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Corporate Board Member “Interlocks Under Section 8 of the Clayton Act: What Directors and Their Counsel Need to Know” May 3, 2010 CRAVATH, SWAINE & MOORE LLP Printed with permission from Board Member Inc., www.boardmember.com. Interlocks Under Section 8 of the Clayton Act: What Directors And Their Counsel Need To Know May 3, 2010 by Katherine Forrest and Jonathan Clarke President Obama's nomination of aggressive new antitrust enforcers has led to increased focus on a previously little-used statute, Section 8 of the Clayton Act, which bars interlocking board relationships between competitors. A 2009 FTC investigation into the relationship between Google and Apple resulted in the voluntary resignations of Google CEO Eric Schmidt from the board of Apple and of former Genentech CEO Arthur D. Levinson from the boards of both Apple and Google. More recently, venture capitalist John Doerr resigned from the board of Amazon amid an FTC investigation into Amazon's relationship with Google, where Mr. Doerr is also a director. These headline-grabbing cases make it incumbent upon directors and their counsel to understand the risks associated with Section 8. The FTC has stated that it intends to continue monitoring director interlocks. Such monitoring could pose particular concern in Silicon Valley, where executives and venture capitalists often sit concurrently on the boards of companies that have joint marketing and development agreements in some markets but that compete vigorously in others. This practice of “coopetition” can offer benefits, but it also poses risks of improper information-sharing and agreements that could be harmful to consumers. Simply stated, Section 8 prohibits a person from serving as a director or officer of two or more corporations when those corporations are competitors. The interlock need not involve the same individual serving as the director or officer for two competing companies; a Section 8 violation may arise when a parent company designates different persons to sit on the boards of competing companies if those individuals' service on the board is in their capacity as agents of the parent company. Jurisdictional limits and safe harbor provisions mean that Section 8 is unlikely to reach smaller enterprises like start-ups, private foundations, and not-for-profit entities. If an interlocked director is safely serving as a dual officer/director, but the net worth or competitive sales of a corporation rises over time, such that Section 8 is invoked, the dual officer/director has one year to "cure" the problem by resigning from one of the positions. The most common scenario is the start-up company whose revenues grow to exceed the jurisdictional threshold. Excerpted from: www.boardmember.com The precise definition of “competition” under the statute is unsettled. The case law suggests that the Section 8 definition may differ from that used to define antitrust markets as part of the merger review process. The possibility remains that the government could assert a looser definition of competition under Section 8, particularly in cases involving nascent Internet markets. In such rapidly-shifting markets, where competitive incentives are often different, the merger review concept of competition may not be a satisfactory measure. Large private investors such as hedge funds, private equity firms, and venture capitalists are at significant risk from Section 8. Such firms may have a legitimate need for representation on the boards of companies in which they hold large stakes, but such representation could invite legal action if two or more of those companies are horizontal competitors. Since a significant number of private investors focus their activities on particular industries, this is more than a theoretical problem. The resignation of Mr. Doerr from the board of Amazon, referenced above, highlights this concern. Government enforcement of Section 8 violations is ordinarily remedied by the resignation of the interlocked director. In addition to the public embarrassment associated with a forced resignation, there is the possibility that a key board member could be lost at a crucial juncture, taking with them skills, experience, and knowledge of the business that may be difficult to replace. The direct risk arising from Section 8 is augmented by the indirect risk that interlocking directorates will lead to a core Sherman Act antitrust violation such as price-fixing, bid-rigging, or market allocation, or lend circumstantial support to a claim that such a violation has occurred. Interlocking directorates are disfavored precisely because they are thought to facilitate such agreements. The harsher remedies available under the Sherman Act include criminal penalties and fines as well as treble damages for private plaintiffs. Section 8 is typically invoked by government enforcers, but the statute also provides for private rights of action. Members of the Sears board were recently accused by shareholders of violating Section 8 when they re-nominated to the board officers of two private equity firms that also held seats on the boards of Searsʼs competitors AutoZone, AutoNation, and Jones Apparel. After the complaint survived a motion to dismiss, one of the allegedly conflicted directors resigned from the Sears board, and the other two agreed that they would not participate in board discussions related to Sears' automotive and apparel businesses. Directors of companies confronted by investor insurgencies should be aware that Section 8 also has a potential defensive use. Genzyme recently invoked Section 8 in a proxy battle with Carl Icahn, after Icahn, who owns a minority stock position in Genzyme, nominated himself and three associates to Genzyme's board. Genzyme pointed out to investors that Icahn Partners LP already holds two board seats at Biogen, a Genzyme competitor, and that the election of Icahn Partners representatives to Genzyme's board likely would be a per se violation of Section 8. It remains to be seen whether this tactic will give Genzyme's current management significant leverage in its battle with Icahn. Given the paucity of case law in this area, further guidance from the FTC and the Antitrust Division regarding their enforcement priorities would be welcome. Until such guidance arrives, however, or significant further case law is handed down, weighing Section 8 risks will remain a difficult challenge for corporate boards and their advisors. Katherine B. Forrest is a partner in the Litigation Department at Cravath, Swaine & Moore LLP and her practice focuses primarily on antitrust and intellectual property. Jonathan J. Clarke is a lawyer in the Firm's Litigation Department. Excerpted from: www.boardmember.com Corporate Board Member “Interlocks Under Section 8 of the Clayton Act: What Directors and Their Counsel Need to Know” May 3, 2010 CRAVATH, SWAINE & MOORE LLP Printed with permission from Board Member Inc., www.boardmember.com..

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