United States: FTC Takes Broad View Of Clayton And FTC Acts In Proposed Consent Order To Prevent Interlocking Directorate And Anti-Competitive Information Exchange

On August 16, 2023, the Federal Trade Commission (FTC) took legal action to prevent an interlocking directorate arrangement and purported entanglements stemming from a deal and an existing joint venture between EQT Corporation, the nation's largest natural gas producer, and private equity entities QEP Partners LP, Quantum Energy Partners VI LP and Q-TH Appalachia (VI) Investment Partners LLC (collectively, Quantum). As alleged, both EQT and Quantum compete directly in the production and sale of natural gas in the Appalachian Basin.

The enforcement action, which will be subject to public comment and FTC finalization, underscores the FTC's efforts to put businesses on notice that it is reinvigorating enforcement of Section 8 of the Clayton Act and broadening enforcement of Section 5 of the FTC Act. This action is the FTC's first formal enforcement under Section 8 of the Clayton Act in more than 40 years and the first time in decades that the FTC has challenged a deal as a standalone violation of Section 5 of the FTC Act.

Key Takeaways

The FTC's enforcement of Section 8 of the Clayton Act is notable because it signals, with respect to interlocking directorates, a return to the FTC's approach of seeking binding prospective relief through consent orders and marks an expansion upon the remedies previously sought.

Although it has been an open question whether limited liability corporations or limited partnerships were "corporations" to which Section 8 would apply, FTC Chair Lina M. Khan stated expressly that, at least in the FTC's view, the August 16 action "makes clear that Section 8 applies to businesses even if they are structured as limited partnerships or limited liability corporations." This interpretation of Section 8 ultimately may be the subject of litigation in future cases.

With respect to Section 5 of the FTC Act, the FTC's action builds upon its November 2022 policy statement, in which it took a broad view of its power to prosecute standalone antitrust violations under Section 5 of the FTC Act, even where a transaction might not violate the Clayton or Sherman Acts.

The proposed consent order imposes several structural remedies to the FTC's concerns, including, among other things, (i) prohibiting Quantum from occupying an EQT board seat, (ii) requiring Quantum to divest EQT shares, (iii) limiting current and future entanglements between the firms and (iv) reducing opportunities for exchanging confidential and competitively sensitive significant information between Quantum and EQT, including by requiring EQT and Quantum to unwind their existing joint venture and any noncompete provisions.

The FTC's Allegations and the Relief Ordered

The FTC alleges that, in late 2022, EQT and Quantum entered into a purchase agreement, pursuant to which EQT sought to acquire two entities held by Quantum-controlled funds for cash and EQT stock, for a total purchase price of approximately $5.2 billion. This proposed transaction, which would make Quantum one of EQT's largest investors, also required EQT to "take all necessary action to facilitate" the appointment of Quantum CEO Wil VanLoh (or another Quantum designee) "to be included in a slate of director nominees recommended by the [EQT] Board" for election as an EQT director. VanLoh is, in addition to CEO of Quantum, chair of the Investment Committee for Quantum Energy Partners (Quantum's private equity subsidiary and the entity that oversees the investment decisions of Quantum Energy Partners VI LP and its subsidiaries), and he also sits on the board of directors of another natural gas company in which Quantum invests. Per the FTC, the proposed transaction would create a board interlock among competitors.

As alleged by the FTC, the proposed transaction would have deepened the "already cozy relationship" between competitors EQT and Quantum, as demonstrated by the 2020 formation of the Mineral Company (TMC), an EQT-Quantum joint venture dedicated to purchasing Appalachian Basin mineral rights that would be used exclusively by EQT. The FTC alleged that, by virtue of Quantum's ownership stake in TMC, Quantum had easy access to a rival producer's confidential business information, including EQT's mineral acquisition plans.

The proposed consent order would impose a myriad of structural remedies, including:

• Requiring Quantum to forego its right to a seat on EQT's board of directors and prohibiting Quantum from appointing any persons to EQT's board of directors, seeking or obtaining representation on EQT's board or having any of its agents or representatives serve simultaneously as an officer or director of EQT or in a decision-making capacity of any EQT entity;
• Prohibiting EQT from having any of its representatives serve simultaneously in any management capacity within Quantum, any operating entity controlled by Quantum or any investment fund managed by Quantum;
• Prohibiting Quantum, absent prior FTC approval, from serving on the board of any of the top seven Appalachian Basin natural gas producers;
• Requiring Quantum to divest its EQT shares and hold the shares in a voting trust until such divestment;
• For a period of 10 years, prohibiting Quantum from acquiring additional EQT shares absent prior FTC approval, with certain exceptions;
• Requiring Quantum and EQT to unwind TMC, including any noncompete provisions;
• Imposing further limitations on future entanglements between EQT and Quantum, including prohibiting Quantum and EQT from entering into any noncompete agreements other than those in connection with and ancillary to the sale of a business, assets or company;
• Requiring the appointment of a monitor to track compliance with the order; and
• Requiring EQT and Quantum to distribute the order to each of their respective board members, officers and directors, and to design, maintain and operate an antitrust compliance program.

Conclusion

The FTC's action highlights recent efforts by U.S. antitrust enforcers to remove purported conflicts of interest and to deter anti-competitive exchanges of competitively sensitive information. The action makes clear that the FTC is increasingly likely to enforce interlocking directorate arrangements violating Section 8 of the Clayton Act and transactions permitting communication between rival firms, access and exchange of competitively sensitive business information or influence over competitive actions or strategies as an unfair method of competition under Section 5 of the FTC Act. Firms considering such "entanglements"—including private equity firms (in particular, those focused on the life sciences industry)—should consider carefully this rapidly changing enforcement landscape.

For More Information

If you have questions about this Alert, please contact Sean P. McConnell, Brad D. Feldman, any of the attorneys in our Antitrust and Competition Group or the attorney in the firm with whom you are regularly in contact.

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