Published in The M&A Lawyer. Originally appeared in Kaye Scholer’s Summer 2016 M&A and Corporate Governance Newsletter.
—By Philip Giordano
On July 14, 2016, the Department of Justice reached a settlement with parties to an asset acquisition that the DOJ said would create an unlawful» Click here to read more articles from our latest M&A and Corporate Governance Newsletter. interlocking directorate. The parties, Tullett Prebon Group Ltd. and ICAP plc, agreed to restructure their $1.5 billion transaction so that ICAP would no longer have a right to nominate a member of the Tullett Prebon board of directors, or hold a minority stake in Tullett Prebon. The government’s intervention highlights the need to review changes in board representation arising from proposed mergers and acquisitions to insure that they comply with the antitrust laws.
A Transaction Between Competitors
Both Tullett Prebon and ICAP are prominent global interdealer money brokers. Both are publicly traded British companies with operations in the United States. As interdealer brokers, they serve financial institutions to facilitate wholesale trading in bonds and other fixed income instruments for which there is no centralized exchange or market maker. Their voice, electronic, and hybrid trading platforms provide price discovery, transaction execution and trade processing services, along with the liquidity and anonymity necessary for efficient trading, in markets that typically involve more than a trillion dollars of trading volume each day.
Announced in November 2015, the transaction as originally structured involved the acquisition by Tullett Prebon of ICAP’s voice brokerage business and the ICAP name. ICAP’s shareholders were to receive a 36.1 percent stake in Tullett Prebon; Tullett Prebon’s shareholders were to retain a 44 percent stake; and ICAP itself (renamed NEX Group Ltd.) was to receive a 19.9 percent stake in Tullett Prebon and the right to nominate one member of the Tullett Prebon board of directors. At the government’s behest, under the revised agreement ICAP will not have a right to nominate a member of Tullett Prebon’s board of directors, nor will ICAP own any part of Tullett Prebon after the transaction. Instead, ICAP shareholders will receive a 56 percent stake in Tullett Prebon.
Although ICAP will exit the voice brokerage business via the transaction, it will continue to offer electronic trading brokerage services. Thus, given that the parties would continue to compete as inter-dealer brokers in the US and worldwide after the transaction, the DOJ “had serious concerns” that ICAP’s right to nominate a Tullett Prebon board member would create an interlocking directorate in violation of Section 8 of the Clayton Act.
Section 8 forbids a person from serving “as a director or officer in any two corporations . . . that are . . . competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws. . . .” While by its terms Section 8 prohibits a “person” from simultaneously serving on the boards of competing corporations, it has been interpreted to also prohibit two different agents of the same legal entity from serving on the boards of competing corporations. As a corollary, the federal antitrust agencies deem Section 8 to forbid a corporation from possessing the right to nominate a competitor’s officers or directors.
While US antitrust laws generally do not impose any restrictions on the composition of a corporation’s board of directors, Section 8’s proscription against interlocking directorates must be heeded when two corporations are competitors. A person that sits on the boards of two competitors will likely have fiduciary duties to the two companies that conflict. Competition between the two companies may be threatened where the director is called upon to contribute to the management decisions of one company that may have adverse consequences for the other. An interlocking directorate also risks exchanges of competitively sensitive, nonpublic information between competitors, unlawful coordinated conduct, foreclosure of rivals, or a number of other activities that might, in the government’s view, affect competition adversely. Notably, it is not necessary for the federal antitrust agencies to establish any actual or potential adverse effect on competition in order to prove a Section 8 violation. Rather, defendants face per se liability.
Interlocking directorates between small companies, including the right to nominate board members as part of a transaction, do not implicate Section 8 because the Clayton Act provides for certain de minimus safe harbors. Firms that each have capital, surplus and undistributed profits aggregating less than $31,841,000 are exempt from Section 8’s prohibitions. Larger firms can also be exempt if their “competitive sales” in the product market at issue are small or constitute a very small share of their sales. The exemption applies if either firm’s “competitive sales” are less than $3,184,100 or less than two percent of sales; it also applies if both firms’ “competitive sales” are less than four percent of their revenues. None of these safe harbors were applicable to the Tullett Prebon/ICAP deal.
In addition to objecting to ICAP’s right to nominate a Tullett Prebon board member, the DOJ took issue with the parties’ original proposal that ICAP would take a 19.9 percent stake in Tullett Prebon. The Department was concerned that the holding would compromise the parties’ mutual independence, “creating a cozy relationship among competitors.” This provides an important reminder that a company need not acquire control of a competitor in order to run afoul of the federal antitrust laws. Section 7 of the Clayton Act proscribes the acquisition of “any part” of a company’s stock where the effect “may be substantially to lessen competition, or tend to create a monopoly.” Depending on the circumstances, the antitrust enforcement agencies may conclude that an acquisition of a substantial minority share of a competitor’s stock may, for example, reduce competitive zeal if it undermines the value of the acquirer’s investment or if it threatens the “special relationship” the acquired company might have developed with its investor. The government may also question whether the investment would make it more attractive to the parties to reach tacit understandings or engage in other willing cooperation that is adverse to competition.
The Tullett Prebon/ICAP acquisition illustrates the scrutiny that the enforcement agencies continue to apply to two specific issues that can arise in mergers and acquisitions involving competitors: ownership of a minority stake and rights to nominate board members. More generally, any transfer of rights to nominate officers or directors should alert counsel to the possibility of a Section 8 issue, such as when a buyer acquires from a seller an interest in a third entity or a portfolio company that holds such rights.
In addition to its implications for mergers and acquisitions, Section 8 also raises compliance issues. Corporate compliance officers must review nominations to the board of directors to determine whether the nominee already sits on a competitor’s board. And director interlocks that fall within the Clayton Act’s safe harbors must be reviewed periodically to insure that changing revenues do not make the safe harbor unavailable. Finally, the introduction of new products, entry into new geographic markets and upstream or downstream integration can create a new competitive relationship between companies where none existed before—raising Section 8 issues for individuals whose simultaneous service on both of their boards predated the newly competitive relationship.
The restructuring of the Tullett Prebon/ICAP acquisition should remind both deal counsel and compliance officers to remain alert to the potential Section 8 issues that can arise whenever board compositions change so that compliance with Section 8 can be maintained.
 Press Release, Department of Justice Antitrust Division, “Tullett Prebon and ICAP Restructure Transaction after Justice Department Expresses Concerns about Interlocking Directorates” (July 14, 2016).
 15 U.S.C. § 19(a)(1).
 See United States v. Cleveland Trust Co., 392 F. Supp. 699 (N.D. Ohio 1974), aff'd mem., 513 F.2d 633 (6th Cir. 1975), consent decree entered, 1975 Trade Cas. ¶60,611 (N.D. Ohio) (denying summary judgment to defendant financial institution that held, though its different officers, seats on the boards of competing machine tool equipment manufacturers in which it had invested).
 See, e.g., Complaint, United States v. Commscope, Inc. et al., No. 1:07-cv-02200 (D.D.C. Dec. 6, 2007) (alleging that transaction violates Section 8 of the Clayton Act where it would result in defendant owning 30 percent of the voting securities of a significant competitor, obtaining the right to appoint directly two members of the competitor’s seven-member board of directors, and obtaining the right to appoint two more board members jointly with another board member).
 United States v. Sears, Roebuck & Co., 111 F. Supp. 614 (S.D.N.Y. 1953) (proof of Section 8 violation does not require a showing that the Clayton Act would prohibit a hypothetical merger between two competitors in order to establish a Section 8 violation for an interlocking directorate between the two companies).
 15 U.S.C. § 19(a)(1). Originally $10,000,000, the threshold is adjusted for inflation on October 1 each year by the Federal Trade Commission. 15 U.S.C. § 19(a)(5).
 15 U.S.C. § 19(a)(2). The original threshold was $1,000,000 and also is adjusted for inflation on October 1 each year by the Federal Trade Commission. 15 U.S.C. § 19(a)(5). The Clayton Act defines “competitive sales” as “the gross revenues for all products and services sold by one corporation in competition with the other, determined on the basis of annual gross revenues for such products and services in that corporation’s last completed fiscal year.” 15 U.S.C. § 19(a)(2)(c).
 Department of Justice Antitrust Division Press Release, supra note 1.
 See Denver and Rio Grande W. R.R. Co. v. United States, 387 U.S. 485, 501 (1967) (“A company need not acquire control of another company in order to violate the Clayton Act.”); United States v. Dairy Farmers of America, Inc., 426 F.3d 850 (6th Cir. 2005) (reversing summary judgment for defendants where plaintiff alleged significant anticompetitive effects arising from partial acquisition of competitor).
 15 U.S.C. § 18.
 United States v. Dairy Farmers of America, Inc., 426 F.3d, at 859-60, citing United States v. E.I. du Pont de Nemours & Co., 366 U.S. 316, 321 (1961).
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