It Takes Two to Tango: Interlockings and Partial Equity Ownership

This paper investigates the role of interlocking directorates as a pre-deal mechanism in minority equity acquisitions between firms competing in the same product market. The potential gain from such transactions depends on the target firm’s private intrinsic value, which the acquiring firm must assess under conditions of adverse selection. As an alternative, the acquirer may propose that one of its executives join the target’s board to facilitate information disclosure. For this arrangement to succeed, however, the target must consent to the proposal. To analyze this mechanism, we develop a novel theoretical framework that identifies the conditions under which interlocking directorates arise and determines the equilibrium terms of the minority equity acquisition. The findings have important antitrust policy implications. An interlocking directorate is not necessarily part of a collusive arrangement, yet it may represent an initial step toward minority equity participation among competing firms in the same market.