Minority shareholdings have been on the regulatory agenda of competition authorities for some time. Recent empirical studies, however, draw attention to a new, thought provoking theory of harm: common ownership by institutional investors holding small, parallel equity positions in several competing firms within concentrated industries. The European Commission has already made use of the common ownership theory in its merger enforcement practice, while the US antitrust agencies have proposed amending their merger control reporting thresholds to account for aggregate institutional holdings.
This paper, available here, reviews common ownership from the perspective of merger control. It starts with a novel distinction between two types of common ownership – ‘concentrated’, which broadly fits within existing concepts in merger control; and ‘diffuse’, which broadly encompasses the instances of common ownership that avoid merger scrutiny in jurisdictions that rely on control-based thresholds. It is this latter form of common ownership that preoccupies the contemporary debate, and falls through the gaps of competition law. The paper explores how this occurs, and argues for a reform of competition law – and merger control in particular – to close such gaps.
Part II introduces a typology of common ownership.
The criterion of ‘control’ is used in some legal systems to determine the level of ownership that triggers merger scrutiny. This paper ultimately questions the correctness of such a criterion, particularly in light of recent findings concerning common ownership – i.e. the simultaneous holding of (part of the) shares of competing firms by the same (sub)set of third-party investors.
The paper distinguishes between three different versions of common ownership. In a “full” merger or “complete” acquisition, a (set of) common shareholder-investor(s) comes to fully own and control two firms that were previously independent. In instances of ‘concentrated’ common ownership, the common shareholders have (up to) full ownership and control over one of the commonly held firms, coupled with a passive (non-controlling) interest in the other competing firm. Under ‘diffuse’ common ownership, common shareholders have a minority ownership (below 50%) in the commonly held firms. The contemporary debate on the competitive effects arising from minority shareholdings by common institutional investors falls within the paradigm of “diffuse” common ownership.
Part III examines different merger control regimes and the relevance of legal control as regards partial acquisitions.
The concept of “control” is a key foundation both for the legal definition of a notifiable merger transaction, and for the economic theories of harm associated with mergers and acquisitions. The underlying economic logic is that “in most horizontal mergers, two competitors come under common ownership and control, completely and permanently eliminating competition between them”. In contrast, the treatment of “minority” acquisitions varies greatly across merger control regimes. In general, the potential anticompetitive effects of “non-controlling” or purely “passive” shareholdings are not considered likely, material or predictable enough to justify scrutiny of all minority shareholding transactions under merger control procedures.
This section provides an overview of the diverse legal thresholds for merger control in a number of major jurisdictions (EU, Germany, UK, U.S.). The most conservative is the EU approach that employs a “decisive influence” test to determine which transactions fall within its merger control regime. A number of European jurisdictions, such as Germany, Austria and the UK, apply lower control thresholds that focus instead on the possibility of a shareholder exerting material influence over the target. The US merger control regime is the most far-reaching. In the United States, any acquisition of stock is subject to scrutiny and may be challenged under Section 7 of the Clayton Act, where the effect “may be substantially to lessen competition”.
Part IV analyses the competition effects of partial and common shareholding and possible channels of transmission.
While it is commonly thought that non-controlling or silent shareholdings are innocuous at very low levels, this conclusion is misguided. The potential competition effects of partial acquisitions are the product of three particular factors: i) market structure, ii) ownership structure, and iii) governance structure.
Minority shareholdings’ threat to competition is not continually present or substantial. However, there are situations where minority shareholdings are more likely to lead to anticompetitive effects. This is particularly the case for concentrated markets and widely held public corporations. Specifically, in oligopolistic markets with high entry barriers, shareholding links between (all) actual or potential competitors may have clear competitive implications, as they are likely to lead to reduced output and higher prices. Estimating the “degree of internalisation” of rivals’ profits (i.e. the “profit weight”) due to partial or common shareholding is a critical starting point for unilateral and competitive effects analysis. In the case of common ownership, these weights are theoretically linked to, and may increase (or decrease) with portfolio diversification, investor concentration and market concentration, i.e. as a function of ownership, governance and market structure.
The mechanics of anticompetitive effects become particularly clear in instances of acquisition of a purely financial interest in a rival by a firm’s “controller” as a passive investor (i.e. a ‘concentrated’ common ownership scenario). The competitive effects of such passive investment by a firm’s controller (be it a dominant shareholder or a manager) are more serious and concerning when the controller’s stake in its controlled firm is smaller (e.g. less than full ownership while still keeping control) because of a “dilution effect”. By diluting its stake in the firm it controls, the controller effectively commits to place relatively less weight on its controlled firm, and thus more weight on its passive stake in the rival. The controller, precisely because it is in a position of sole control, may “self-manipulate” its ownership stake in the controlled firm to the level of its choice considering the profit maximisation calculus that is most beneficial to itself (rather than the company and its shareholders as a whole).
Part V addresses plausible anticompetitive strategies by common owners.
The driver of the anticompetitive effect of common ownership is strategic competition (oligopolistic market interactions) and the opportunity cost created by acquiring partial or common shareholdings (selective passivity) – a form of self-commitment to profit sharing with rivals. Although this strategy may entail suboptimal management performance, this is tolerable as the overall value to common owners from this ownership and institutional structure is presumably higher.
This model may fit well index investment funds (with a minimum cost governance model) and diversified shareholders across firms who rationally diversify their stock portfolios (“passive” diffuse common ownership). This amounts to a form of corporate control that is partial (given diffuse corporate ownership, no single shareholder controls the company), factual (instead of meeting legal standards of corporate control), and sharedbetween the common owners-shareholders and other groups with (partially) heterogeneous goals (undiversified shareholders, managers).
While common ownership does not strictly rely on joint control as in a merger or joint venture scenario, the full internalisation of rivals’ profits will functionally have the same effect. This is why one needs to move from a focus on ‘control rights’ to ‘parallel interests’ in instances of “diffuse” common ownership. The absence of large dominant shareholders within firms and the presence of wide-spread common ownership links across firms in an oligopolistic industry should warn us to be on the lookout for anticompetitive effects. Given this, index funds with a highly diversified and wide portfolio of companies, relatively large shareholdings in particular firms compared to small, individual investors, and relatively symmetric stakes across the leading competing firms in an industry are the best fitting candidate for the theory of anticompetitive harm and strategies.
Part V rounds up with policy implications and recommendations for merger control.
The main conclusion is that the focus on ‘control’ as a threshold in merger control and competition enforcement is misguided, particularly because it is under-inclusive. Unilateral effects may flow solely from anticompetitive incentives linked to purely financial interests without any influence or control being required; and the pervasiveness of ‘diffuse’ common ownership means that thresholds based on corporate control, while relevant for instances of ‘concentrated’ ownership, loses a significant part of its usefulness. It follows that ‘control’ is a useful (and theoretically robust) but imperfect proxy for determining whether a specific type of corporate transaction has the potential to cause competitive harm, particularly in cases of common minority shareholding (“diffuse” common ownership).
To address the ills of common ownership, competition law (and merger control) need to adapt. Competition law should recognise and clearly differentiate between different types of common ownership by reference to their underlying risks. In other words, one should distinguish between ‘concentrated’ and ‘diffuse’ common ownership when applying merger control law, and subject the former to stricter scrutiny. At the same time, one should recognise that the competition concerns linked to diffuse common ownership are important, and investigate the mechanisms that may lead to manifestation of such concerns in individual cases.
To achieve this we may need to make changes to existing merger control rules. Until then, one way in which this change of approach can happen is by taking the concerns identified above into account in the control of transactions involving portfolio companies of common owners. The context specific manifestation of competitive harm flowing from diffuse common ownership points towards case-by-case analysis rather than across-the-board structural solutions. Agencies may wish to rely on modified versions of structural and price pressure indices often employed in merger review that better reflect the effects of common ownership.
This is a very interesting paper which takes a different tack from most of the literature on common ownership. Instead of starting from an assumption that competition law as it stands can address common ownership concerns, it starts from an analysis of competition law (and particularly merger control) to identify its limitations in addressing such concerns. The result is a really insightful analysis of how merger control can address concerns arising from minority holdings in different jurisdictions, and the types of changes that may be required to effectively address common ownership harms.
At the same time, I wish the paper could be tightened before publication. My main reaction to this fairly long paper is that its main thesis could have been outlined more clearly. In short: existing mechanisms to review the competitive effects of changes in corporate ownership are ill suited to address anticompetitive concerns flowing from common ownership, particularly of the diffuse kind. The main reason for this is ongoing reliance on changes of ‘control’ as a threshold for triggering review. This reliance creates a gap that immunises common ownership from scrutiny despite its anticompetitive effects. This can be illustrated by distinguishing between full mergers (subject to review), concentrated common ownership (where there are particular risks of anticompetitive effects) and diffuse common ownership (where there are risks of anticompetitive effects if certain conditions are met).
In tightening the paper, I think the author could make better use of the analytical categories she delineates in section 2. These are obviously simplified instances of common ownership, and I expected her to build her analysis around each. Instead, it is unclear what role each category plays in the rest of the paper, other than for the author occasionally to cross-refer back to them.
On a related point, I think the concept of ‘control’ is used a bit too loosely in this paper. It has specific connotations, and the mere existence of some shareholding with the potential to influence corporate behaviour would not seem to amount to control for competition law purposes. I understand that one of the objectives of the author is to flag how different disciplines use different concepts of corporate control (e.g. in economic discourse, in corporate law and even between different merger control regimes), but this could be outlined more clearly. Such clarification would also help discuss what legal changes would be required to ensure that competition law is able effectively to control the anticompetitive effects flowing from the economic influence of common owners.
This would also allow her to do something I was expecting to see in the last section: provide an example of specific changes that one of the regimes analysed in section 3 (probably the EU’s, since it is the most conservative one) should adopt in order better to address the challenges flowing from common ownership. Maybe these last two elements – namely, a systematic identification of the conceptual changes required for competition law to have jurisdiction over problematic forms of common ownership, and specific proposals for individual jurisdictions – could provide the basis of a follow up paper.