Navigating the complex landscape of interlocking directorates in India

Aparna Mehra
Shardul Amarchand Mangaldas & Co
aparna.mehra@AMSShardul.com

Krithika Ramesh
Shardul Amarchand Mangaldas & Co
krithika.ramesh@AMSShardul.com

Sarthak Mishra^[1]
Shardul Amarchand Mangaldas & Co
sarthak.mishra@AMSShardul.com

Introduction

In a recent landmark decision,^[2] the Competition Commission of India (CCI) examined the competitive effects arising from a prominent private equity player’s acquisition of a stake in a tech company, when it already had an existing stake in another tech company. The crux of the matter? The CCI’s worry was that this deal could soften the competitive edge between the investees or could lead to potential exchange of competitively sensitive information between the two. Remedial measures emphasising non-interference with one of the competing investee companies were accepted. This sets the stage for a deeper dive into the role of common directors in investee companies, exploring how their shared positions could influence competitive dynamics beyond mere investment overlaps.

This concept under the antitrust regime is that of interlocking directorates which occur when a single individual serves on the boards of directors of two or more different companies, a practice typically present in scenarios of common ownership. This practice can raise competition concerns, especially when these companies are competitors in the same market. While the Companies Act 2013 allows for common directors, emphasising their fiduciary responsibility (which implicitly includes restrictions on the sharing of confidential information), the reality of enforcing these provisions is complex. Detecting this information exchange/coordination on part of the director/investee company remains a challenge for competition authorities. The CCI therefore approaches its review of mergers with a priori concerns of the possibility of common influence such as information exchange and the risk of coordinated effects.

This prompts an important question: have the detrimental effects of interlocking directorates been conclusively established, or do they, in certain scenarios, contribute to a more dynamic and efficient market?

Comparative analysis between the US, the EU and India

The treatment of interlocking directorates varies significantly across the US, EU and India. The US’ Clayton Act explicitly prohibits interlocking directorates in competing companies, intended to prevent the exchange of competitively sensitive information and coordination that could harm the economy, demonstrated by high-profile cases such as those involving Google and Apple, where directors resigned to comply with the law.^[3] In October 2022, the US Department of Justice announced the resignation of seven directors from five companies in response to concerns raised by the Antitrust Division, reflecting a renewed interest in the enforcement of interlocking directorates.^[4] Furthermore, proposed changes to the Hart–Scott–Rodino Antitrust Improvements Act now call for a detailed disclosure of officers, directors and board observers across acquiring and acquired entities enabling review and the screening of interlocking directors prior to the implementation of a proposed transaction.^[5] This information would allow the antitrust agencies to know of existing, prior or potential interlocking directorates and to assess the competitive implications of such relationships.

Conversely, the EU does not have a specific provision against interlocking directorates but assesses them on a case-by-case basis. Remedies in the EU often involve companies offering commitments to resolve concerns stemming from interlocking directorates. Similarly, India’s Competition Act 2002 does not explicitly ban interlocking directorates but, like the EU, the CCI has more actively engaged with their impact in merger control cases.

Case studies from the CCI

The CCI’s approach to interlocking directorates, especially in the context of private equity investments, reflects a keen interest in the potential for anti-competitive behaviour. In the recent past, the CCI has examined two cases involving private equity players on concerns of common ownership, which are discussed below.^[6] Furthermore, in cases such as Northern TK/FHL^[7] and Nippon/Kawasaki,^[8] the CCI scrutinised arrangements where the acquirers (directly or through portfolio companies) and the targets were competitors in the same market. The concerns centred on the possibility of collusion and exchange of competitively sensitive information due to common directorships. To mitigate these risks, the parties in these cases offered commitments such as ensuring no common directors between competing entities and establishing rules of information control.

The 2020 ChrysCapital/Intas case along with the 2023 GA/Acko Tech case further show the evolving regulatory stance of the CCI.

ChrysCapital/Intas case

In 2020, ChrysCapital sought to increase its stake in Intas Pharmaceuticals. However, the CCI identified potential anti-competitive risks due to ChrysCapital’s existing investments in Intas’ competitors, ie, other competing pharmaceutical firms. One of the major points of concern was the presence of interlocking directorates, where ChrysCapital had the right to appoint board members in companies that were direct competitors to Intas, raising fears of anti-competitive coordination. To mitigate these concerns, ChrysCapital made several commitments, including the removal of a director from a competitor’s board and imposing restrictions on the use of sensitive information.

GA/Acko Tech case

In 2023, in the GA/Acko Tech case, the CCI closely scrutinised the private equity player General Atlantic’s (GA) acquisition of an additional stake in Acko Tech, particularly due to GA’s existing investment in NoBroker (a player in the market for society/gated community management solutions). Acko Tech had a stake and board observer rights in Vivish Technologies (Vivish), which operated MyGate, a competitor to NoBroker. The CCI was concerned that this deal could soften competition between NoBroker and Vivish who were both significant players in society/gated community management solutions. To address these concerns, GA proposed voluntary modifications, including non-involvement in matters related to Vivish, refraining from accessing non-public information about Vivish, and not influencing any appointments by Acko Tech. This modification, in effect, also restricted GA’s ability to appoint a common director on the boards of Vivish and NoBroker, and would be applicable as long as GA had a stake in NoBroker. Based on these voluntary commitments, the CCI approved the transaction, concluding it was unlikely to adversely affect competition in India.

The Google/Airtel case

The Google/Airtel case,^[9] while not directly addressing interlocking directorates, highlights concerns around sensitive data sharing – a critical issue also pertinent to scenarios involving common ownership/interlocking directorates. The CCI raised concerns regarding information sharing in Google’s minority investment in Airtel, particularly due to possible sensitive data exchange with Jio, another of Google’s investments. Google addressed these issues by establishing a firewall to limit information flow and amending parts of the Co-Marketing Agreement to prevent data sharing.

These cases reflect the CCI’s cautious approach in examining risks of coordination/collusion in transactions involving common shareholders. However, is it possible that common ownership can enhance, rather than hinder, competitive dynamics?

The complex reality

The perception that common ownership leads to anti-competitive behaviour lacks substantial empirical support. A 2014 study critically examines the relationship between interlocking directorates and collusion in Europe.^[10] Contrary to common assumptions, it finds that interlocking directorates rarely lead to collusive activities. Utilising network analysis and a dataset of EU cartel cases, the study reveals that only a few instances of collusion involved companies previously connected via interlocking directorates. This suggests that, especially in a regulatory environment which remains vigilant against anti-competitive practices, interlocking directorates may not be a prevalent or an effective tool for facilitating collusion, with their potential impact on cartels being far less significant than previously thought. Therefore, if cartel cases do not demonstrate a clear link between interlocking directorates and anti-competitive behaviour, this suggests that the regulators should, on balance, not necessarily intervene in such arrangements in merger control cases, especially considering evidence that they may lead to efficiencies.

Furthermore, the impact of common ownership on competition is complex. For instance, if an investor holds stakes in two competing firms, it is simplistic for the antitrust authorities to assume that both firms would collude to increase prices or reduce quality. The investor only owns a portion of each firm, diluting the potential for anti-competitive behaviour. Moreover, non-common shareholders and directors who stand to lose from any collusion that benefits a rival would likely oppose such practices. That said, it is equally likely that the non-common directors will be unable to detect the collusion by the common directors. This complexity is further enhanced by the firm’s internal incentive structures. Directors/managers typically aim to maximise the firm’s individual revenues, aligning with non-common shareholders’ interests. This objective may take precedence over any theoretical benefit common shareholders might gain from reduced competition. Additionally, corporate governance mechanisms, like fiduciary duty suits, play a critical role in ensuring that directors/managers act in the best interest of the firm, countering any potential influence from common ownership.

Another study has also shown that the role of common ownership also extends significantly into fostering innovation.^[11] The study pertained to the pharmaceutical industry, involving over a thousand drug projects, and revealed that innovation efficiency could be enhanced when venture capital firms had stakes in multiple competing start-ups. By strategically redirecting investments from less promising ventures to those with higher potential, the venture capital firms not only optimised resource allocation but also encouraged startups to diversify their projects, thereby reducing redundant research and development (R&D) efforts. This approach, correlating with a higher ratio of Food and Drug Administration approved drugs to funding, suggests that common ownership can effectively minimise inefficient duplication in R&D, addressing a crucial market failure in patent races.

Thus, while common ownership poses theoretical concerns, its real-world impact on competition needs to be tested in individual cases. The interplay of shareholder interests, management incentives, and corporate governance structures creates a balance that might not only maintain competitive dynamics but could also potentially foster innovation.

Conclusion

Empirical evidence is paramount in gauging the true impact of interlocking directorates and common ownership. Without empirical evidence to back it up, remedies like director removal might be excessive, leading to reduced investments – a critical aspect as India seeks to attract more international investment. Such stringent measures could deter and disincentivise inbound investments, which are essential for economic growth. Introducing less onerous guardrails such as introducing stricter information exchange controls, recusing directors from taking part in certain decisions, and increasing competition compliance awareness through training at the managerial level, could be solutions worth exploring. Moving forward, while the CCI is navigating these complexities, a balanced assessment by the CCI and proactive compliance by companies, will be the key to balance healthy competition with the potential benefits of common ownership and interlocking directorates.