A sleeping bear in the Competition Law

The Enactment of the Philippine Competition Act (PCA) has given rise to a myriad of issues for businesses. One of these is whether there can be interlocking directors in different boards. Say, can an individual simultaneously serve as a director in competing businesses?

In the United States, the prohibition has been around for about 100 years. There are two legal bases for prohibiting interlocking directorate in competing businesses. The first is the Sherman Act, which prohibits price fixing between or among competitors. Information exchange concerns can arise when the director is exposed to competitively sensitive information from both companies. Interlocking directorates can facilitate collusion or abuse of market power by serving as a means by which market-sensitive information can be shared between or among competing enterprises.

To give more meaning to the Sherman Act, the Clayton Act was subsequently enacted. Section 8 expressly provided “[n]o person shall, at the same time, serve as a director or officer in any two corporations … that are … competitors such that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.” Section 8 partakes of a strict liability statute. Liability is determined irrespective of intent and there is no need to demonstrate an adverse effect on prices, output or competition. Even if Section 8 is directed to individuals, antitrust regulators and the courts of law in the United States have taken the position that Section 8 applies to corporations and not only to natural persons.

This issue is like a sleeping bear that awakens every so often. In 2009, for example, the Federal Trade Commission (FTC) investigated the relationship between Google and Apple. This 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. The FTC publicly commended Google and Apple “for recognizing that overlapping board members between competing companies raise serious antitrust issues.” In a similar situation, venture capitalist John Doerr resigned from the board of Amazon after having simultaneously served as director of Google. This followed an FTC investigation into Amazon’s relationship with Google.

In the United States, the issue of interlocking directors in competing businesses has gone beyond purely antitrust concerns. There have been derivative suits alleging illegal interlocking directorates. In these suits, members of the board of a company are accused of breaching their fiduciary duties by allowing the overlapping directorate in violation of antitrust law.

Unlike the Clayton Act, the PCA does not contain any specific provision expressly prohibiting interlocking directorates in competing businesses. Like the Sherman Act, however, the PCA contains a general prohibition on price fixing. In fact, it makes it a per se violation (a violation in itself) for competitors not only to fix prices but also to fix other terms and conditions of trade. The same per se rule also applies to bid rigging between or among competitors.

Based on the Congressional deliberations on the PCA, the Philippine Competition Commission (PCC) appeared to have broad discretion to implement the law. Therefore, it is up to the PCC to determine whether it can adopt a prohibition on interlocking directors in competing businesses as part of the PCA’s implementing rules and regulations. Alternatively, the PCC may decide the issue on a case-to-case basis after a consideration of all attendant facts and circumstances. Either way, the PCC must take into account that the business environment today is very much different than in 1914 when the Clayton Act was first enacted.

Indeed, an interlocking directorate situation, which exists today, may not at all be intended to restrict or lessen competition. Instead, employing overlapping directors may simply be the result of a desire to seek the most qualified and experienced outside directors for the corporation. A person with extensive familiarity with a particular industry can share governance best practices, experiences and perspectives for the benefit of the company. He is thus a desirable outside director who can play a vital role in adding value to the company and its shareholders.

Let’s wait and see how the PCC will address this issue.

(The author is a senior partner in Accralaw and a law professor in the Ateneo College of Law. The views in this column are exclusively his and may not attributed to the institutions he is connected with. He may be contacted at [email protected])