FTC Pushes Enforcement Frontier Against Board Interlocks and Information Sharing Among Competitors

The Federal Trade Commission took a major step recently to crack down on unlawful interlocking directorates and leverage its “standalone” authority that prohibits “unfair methods of competition.”  In a complaint and consent order issued last week, the FTC alleged that a transaction between EQT Corporation and QEP Partners, LP (Quantum) violated Section 8 of the Clayton Act, the first time in 40 years that the agency has enforced the statute.  The FTC also alleged that the transaction and an existing joint venture independently violated Section 5 of the FTC Act based largely on the prospective ability to share competitively sensitive information, an expansive theory of harm. The consent order goes well beyond the typical remedy for a Section 8 violation – prohibiting the interlock – and also prohibits Quantum from serving on certain other competitors’ boards without prior approval of the Commission.  The Section 5 information sharing remedy is similarly aggressive, requiring the parties to dissolve an existing “cozy” joint-venture and requiring Quantum to divest all EQT shares it acquired in the underlying transaction.  These novel theories of harm and aggressive remedies are a warning shot to companies that the agencies are ramping up scrutiny of board interlocks and competitor information exchanges.

The Transaction and Existing Joint Venture

EQT is the nation’s largest natural gas producer and primarily operates in the Appalachian Basin.  Quantum is a private equity firm that owns Tug Hill, the eleventh largest Appalachian Basin natural gas producer, and XcL Midstream, which transports and processes natural gas produced at Tug Hill. 

Under the Purchase Agreement, EQT would acquire Tug Hill and XcL Midstream from Quantum.  In exchange, Quantum would receive $5.2 billion in cash and shares of EQT amounting to an 11% stake, thereby making Quantum one of EQT’s largest shareholders.  In addition, EQT agreed to “take all necessary action to facilitate” the appointment of Quantum’s CEO (or another Quantum designee) to EQT’s board of directors.

EQT and Quantum also had an existing joint venture known as The Mineral Company (TMC).  Under the arrangement, Quantum provided financing and EQT agreed to provide TMC with a right of first refusal before acquiring mineral rights in a certain region. 

Section 8 Claim Regarding Interlock

The FTC alleged that the appointment of Quantum’s CEO or another designee would violate Section 8 of the Clayton Act, which prohibits “interlocking directorates”—meaning officers and directors of competitors may not occupy seats on each other’s boards.  A board interlock is a per se violation of Section 8—that is, it applies regardless of any anticompetitive effect of the interlock, with only limited exceptions if the “competitive sales” of the companies are de minimis (which did not apply here).

The FTC Complaint alleges that the appointment of any Quantum director to the EQT board creates an illegal interlock because Quantum, through its portfolio companies, competes with EQT to produce and sell natural gas in the Appalachian Basin. 

The consent decree prohibits Quantum from appointing a person to the board of EQT and from having any of its partners, officers, employees, or agents serving on EQT’s board or in EQT’s management.  Similarly, EQT is prohibited from having any of its officers, directors, or agents serve in any management capacity within Quantum, any operating entity controlled by Quantum, or any investment fund managed by Quantum.  Further, the consent order prohibits Quantum from having a partner, employee, or agent serve as an officer or director at any of the top seven Appalachian Basin natural gas producers without the FTC’s prior approval.

On the same day that the FTC announced the EQT/Quantum consent decree, the Antitrust Division of the Department of Justice announced the resignations of two directors of Pinterest (an image sharing service) and Nextdoor (a neighborhood social networking platform) based on the Division’s Section 8 concerns, showing that Section 8 remains a priority at both the Division and the FTC.

Unprecedented Section 5 Claim Regarding Prospective Information Sharing

The FTC mounted a separate challenge under Section 5 of the FTC Act, alleging that a Quantum seat on EQT’s board, Quantum’s acquisition of EQT voting stock, and the TMC joint venture all constituted unfair method of competition in violation of Section 5. 

The FTC complaint alleges that a Quantum seat on EQT’s board—whether directly via the Quantum CEO or indirectly via a designee—“would provide [the board member with] access to EQT’s confidential, competitively sensitive information. . . [and] also provide [the board member] opportunity to divulge confidential, competitively sensitive information from the companies that Quantum manages or controls, and those on which Quantum enjoys representation on the relevant Board of Directors.”

The complaint further alleges that Quantum’s position as one of the largest EQT shareholders would “create opportunities and a threat that competitors will directly communicate, solicit, or facilitate the exchange of competitively sensitive information with the purpose, tendency, and capacity to facilitate collusion or coordination.”  Additionally, in light of supposed industry “signaling” activity whereby natural gas companies exhorted other companies to demonstrate capital, production, and pricing “discipline,” the FTC alleged that the purchase agreement “facilitates opportunities for EQT and Quantum to exchange non-public information to exercise capital discipline[, that is, shift focus from deploying capital to expand production volume,] and coordinate public statements relating to industry benefits from reducing output and continuing maintenance production.”  This theory of harm – that the potential for prospective information constitutes an “unfair method of competition” – is expansive, if not unprecedented.  The divestiture of Quantum’s minority interest in EQT is a similarly extraordinary remedy.  

Separately, the FTC alleged that the TMC joint venture creates additional opportunities for the exchange of competitively sensitive business information.  The complaint notes that the parties “already may use TMC as a vehicle for information exchange, either with respect to competition for the purchase of mineral rights or in connection with EQT’s future drilling plans.”  Under the joint venture, TMC was required to share information with Quantum regarding EQT’s non-public and competitively sensitive drilling plans, business strategies, operations, and bid strategies.

The consent decree requires the parties to unwind the TMC JV, including any non-compete provisions, and other restrictions.

Key Takeaways

The consent decree is notable in several respects:

• First time Section 8 is applied to LLCs/LPs: In addition to being the first Section 8 case by the FTC in 40 years, the FTC’s expansive approach here is significant. While the text of Section 8 prohibits interlocks among competing “corporations,” (15 U.S.C. § 19), the FTC brought this action against Quantum and its affiliates, all of which are LPs or LLCs.  Indeed, in a statement, FTC Chair Khan stated that the “proposed order puts industry actors on notice that they must follow Section 8 no matter what specific corporate form their business takes.”  
• First use of Section 8 to block future interlocks: While Section 8 has historically been used to unwind existing board interlocks retrospectively, and after a grace period of “one year from. . . ineligibility,” the FTC brought this action to enforce Section 8 prospectively to prohibit a future board interlock.
• First standalone use of Section 5 of FTC Act in a merger case: The consent represents the first “standalone” use of the FTC’s Section 5 authority against a transaction in decades—meaning the agency alleged an antitrust violation under Section 5 without also alleging another antitrust statute (here Section 7 of the Clayton Act) was violated. Notably, the FTC did not contest the underlying acquisition itself, but only the potential for information sharing.  This is the first major Section 5 enforcement action in a transaction since the FTC announced its expansive interpretation of its Section 5 authority in a November 10, 2022 policy statement. FTC Issues New Policy Statement on “Rigorous Enforcement” Against Unfair Methods of Competition | Crowell & Moring LLP.
• The relief is also notable in that it goes beyond unwinding a board interlock, but specifically prohibits interlocks with other companies (absent FTC prior approval), extending the FTC’s prior approval policies beyond the typical Section 7 Clayton Act consent.
• The EQT/Quantum consent illustrates the importance of corporate antitrust hygiene, especially in the context of mergers and acquisitions that may wind up in front of the antitrust authorities, when it comes to board seats and information exchanges involving industry competitors.
• Private equity buyers in particular should expect increased scrutiny during merger reviews with respect to board seats they hold in competing companies across their portfolio, especially if they are obtaining a board seat in the acquisition before the agencies.
• Merger review is a ripe opportunity for regulators to cast a keen eye on firms’ conduct beyond the transaction itself, and it is indeed during agency review that Section 8 and information sharing issues are likely to be brought to the agencies’ attention.
• Firms should consider the impact joint ventures and cross supply agreements may have on future mergers and acquisitions.
• The antitrust enforcers under the Biden Administration have demonstrated their interest in sharpening lesser-used tools in their antitrust tool belt, and this enforcement action against corporate interlocks and information sharing is yet another step in that direction.