By MIGUEL BUSTILLO And JOANN S. LUBLIN
More companies are running up against a law that prohibits corporate directors from sitting on boards of their rivals.
On Tuesday, Sears Holdings Corp. announced that one board member would vacate his seat and that Chairman Edward S. Lampert will abstain from some discussions after a shareholder lawsuit alleged violations of the law. In a proxy filing this week, Sears said that while it still disputed claims that its board members were conflicted, it was taking action in order to avoid a protracted legal battle.
The federal law, called the Clayton Act, is also being used strategically by some companies to try to thwart efforts by activists to gain board seats. Genzyme Corp. said an effort by activist investor Carl Icahn’s to gain seats on the board could violate antitrust rules because two of his nominees already serve the same role at fellow biotech firm Biogen Idec Inc.
The act, passed in 1914, bars “interlocking directorships” in order to preserve competition, and to avoid possible collusion or exchange of sensitive pricing information between rivals. These days, potential conflicts are popping up as hedge funds, private-equity firms and venture capitalists take significant positions in multiple, and often, related companies.
As scrutiny increases, companies will have to think twice about prospective directors with seats on rivals’ boards, corporate-governance experts said.
The Sears situation “is going to be another wake-up call for boards to pay more attention to the interlock provisions of the Clayton Act not only when they recruit directors but on a continuing basis,” said John Olson, a senior partner at law firm Gibson, Dunn & Crutcher LLP in Washington, who advises boards and isn’t involved in the suit.
Potential conflicts posed by the Clayton Act flared last year at Google Inc. and Apple Inc. Arthur Levinson, chairman of Roche Holding AG’s Genentech, resigned from Google’s board last October amid a Federal Trade Commission probe into his membership on both the boards of Google and Apple, which are competing in a growing number of areas