Interlocking directorates (or interlocks) arise when a director of one company also sits on the Board of Directors (Board) of a competing company. For example, Mr. A serves on the Boards of competing companies, X Private Limited and Y Private Limited (like Coke and Pepsi).
The concept of interlocks also extends to directors appointed by a common investor to the Boards of competing companies. For example, a private equity investor, has investments in competing companies X Private Limited and Y Private Limited, appoints Mr. A and Mr. B on the respective Boards, which leads to interlocks.
One of the factors that drives competition in the market is uncertainty or lack of transparency which drives innovation, as companies want to stay ahead of each other. Interlocks can raise competition concerns by facilitating exchange of sensitive information between companies related to prices, business strategies, sales quantities, product plans etc. which reduces market transparency and results in subsequent collusion between companies, thereby dampening competition. Thus, as a result of interlocks, the competitive force of uncertainty will not be as strong as it was.
Please click here to read the full article by Ela Bali and Aditi Khanna, published in Mondaq.