The latest enforcement effort involving Section 8 of the Clayton Act, which prohibits interlocking directorates, “put[s] market participants . . . on notice” that Section 8 “must [be] follow[ed].” On August 16, 2023, the US Federal Trade Commission (FTC) announced an action to prevent “an interlocking directorate arrangement” between Quantum Energy Partners and EQT Corporation. This settlement demonstrates the continued resolve of the US antitrust agencies not only to enforce Section 8 but also to expand its reach.
- For the first time, the FTC applied Section 8 to non-corporate entities (i.e., LLCs or LPs) in an enforcement action. This likely will have impacts for private equity and financial sponsor clients that typically operate via LLC or LP structures.
- The FTC has demonstrated that it will impose interlocking directorate structural remedies, even where the underlying transaction may not, by itself, raise competition questions.
- Prior approval provisions are not limited to transactions. By requiring prior approval notice for future board appointments, the FTC is making clear that it will impose restrictions and monitoring provisions in multiple enforcement scenarios.
- Section 8 enforcement remains a high priority for the US antitrust agencies, and companies should remain vigilant with regard to potential Section 8 exposure and should consider mechanisms to remain compliant – especially when an HSR-reportable transaction puts companies in front of the agencies.
FTC Enforces Section 8 for the First Time in 40 Years
The FTC’s settlement with Quantum and EQT is consistent with efforts by the Antitrust Division of the US Department of Justice to “effectively put market participants back on notice” that Section 8 enforcement has been reactivated. Arguably, however, the Quantum/EQT settlement does more than just put parties on notice; it represents a significant and “innovative” expansion of Section 8 enforcement.
According to the FTC’s complaint, EQT Corporation is the largest producer of natural gas in the US and operates mostly in the Appalachian basin. Quantum Energy Partners is a private equity firm with portfolio companies that produce natural gas both in the Appalachian basin and elsewhere in the US. On September 6, 2022, EQT and Quantum entered a Purchase Agreement containing the following provisions:
- EQT would acquire Tug Hill, a natural gas producer, and XcL Midstream, a natural gas gatherer and processor, both located in the Appalachian Basin, in exchange for cash and EQT stock. The total deal value was approximately $5.2 billion.
- Quantum would receive 55 million EQT shares, or about 11%, making it one of EQT’s largest shareholders.
- Quantum’s CEO or a designee would be appointed to the EQT board, although Quantum later voluntarily agreed to no longer seek this board seat at closing “out of an abundance of caution and to ensure compliance with Section 8 of the Clayton Antitrust Act.” However, Quantum retained its right to the seat in case it wanted to exercise that right in the future.
Although the FTC did not allege that EQT’s acquisition of Tug Hill or XcL would harm competition, the FTC argued that the agreement would lead to violations of both Section 8 and Section 5 (unfair competition) of the FTC Act. To close the underlying transaction, the parties agreed to settle the FTC’s investigation and be subject to a consent decree with the following terms:
- Board Seats: Quantum is subject to Section 8 notwithstanding the fact that it is not a corporation; therefore it must give up its right to an EQT board seat. Quantum also will be subject to prior approval before serving on the board of any of the top 7 Appalachian Basin natural gas producers. EQT cannot serve in any management capacity relating to Quantum.
- Minority Holding: Quantum must sell its minority holding in EQT, and it cannot sell its shares to one of the top 7 Appalachian Basin natural gas producers. To the extent there is a period when Quantum owns the shares, the shares will be held in a voting trust and voted pro rata with other shareholders.
- Prior Approval: Quantum is subject to prior approval for any acquisition of additional EQT shares.
- The Mineral Company: Quantum and EQT are required to unwind The Mineral Company (TMC), an existing JV relating to mineral rights.
- Future Entanglements: Quantum and EQT are prohibited from entering into additional agreements, including non-competes, other than those ancillary to the sale of a business.
- Compliance: A monitor will be appointed, and the parties will be required to submit regular compliance reports. Quantum and EQT also must design, maintain, and operate an antitrust compliance program.
FTC Declares that Section 8 Applies to Non-Corporate Forms
The statutory text of Section 8 provides that it only applies to corporations. Agency enforcers previously have questioned whether Section 8 should be read more broadly to apply to LLCs and other corporate forms. In the Quantum/EQT settlement, the FTC makes clear that “Section 8 applies to businesses even if they are structured as limited partnerships or limited liability corporations.”
Specifically, the FTC alleged that Quantum’s right to a seat on the EQT board would be a violation of Section 8 because it would involve the simultaneous service of an officer or director (the Quantum CEO or his designee) on the board of a competitor. In addition to meeting the jurisdictional thresholds and exceeding the exemption thresholds, the FTC alleges that EQT competes directly with a Quantum portfolio company in the production and sale of natural gas in the Appalachian Basin. Note that even though Quantum agreed to not seek the EQT board seat at closing, this concession appears to have been insufficient to allay FTC’s Section 8 concerns.
FTC Alleged a Stand-Alone Section 5 Violation Resulting from Inappropriate Information Exchanges
The FTC also alleged two claims under Section 5 of the FTC Act, the first time in decades that the FTC has challenged the structure of a transaction as a standalone violation of Section 5. First, Quantum’s purchase of 11% of EQT would make Quantum one of EQT’s largest shareholders with the “ability to sway competitive decision-making” and have the “potential to access EQT’s competitively sensitive information.” Additionally, the FTC alleged that the proposed interlocking directorate would lead to an opportunity for both parties to solicit and exchange competitively sensitive information with “purpose, tendency, and capacity to facilitate collusion or coordination”.
Second, the FTC alleged that TMC, a pre-existing JV between the parties, created additional opportunities for the parties to exchange competitively sensitive business information. The FTC also alleged that information exchanged via the JV, “coupled with noncompete agreements in place, harms competition.”
The expansion of Section 8 to cover non-corporate forms brings many more business relationships and minority investments into the lens of Section 8. Now that this door has been opened, parties can expect agencies to enforce Section 8 increasingly in situations involving LLCs or LPs, either alone or in conjunction with a Section 5 claim. Additionally, where there is a minority investment as part of merger consideration and the parties will remain competitors, the FTC will closely scrutinize the ongoing relationship, including the potential for anticompetitive information sharing or undue influence. As always, the best defense is to be proactive: conduct regular audits of board appointments across all corporate and non-corporate relationships, maintain a regular schedule of antitrust compliance training, and ensure that all information sharing protocols are up-to-date and followed by relevant employees.