When Directors Collide: Navigating the Competition Concerns Arising from Interlocking Directorates

If history holds any lessons, it is that mature antitrust regulators are able to identify and develop jurisprudence on novel and complex issues early which in turn helps regulators across the globe to re-evaluate their existing toolkit to effectively address these concerns. This is primarily because the underlying concerns and goals of antitrust regulators broadly remain aligned. The recent increased focus of antitrust enforcement agencies on interlocking directorates has raised many questions regarding its importance and relevance.

An interlocked director is a director that sits on the board of two or more competing businesses thereby creating indirect connections between competing businesses. Interlocks also include directors that have been appointed through a common investor to the Boards of two or more competing companies.

While the Competition Act, 2002 (“Act”) does not define or prohibit interlocking directorates, the Competition Commission of India (“Commission”) has recognized the impact of interlocking directorates and has attempted to develop certain basic conceptual jurisprudence on interlocking directorates in its analysis of mergers/acquisitions (“combinations”).

For competitors to compete fairly and effectively, companies differentiate their offerings through, amongst others, price, quality, and innovation. Therefore, the cause for concern with interlocks is the ability of directors on the boards of competing businesses to share/ exchange competitively sensitive information such as information on pricing, costs, agreements, business strategies, sales quantities, etc. This could in turn increase the potential for anticompetitive conduct wherein competitors could enter into implicit or explicit agreements that can be monitored which would ultimately dampen competition. This phenomenon is often referred to as “coordinated effects” under competition law jurisprudence.

The ability of competing companies to exchange competitively sensitive information through interlocked directorates has direct implications under competition law with regards to maintaining a level playing field, efficiency, and consumer welfare.

Apart from coordinated effects, interlocking directorates coupled with common investments in competing companies pose the risk of “unilateral effects” i.e., the common investor guiding the decision making of the competing businesses in such a way that competition is lessened, and the competing businesses behave in unison.

The Commission has recognized common ownership as having the potential to distort competition even through passive investments when competing commercial interests are involved. However, it remains cautious as to whether common ownership would create anticompetitive effects in every market scenario. In December 2020, the Commission hinted that it was likely to launch a market study on common ownership.

The United States scrutinizes interlocking directorates under Section 8 of the Clayton Act 1914 (“Clayton Act”) enforced by the Federal Trade Commission (“FTC”) and the Department of Justice’s Antitrust Division (“DOJ”). Section 8 of the Clayton Act has a de minimis exemption wherein appointment of a director in a competing firm will be prohibited based on competitive sales thresholds. The US takes a strict approach as the prohibition under the Clayton Act is a per se prohibition which means that harm to competition is presumed if a prohibited interlock exists. In the European Union (“EU”), similar to the Indian scenario, there is no specific provision that recognizes and prohibits interlocking directorates. Rather, the concept of interlocking directorates and its potential to distort competition is recognized as part of EU’s merger control regime.

It is pertinent to note that directors are privy to board meetings wherein they have the ability to influence voting, access to confidential information, ability to affect strategic business decisions such as approving mergers, amalgamations, acquiring control or stakes in other companies, etc. Section 165 of the Companies Act, 2013 (“Companies Act”) stipulates that a director can serve on the Boards of up to 20 companies simultaneously and Section 166 of the Companies Act lays down the duties of a director, which includes the duty of a director not to involve themselves in a situation wherein they may have direct or indirect interests that conflicts with the interest of the company. However, the scrutiny under competition law would be vastly different from that under company law.

Section 3(1) read with Section 3(3) of the Act prohibits anticompetitive arrangements between enterprises for price fixing, market sharing, bid rigging and restricting output and provides that such agreements would be presumed to have an appreciable adverse effect on competition. The Commission, in its decisional practice has held that exchange of any competitively sensitive information would be a step in furtherance of the above arrangements and would also be prohibited. Therefore, information exchange arising from interlocks could constitute cartel conduct. While the jurisprudence regarding the same is yet to develop, the Commission has made several pertinent observations regarding information exchange and potential collusion through interlocking directorates in its review of combinations.

The Commission, in its ex-ante review of combinations, in particular, joint ventures (“JV”) and investments by common shareholders in competing businesses in the same level of the production chain (horizontally) or investments in businesses in different levels of the production chain (vertically) has made observations with regards to issues arising out of interlocking directorates. These observations primarily indicate a concern with “coordinated effects”. In the Nippon/ Kawasaki combination, in order to alleviate competition concerns, the parties offered commitments to introduce a “rule of information spillover” which stipulated that directors, officers and employees of the JV would not receive sensitive information regarding the non-integrated businesses, irrespective of whether the directors, officers or employees obtained such information prior to the formation of the JV. In Northern TK Venture Pte. Ltd. combination, the acquirer through a JV and the target were competitors wherein the acquirer had an existing director in the JV. The acquirer made commitments to ensure that it would not appoint a common director in the target and the JV and that it would put into place a “rule of information control” wherein sensitive information would not be shared between the target and the JV. In ChrysCapital/ Intas, ChrysCapital wanted to acquire additional shareholding in Intas Pharmaceuticals (“Intas”). However, the Commission observed that ChrysCapital already had shareholding, voting rights, board representation, and a right to veto certain corporate actions in competitors of Intas namely, Curatio, Mankind, and GVK. In order to address the anticompetitive effects that could arise from the transaction, ChrysCapital offered commitments that included the removal of its existing director in Mankind, restricting use of information relating to Intas, Curio, and Mankind, and to not exercising veto rights in Mankind.

Interlocking directorates could potentially lead to efficiency gains. A director of a competing business would not only have the prior experience and expertise but also being a board member of competing businesses could potentially reduce the use of aggressive business strategies as there would be less uncertainty in the market due to information exchange and this can help bring up the overall performance of the businesses.

While the Commission does not have any explicit prohibition on interlocking directorates, it is clear that the jurisprudence on interlocking directorates is still developing on a case by case basis and it would be interesting to see how the Commission analyzes the impact of interlocking directorates in the future.

Avinash Amarnath is a Partner and Aileen Aditi Sundardas is an Associate at Chandhiok & Mahajan.