Wall Street Journal
Board Ties Begin to Trip Up Companies
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.
![[SEARS]](http://sg.wsj.net/public/resources/images/MK-BC242_SEARS_NS_20100407211640.gif)
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.
That move occurred two months after Google Chief Executive Eric Schmidt dropped his Apple board seat after facing the same scrutiny.
"This issue has not been brought up before in the governance debate as much as it should have been," said Espen Eckbo, director of the Center for Corporate Governance at Dartmouth College's Tuck School of Business. "It's the next level of debate."
Richard Feinstein, director of the FTC's Bureau of Competition, said his agency is "not devoting a disproportionate attention to it, but we are paying attention, as we should be. This is a law we are charged with enforcing."
Two Sears investors, the Robert F. Booth Trust and Ronald Gross, sued in August, saying that board member William C. Crowley violated the Clayton Act by simultaneously sitting on the boards of competing companies: Sears, as well as AutoNation Inc., and AutoZone Inc.
As part of a settlement, Mr. Crowley will not seek re-election to his Sears board seat at next month's annual meeting. He also will step down from his executive position at Sears. He has served as executive vice president and chief administrative officer since 2005.
In addition, Mr. Lampert agreed not to participate in discussions about the company's automobile and related services businesses due to his ESL Inc. hedge fund's large stakes in Sears, AutoNation and AutoZone.
Also, Sears director Ann N. Reese agreed not to take part in talks about women's apparel, due to her board position at Jones Apparel Group Inc.
AutoNation, AutoZone and Jones all said they didn't see any problems with directors' potential conflicts of interests.
Sears's settlement, which includes payment of the plaintiffs' legal fees, must be approved by a judge. Representatives for the plaintiffs didn't return calls seeking comment.
Ralph Ward, author of governance books and editor of the newsletter Boardroom Insider, says the restrictions could hurt Mr. Lampert's chairmanship and "hobble his effectiveness" in running the Sears board. "Essentially, he has amputated one good chunk of his value to the board as executive chairman." Genzyme, in raising doubts about two of Mr. Icahn's nominees, cites its blood cancer treatments Campath and Fludara, which compete with Rituxan, sold by Biogen and Roche. Sales figures for the Genzyme drugs aren't publicly disclosed, and it is unclear how much they overlap with Rituxan's total 2009 sales of $5.9 billion.
Genzyme believes the conflict exceeds the levels outlined in the Clayton Act. The law has several conditions, including whether sales overlap more than 2% at one company and at least 4% at the other company. "It is an issue that we are taking very seriously," said Peter Wirth, Genzyme's executive vice president.
A Biogen spokeswoman declined to comment, except to say that the company's board "has a process to address conflicts that arise." Officials from Mr. Icahn's office declined to comment.
—Thomas Gryta contributed to this articleAccess Content Source: http://online.wsj.com/article/SB10001424052702303591204575170261738319340.html?mod=WSJ_hpp_sections_business
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.
That move occurred two months after Google Chief Executive Eric Schmidt dropped his Apple board seat after facing the same scrutiny.
"This issue has not been brought up before in the governance debate as much as it should have been," said Espen Eckbo, director of the Center for Corporate Governance at Dartmouth College's Tuck School of Business. "It's the next level of debate."
Richard Feinstein, director of the FTC's Bureau of Competition, said his agency is "not devoting a disproportionate attention to it, but we are paying attention, as we should be. This is a law we are charged with enforcing."
Two Sears investors, the Robert F. Booth Trust and Ronald Gross, sued in August, saying that board member William C. Crowley violated the Clayton Act by simultaneously sitting on the boards of competing companies: Sears, as well as AutoNation Inc., and AutoZone Inc.
As part of a settlement, Mr. Crowley will not seek re-election to his Sears board seat at next month's annual meeting. He also will step down from his executive position at Sears. He has served as executive vice president and chief administrative officer since 2005.
In addition, Mr. Lampert agreed not to participate in discussions about the company's automobile and related services businesses due to his ESL Inc. hedge fund's large stakes in Sears, AutoNation and AutoZone.
Also, Sears director Ann N. Reese agreed not to take part in talks about women's apparel, due to her board position at Jones Apparel Group Inc.
AutoNation, AutoZone and Jones all said they didn't see any problems with directors' potential conflicts of interests.
Sears's settlement, which includes payment of the plaintiffs' legal fees, must be approved by a judge. Representatives for the plaintiffs didn't return calls seeking comment.
Ralph Ward, author of governance books and editor of the newsletter Boardroom Insider, says the restrictions could hurt Mr. Lampert's chairmanship and "hobble his effectiveness" in running the Sears board. "Essentially, he has amputated one good chunk of his value to the board as executive chairman." Genzyme, in raising doubts about two of Mr. Icahn's nominees, cites its blood cancer treatments Campath and Fludara, which compete with Rituxan, sold by Biogen and Roche. Sales figures for the Genzyme drugs aren't publicly disclosed, and it is unclear how much they overlap with Rituxan's total 2009 sales of $5.9 billion.
Genzyme believes the conflict exceeds the levels outlined in the Clayton Act. The law has several conditions, including whether sales overlap more than 2% at one company and at least 4% at the other company. "It is an issue that we are taking very seriously," said Peter Wirth, Genzyme's executive vice president.
A Biogen spokeswoman declined to comment, except to say that the company's board "has a process to address conflicts that arise." Officials from Mr. Icahn's office declined to comment.
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http://dreamlearndobecome.blogspot.com This posting was made my Jim Jacobs, President & CEO of Jacobs Executive Advisors. Jim also serves as Leader of Jacobs Advisors' Insurance Practice.
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