(iii) Corporations engaged in international banking operations that have entered into an agreement with the Federal Reserve Board under section 25 of the Federal Reserve Act;

(iv) A bank, banking association, savings bank, or trust company in which more than 50 percent of the common stock is owned, directly or indirectly, by the same persons who, directly or indirectly, own more than 50 percent of the common stock of the member bank;

(v) Any bank, banking association, savings bank, or trust company, and any of its branches, that are not located in the same, or contiguous, city, town, or village as the member bank;

(vi) Any bank, banking association, savings bank, or trust company that is not engaged in the same class or classes of business as the member bank;

(vii) A mutual savings bank with no capital stock.

(c) The August 23, 1935 amendments permitted any director, officer or employee to continue, until February 1, 1939, in any interlocking relationship that, prior to the amendment, had been lawful.

(3) Interlocks not covered.-The prohibitions of the statute do not apply to banking institutions located in the United States but organized under the laws of foreign countries. Nor do they apply to mutual savings banks, Federal savings and loan associations, and Federal credit unions. The prohibitions apply only to horizontal interlocks that affect the types of banking organizations listed. There is no prohibition in the statute against indirect horizontal interlocks or against either vertical or horizontal, direct or indirect, interlocks between the banking organizations and other types of corporations.

b. Industrial and commercial corporations

The provisions in section 8 that bar interlocking directorates in corporations other than banks, banking associations, trust companies, and common carriers, have not been changed since enactment in 1914. (1) Interlocks prohibited. In pertinent part, the provisions that relate to industrial and commercial corporations are as follows:

no person at the same time shall be a director in any two or more corporations, any one of which has capital, surplus, and undivided profits aggregating more than $1,000,000, engaged in whole or in part in commerce, other than banks, banking associations, trust companies, and common carriers subject to the Act to regulate commerce, approved February fourth, eighteen hundred and eighty-seven, if such corporations are or shall have been theretofore, by virtue of their business and location of operation, competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the provisions of any of the antitrust laws. *** 23

Unlike the banking provisions, industrial and commercial interlocks that are made by "officers" and "employees" are not affected by section 8. The size test makes the provision inapplicable to small companies with less than $1 million in capital, surplus, and undivided profits. Further, only horizontal interlocks between such corporations in interstate commerce are affected. The prohibition applies only to corporations that in the past have been, or presently are, such competitors that an agreement to eliminate competition between them would constitute a violation against the antitrust laws.

23 15 U.S.C. 19 (1958).

The statute does not require a demonstration that competition in fact has been adversely affected. This provision seeks to avert a reduction in competition that exists between relatively large corporations. It is narrow in scope and is based on the virtually inescapable conclusion that meetings of directors under the conditions prohibited necessarily would impair the vigor of competition.

(2) Exemptions.-By its terms, the provision does not apply unless at least one of the corporations involved has capital, surplus and undivided profits that aggregate more than $1 million. Nor does it apply to interlocks with banks, banking associations, or trust companies, or with common carriers that are subject to the provisions of the Interstate Commerce Act.

With respect to the industrial and commercial interlocks subject to its prohibitions, however, section 8 is absolute. There is no provision, and no procedure is authorized to be established, by which an otherwise prohibited interlock may be approved by an administrative body or other official after a showing of compliance with some legislatively approved standard.

(3) Interlocks not covered.-Common directors on the boards of industrial and commercial corporations that are potential, rather than actual, competitors are not reached by section 8. As a result, companies that readily could become competitors, but for the existence of an interlock, may be led into other fields. Developments in technology and the increased availability of funds have, in the postwar period, resulted in a greatly accelerated trend toward diversification by the larger and more sophisticated corporate organization. Decisions bearing upon diversification into new fields, and the consequent development of competition in the new areas, can be diverted by the participation of a director who also is interested in protecting a corporation that is presently operating in the new field.

Section 8 applies only to the situation where the same individual serves on the boards of two corporations; it does not apply where a director of one corporation is a major officer or employee of the other company.

Indirect interlocks, similarly, are not covered, notwithstanding the fact that such relationships may dilute competition as much as the direct interlock that is prohibited. In the situation where each of two corporations has a director on the board of a third corporation, competition between the two may be adversely affected, and if the third corporation is a potential competitor of both, the effect may be to impair the vigor of competition in all three companies.

Perhaps the most significant exclusion, however, is the failure of section 8 to apply to vertical interlocks that involve the managements of an industrial or commercial corporation and its suppliers or customers. Access to a secure supply of scarce materials, or to assured marketing channels, are among the most significant influences on the success of a business. Where these vital activities involve interlocking managements, there is opportunity for the inside dealing and for the abuse of confidential information that all too frequently result in the sacrifice of the vitality of the corporations involved to the private gain of individuals. Even where no abuses result from the conflicting interests, preferential treatment among the interlocked corporations impairs competition with the outside firms trying to break into the supply

chain. This aspect of vertical management links is important in the supply of credit and other financial services by banks and financial institutions. Preferential access to credit that results from favored management ties may severely handicap other concerns that seek credit and financial services.

4. ANALYSIS OF SECTION 10

Section 10 of the Clayton Act applies to management interlocks that involve common carriers subject to the Interstate Commerce Act; that is, railroads, oil pipelines, water carriers, and motor carriers. Section 10's prohibitions fundamentally differ from the rules in section 8 in that they are concerned with vertical interlocks, but not with horizontal interlocks. In fact, Congress made no provision to prohibit horizontal management interlocks among railroads until 1920, with the enactment of the Transportation Act of 1920.24

Another difference is the existence of a separate penalty for violation of section 10's provisions. Section 10 contains a criminal penalty while section 8 is enforced by injunctive relief only. The penalty provisions of section 10 provide for a fine not to exceed $25,000 for carriers, and not to exceed $5,000 for directors, agents, managers, or officers, who knowingly voted for the act that constituted the violation, or who aided or abetted in such violation. Such individuals are also subject to confinement not to exceed 1 year. Enforcement of the penal provisions of section 10, in the first instance, rests with the ICC. Section 10 requires that prohibited transactions be reported to the ICC within 30 days after occurrence. If the Commission, after investigation or hearing, should have reason to believe that there has been a violation, it is required to transmit all papers or documents, together with a statement of its own views or findings, to the Attorney General for prosecution.

Section 10 also differs from section 8 in the persons that are subject to its prohibitions. Section 10 applies to a common carrier's director, president, manager, purchasing officer, selling officer, or agent, who serves at the same time as a director, manager, purchasing officer, selling officer, or “** "*** who has any substantial interest in ** *the other organization that is involved in the prohibited transaction. This includes more management individuals than section 8 does in the case of industrial and commercial corporations, where only "directors" are included, but not as many as in the case of banking organizations, where "directors," "officers," and all "employees" are included. Neither of the classes of persons covered by section 8, however, include a person who is identified by the test of having any "substantial interest" in the other interlocked organization.

a. Interlocks prohibited

In the language of the statute, section 10 prohibits the following management ties:

no common carrier engaged in commerce shall have any dealings in securities, supplies, or other articles of commerce, or shall make or have any contracts for construction or maintenance of any kind, to the amount of more than $50,000, in the aggregate, in any one year, with another corporation, firm,

24 41 Stat. 494 (1920) amended 49 Stat. 543, Aug. 9, 1935; and 64 Stat. 487, Aug. 2, 1949; 49 U.S.C. 20a (12).

partnership, or association when the said common carrier shall have upon its board of directors or as its president, manager, or as its purchasing or selling officer, or agent in the particular transaction, any person who is at the same time a director, manager, or purchasing or selling officer of, or who has any substantial interest in, such other corporation, firm, partnership, or association, *** 2

The foregoing provision encompasses three types of vertical transactions: (1) dealings in securities; (2) the sale of supplies and other articles of commerce; and (3) contracts for the provision of construction or maintenance services that aggregate more than $50,000 in any one year.

b. Exemptions

Section 10 permits transactions that occur concurrently with the prohibited management ties when such purchases or dealings are made with a bidder whose bid is most favorable to the common carrier and who has complied with ICC procedures for the regulation of competitive bidding. Section 10 itself requires that all bids, to be eligible for consideration, disclose information which will identify the officers, directors, managers, or agents involved in the transaction. Section 10 also, with respect to the bidding procedures, provides that any person who directly or indirectly attempts to do, or does, anything to prevent anyone from bidding, or to prevent free and fair competition among bidders and those desiring to bid, shall be subject to its penalty provisions applicable to an officer or director.

5. CONCLUSION

It is apparent that Congress, when it enacted the Clayton Act rules to govern the management interlocks that affect the three classes of corporations involved had neither an integrated approach nor a consistent policy. Divergences in coverage and in treatment manifest the exploratory and experimental nature of the legislation. Congress apparently was reluctant to go beyond the specific management abuses that had been defined at that time and promulgate a consistent policy that would define and deal with the root of the problem. Whether this reluctance was a recognition that interrelated management controls in the burgeoning corporate structures that characterized the American business scene at the turn of the century provided public benefits as well as private abuses, or whether it was merely a reflection of the entrenched power that had already been garnered by the operators of the "trusts," at this time, can only be surmised. In any event, it is clear, notwithstanding the assertions that in the interlocking directorate provisions an attempt had been made to carry out the recommendations that had been made by President Wilson, the result fell far short of the legislative goals that had been requested.

President Wilson had asked that Congress prevent interlocks of personnel in the management of great corporations, including banks and railroads, industrial, commercial, and public service bodies which (1) "*** in effect result in making those who borrow and those who lend practically one and the same" (vertical interlocks between banking corporations and all other types); (2) "*** those who sell and those who buy but the same persons trading with one another under different names and in different combinations" (vertical inter

25 15 U.S.C. 20 (1958).

locks between purchasers and suppliers); and (3) "*** those who affect to compete in fact partners and masters of some whole field of business" (horizontal interlocks between ostensible competitors).26 Section 8 does not give any effect to President Wilson's first request for bars to vertical management interlocks that involve banks, and his second request was fulfilled in section 10 only as to vertical interlocks involving common carriers.

When H.R. 15657 was reported to the House, there were a series of minority reports from the Judiciary Committee that reviewed what were then considered to be deficiencies in the provisions on interlocking directorates. In his statement of minority views, for example, Representative Nelson of Wisconsin asserted that Congress had dealt with only one form of corporate control and had left other forms uninhibited. With respect to the section on interlocking directorates, he stated:

27

Section 9 deals with the evil of interlocking directorates. Such interlocking directorates have been one of the means employed for the building up of a powerful money trust, dominating many great industries. But interlocking directorates are but one of many manifestations of the real evil-the interlocking control of corporations in the same or allied fields of business. *** The interlocking control is the vice, and it should be prevented, no matter how it may be manifested. There may be some doubtful advantage in forcing big business to substitute dummy directors for interlocking directorates; but certainly this does not solve the great evil of the Money Trust. There may be interlocking control although there are no interlocking directorates, and while it continues there will be no real competition.

Every paragraph in this section has the vice of striking at a form of the evil and not at the root of the evil itself. * * #28

B. ANCILLARY LEGISLATION AND IMPLEMENTING REGULATIONS

Prohibitions against interlocking corporate managements are not confined solely to the Clayton Act. In connection with the organization and operation of administrative bodies to supervise and regulate, to varying degrees, entry, prices, conduct, and practices in those industries where, because of scarcity in one or more vital industry factors, the normal forces of competition are found, or are believed, to be ineffective to protect the public interest, Congress has enacted provisions that give the administrative body authority to regulate or approve interlocking management relations that otherwise it would prohibit. In general, the regulated industry statutes prohibit specified types of interlocking management positions, and provide an exempting mechanism whereby these relationships may be condoned by the administrative body if found to be in accord with a standard that is established in the statute. Generally the administrative body is empowered to prescribe the procedures that must be followed by the parties who seek approval of otherwise forbidden arrangements. The various statutes differ substantially in the type of interlocking relationships prohibited, the persons subject to the prohibitions, the standards that the agency applies in its determination to grant its approval, and the policies followed by the agency in its treatment of the problem.

H. Rept. 627, supra, note 7, p. 18; S. Rept. 698, supra, noté 11, p. 14. 7 H. Rept. No. 627, pt. 3, 63d Cong., 2d sess., May 13, 1914.

23 Ibid., p. 8.