[Aditya Mukherjee and Arihant Agarwal are students at Jindal Global Law School.]
The concept of interlocking directorate revolves around the ability of a director to serve and be a part of the Board of Directors (Board) of multiple companies. Whilst this is not illegal in itself as the Companies Act 2013 allows a director to hold its office in up to twenty companies at the same time with a restriction that only ten of them can be public companies. However, this is a challenging concept for the antitrust regime. Ideally, there should not be a problem with a director being a part of the Board of multiple companies that are part of one group since these companies do not normally compete with each other. However, claims of anti-competitive conduct may arise when this happens in companies that have competing interests.
The Competition Act 2002 (Act) does not have any express provision which opposes interlocking directorate, but the concept has been recognized by the Competition Commission of India (CCI) in its merger control cases. In comparison, the US antitrust regime under the Clayton Act specifically opposes the appointment of a person as a director or an officer in two competing companies, subject to the applicability of certain thresholds. The Sherman Act opposes the advantages derived by interlocking directorate too, though its applicability is limited to circumstances of demergers and spin-offs. The European Union competition regime does not have a provision for interlocking directorship; however, the European Commission does recognize it during their 'merger analysis'. The commission is also leading the way in analyzing instances of interlocking directorship even in cases of acquisition of minority stake.
The two main problems associated with interlocking directorate in competitive companies are that of 'information exchange' and 'subsequent collusion'. Information exchange is the transfer of any sensitive or confidential data between competing companies, and such an exchange of data may have anti-competitive effects. Subsequent collusion, on the other hand, is the possibility of intentional or unintentional collusion arising from such information exchange. The fact that the Board composition of the two competing companies is similar will affect their corporate decision-making while rendering confidential data concerning price, production process, supply chain, etc. freely available to a competitor who is in a position to use such information to its advantage. Lack of confidentiality in such cases might also lead to intended or unintended collusion between competitors depending on the powers exercised by the interlocking director. This collusion, whether intentional or unintentional, may be anti-competitive and will affect the market. Famously, the Federal Trade Commission in the US has affected a change in Board composition of mega companies like Google and Apple. Though India has not had any direct cases of anti-competitive conduct due to interlocking directorates, the CCI has looked into the aspects of collusion and information sharing when giving its approval to combinations and formation of joint ventures. For example, the Nippon-Kawasaki combination was granted permission to merge their worldwide ‘container-liner shipping business’ and their ‘container terminal services business’, except business located in Japan, on the condition that ‘essential’ and ‘commercially sensitive’ data would not be shared with the groups to which these companies belong or with other connected third parties.
Interlocking directorate is of specific interest to the technology and the pharmaceutical sectors. This interest peaks from the general practice in this industry of acquisitions made in start-ups and possible competitors. There may be situations wherein investments made in start-ups may render the target company as an associate company which may provide competition to the investing company in the future. In a scenario where the associate company continues to act as a major competitor, the parent company may restrain such competition by virtue of interlocking directorate. Research has shown that such concerns also arise in the airline and the banking industries and are likely to arise in other concentrated markets as well which have common investors and interlocking directorates.
Another aspect of interlocking directorate is the appointment of directors to the Board of competing companies by a common investor. This may be anti-competitive, depending on the shareholding pattern and the Board rights which have been obtained by the investor. Upon obtaining crucial Board rights, the investor may be able to soften the competition between companies and the competitors will indirectly start colluding. In India, Meru had raised similar allegations against Uber and Ola - where SoftBank happened to be a common investor. The CCI, in this case, discussed at length the theories of harm of interlocking directorate via common ownership and observed that where required, it shall look into anti-competitive effects of such practices and also include cases which fall outside the merger control regime. However, it held that although SoftBank and other investors had common ownership and the right to appoint directors in Uber and Ola, their common ownership was not anti-competitive due to the various fiduciary duties imposed on the said directors. It also stated that Meru had failed to furnish any evidence that showed any preliminary contraventions of competition law on account of this common ownership and, therefore, Uber and Ola could not be held to be in contravention of the law.
The major scenarios where interlocking directorate emerges are in mergers, acquisitions, and de-mergers. Acquisition / investment may occur by common investors in competing companies or a company acquiring shares in its competitors on a horizontal or a vertical level. Mergers can stimulate situations wherein a company's entry in a new industry may create an interlocking directorate, while a de-merger in which company groups are changing might have anti-competitive effects due to any existing interlocking directorates. The anti-competitive effects of interlocking directorate remain the same irrespective of it being brought about by a 'combination' or simply by opportunistic Board appointments. However, there is an added effect of de facto control and material / decisive influence which envisages greater control of the acquirer over the target. Through sections 5 and 6 of the Act along with their associated rules, the authorities introduced a robust merger control regime as per which the CCI can pass appropriate orders. The CCI's seriousness about interlocking directorates can be assessed by looking at merger control orders with respect to Item 1 of Schedule I of the regulations which are exceptions to the required notification under the Indian merger control regime. The CCI has held that investments claimed to be made under this exception should not be made with the intention of "participation in the formulation, determination or direction of the basic business decisions". The CCI went one step ahead of this when it decided that exceptions under this regulation are unavailable to acquirers in the event the target is in the "same, substitutable or competing business" or also when the target is engaged in a vertically related business. The reasoning behind CCI's orders is justified as such investments that will evade their scanner will affect the competitive landscape in the industry due to the control which the investor will get over the target company and there might arise a situation of interlocking directorate in the future.
Even though Indian law does not have much jurisprudence and clarity on this subject, it is quite evident that the CCI is in the process of developing its jurisprudence through cases related to merger control. However, it would be beneficial for the competition regime of India if the concept of interlocking directorates is also looked into while analyzing allegations of collusion and anti-competitive agreements. In the vast scheme of things concerning the competition regime in India, interlocking directorate occupies a minuscule portion. However, its relevance in the current scenario has far-reaching consequences. It would be a bold and progressive step by the CCI if it were to start looking into such minute details showcasing the intent and the foresight of the Indian authority.
Companies Act 2013, Section 165.
Clayton Act 1914, Section 8.
Sherman Act 1890, Section 1.
Antitrust Issues Involving Minority Shareholding and Interlocking Directorates, European Commission, Working party no.3 on Co-operation and Enforcement, February 2008
Northern TK Venture Pte. Ltd., Combination Registration no. C-2018/09/601.
Nippon Yussen Kabushiki Kaisha Ltd.- Mitsui O.S.K. Lines- Kawasaki Kisen Kaisha, Combination Registration no. C-2016/11/459.
In Re: Meru Travel Solutions and ANI Technologies, Case no. 25-28 of 2017.
Competition Act 2002, Section 5.
Competition Act 2002, Section 6.
The Competition Commission of India (Procedure in regard to the Transaction of Business relating to Combinations) Regulations 2011.
Competition Act 2002, Section 31.
Competition Commission of India (Procedure in regard to the Transaction of Business relating to Combinations) Regulations 2011, Item 1, Schedule 1.
Zuari Fertilizers and Chemicals Ltd.- Zuari Agro Chemicals Ltd., Combination registration no. C-2014/06/181.
New Moon BV- Mylan, Combination registration no. C-2014/08/202.