple's board, Apple's Arthur Levinson stepped down from Google's board, and Google's John Doerr quit Amazon's board.

Interlocks can be direct when the same person sits on the boards of competing companies, or indirect, when a private equity (PE) firm appoints representatives to the boards of competing companies. Such individuals often have access to competitively sensitive information (CSI), participate in decision-making processes, and can influence competitive strategies and exchange the CSI, resulting in cartelisation, the most pernicious form of anti-competitive activity. As a result, interlocks are prohibited in various countries including the US, Japan, and South-Korea etc.

Regulators Get Tough

In the US, prohibitions have been imposed primarily in the context of merger control reviews by antitrust authorities. However, recently, the Department of Justice (DoJ) has begun to proactively enforce Section 8 outside of merger control reviews leading to several directors resigning from big corporations.

In Europe, this issue primarily emerged in a merger control review by the European Commission (EC), where certain investments by PE funds in competing firms were cleared subject to restrictions on interlocks and exchange of CSI (competitively sensitive information).  India follows Europe's lead in not banning interlocks outright, instead using general competition laws to address its anti-competitive effects.

In India, the Companies Act allows a person to be a director in up to 20 companies at the same time. While there is no express provision in the Competition Act or Companies Act which restricts interlocks, the Competition Commission of India (CCI) has been looking into interlocks/common ownership issues primarily in merger control cases.

In 2018, when IHH Healthcare acquired a majority stake in Fortis Healthcare (IHH-Fortis), it disclosed its existing investments in a competing company, Apollo Gleneagles Hospital, to the CCI. The CCI approved the transaction after accepting voluntary commitments from parties to ensure that the competing hospitals (Apollo and IHH-Fortis) operated independently with no common directors and exchange of CSI. Similar commitments were accepted by the CCI in a merger involving Nippon/ Mitsui/ Kawasaki and a minority stake in GMR Airports by Tata Group and others.

CCI’s Post-2020 Stance

2020 was a paradigm shift in the CCI’s approach to transactions involving common ownership, which raised many eyebrows. The matter involved ChrysCapital’s acquisition of an additional stake in Intas Pharma, going from 3 percent to 6 percent. ChrysCapital disclosed its existing investment in competing companies – Mankind, Curatio and GVK.

The CCI raised concerns regarding ChrysCapital’s growing strategic influence over Mankind and Intas, with their significant presence in certain products that could potentially lead to  possible cartel-like behaviour. To address CCI’s concern, ChrysCapital removed its director from the board of Mankind, and agreed not to exercise veto rights in Mankind, including restrictions on the exchange of CSI.This marks CCI’s altered approach to evaluating PE investments, intensifying the burning debate on common ownership/ interlocks.

Last week, a similar approach was also adopted by the CCI in clearing the acquisition of an additional minority stake in Acko Technology (Acko Tech) by General Atlantic (GA). The CCI noted that GA’s direct/indirect influence on two prominent players (Acko’s Vivish Tech and GA’s NoBroker) for society/gated community management solutions, may raise the risk of softening of competition between them. To address CCI’s concern, GA offered not to exert influence on any matter related to, or receive any CSI relating to, Vivish.

Apart from merger cases, in 2020, CCI examined allegations of coordination between Ola and Uber due to Softbank’s investment in both companies. The CCI noted that although common ownership in competing entities may incentivise cartel-like behaviour, absent evidence, an inquiry was not justified.

While interlocks can result in benefits in terms of expertise and industry knowledge, their negative impact on competition cannot be overlooked and was bound to attract CCI’s attention. In 2020, the CCI hinted at a market study on common ownership/ interlocks, which is pending.

Hence, businesses should carefully consider the legal risks involved before entering into the same. For the CCI, striking a balance between fostering corporate collaboration and preventing anti-competitive behaviour remains a critical challenge.

Sidharrth Shankar is a M&A partner and Vaibhav Choukse is a partner and head of practice (competition law) at JSA. Views are personal, and do not represent the stand of this publication.