This article, available here, argues that new economic proofs and empirical evidence show that horizontal shareholding in concentrated markets often has anticompetitive effect. The piece also develops new legal theories for tackling the problem of horizontal shareholding. When horizontal shareholding has anticompetitive effects, it is illegal not only under Clayton Act §7, but also under Sherman Act §1. Anticompetitive horizontal shareholding also constitutes an illegal agreement or concerted practice under EU Treaty Article 101, as well as an abuse of collective dominance under Article 102.
Part I describes how new proofs and empirical evidence have confirmed that high levels of horizontal shareholding in concentrated product markets can have anticompetitive effects, even when each individual horizontal shareholder has a minority stake.
The last few years have seen a deluge of studies – involving economic modelling and empirical research – demonstrating how overlapping horizontal shareholding can lead to anticompetitive effect, even when each individual horizontal shareholder has a minority stake and without the shareholders needing to communicate between themselves.
These studies explain how such horizontal shareholding creates incentives for (a) corporate managers who want to win votes or re-elections to consider the interests of horizontal shareholders; and (b), corporations to maximize the interests of their shareholders by adopting executive compensation methods that are less sensitive to firm performance the greater the horizontal shareholding level. This has been supported by empirical studies confirming that, across all industries, higher horizontal shareholding levels in fact have the predicted effects. In particular, these empirical studies show that increased horizontal shareholding does make executive compensation less sensitive to their own firm’s performance; that gaps between corporate investment and profits is mainly driven by horizontal shareholding levels within industries. It has also been found that horizontal shareholding increases seed prices; both reduces and delays competitive entry into pharmaceutical; makes start-ups less likely to compete with each other when horizontal ownership is by venture capitalists; and increases the stock market price of both the entrant and its product market rivals.
This section also refutes critiques of the original cross-ownership studies in the banking and airline sectors. Without going into the methodological minutiae with which the paper engages, the author argues that while some of these critiques are valid, addressing them actually increases the estimated adverse effects of horizontal shareholding. What this means is that, unlike what some claim, the anticompetitive effects of horizontal shareholding are not too empirically uncertain for enforcement action.
Part II focuses on legal remedies.
The author claims that any horizontal shareholdings that have anticompetitive effects are prohibited by Clayton Act §7’s ban on any stock acquisitions. This is straightforward. Clayton Act §7 prohibits stock acquisitions that may substantially lessen competition. Thus, the stock acquisitions that create horizontal shareholdings are illegal whenever those horizontal shareholdings are shown to have created actual or likely anticompetitive effects. However, some distinguished academics have worried that case-by-case enforcement would raise administrability concerns because the legality of one horizontal stock acquisition can turn on the existence of other, often later, horizontal stock acquisitions. After all, the anticompetitive effects of horizontal shareholdings turn on the collective impact of multiple horizontal stock acquisitions.
Against this, one can say that this approach is the one traditionally used when anticompetitive effects turn on the collective effect of restraints of trade imposed by multiple suppliers, such as exclusive dealing or vertical price-fixing. Sensible legal regulation should thus take into account the fact that the competitive effects of one shareholder’s horizontal stock acquisitions depend on the horizontal stock acquisitions of others. This is in line with case law that an initially legal stock acquisition becomes illegal if subsequent events mean that continuing to hold the stock would have anticompetitive effects. Administrability concerns have also been overblown based on an implicit premise that antitrust enforcement would automatically make horizontal shareholding illegal above certain thresholds. Instead, such levels of horizontal shareholding and market concentration could simply trigger investigation to determine whether, in fact, those horizontal stock acquisitions had raised prices or were likely to do so.
Part III looks at alternative avenues to tackle common ownership in the US.
The paper argues that, when horizontal shareholding has anticompetitive effects, it also violates Sherman Act §1. Horizontal shareholding that has anticompetitive effects can be tackled under the Sherman Act as an ongoing contract or combination that restrains competition. Horizontal shareholding involves formal contracts between corporations and common investors. Those contracts are what give horizontal shareholders rights to vote for corporate management and a share of corporate profits. Of course, shareholder corporate contracts ordinarily do not restrain competition. But they are contracts that clearly meet the statute’s agreement requirement, and if the shareholder-corporate contracts between horizontal shareholders and competing corporations incentivize those corporations to behave less competitively, they impose a net restraint on competition. This conclusion holds even though each individual shareholder-corporate contract would not, standing alone, restrain competition. Antitrust has long judged the anticompetitive effects of multiple contracts based on their aggregate impact, such as when it judges exclusive dealing contracts based on cumulative foreclosure or vertical price-fixing contracts based on whether they are sufficiently widespread to facilitate oligopolistic coordination.
The statute also applies to any “combination in the form of trust or otherwise.” Antitrust treatment of both trusts and holding corporations establishes that showing a horizontal agreement or combination does not require proving a direct agreement between two competing firms, but rather can be proven through shareholder contracts between each firm and common horizontal shareholders that indirectly link those two competing firms. Accordingly, when a common set of institutional investors are leading shareholders at competing firms, the shareholder contracts between those firms and their common horizontal shareholders also satisfy the contract or combination requirement of Sherman Act § 1.
Part III then looks at alternative avenues to tackle common ownership in Europe.
Concerns have been raised that the fact that the EU Merger Regulation focuses in control may create a regulatory gap that limits the ability of EU competition law to remedy horizontal shareholding, even when it does have significant anticompetitive effect. However, EU competition law can also tackle horizontal shareholding. It may, in some instances, do so under merger control. After all, acquisitions that give a set of minority shareholders joint de facto control because of strong common financial interests can fall under the EU merger regulation – and those acquisitions could be enjoined based on evidence that the horizontal shareholding would diminish incentives to compete, even if joint control is never actually exercised.
Further, and although EU merger control law is narrower than Clayton Act §7, EU antitrust law could be used to tackle common ownership. Article 101 TFEU prohibits “agreements” or “concerted practices” between undertakings that have the effect of restricting competition, and, in practice, can operate similarly to Sherman Act § 1. In Philip Morris, the CJEU specifically held that acquiring a minority stockholding in a corporation can violate competition law, even if it appears to be a “passive investment”, if the agreement to buy the stock “has the object or effect of influencing the competitive behavior of the companies on the relevant market.” Philip Morris thus allows horizontal shareholdings to be condemned as agreements under TFEU Article 101 whenever those shareholdings have or are likely to have adverse effects on firm competition for any reason. Article 101 also extends beyond agreements to also capture “concerted practices”, which applies readily to horizontal shareholding, which causes firms to no longer behave independently because they are indirectly linked through their common shareholders in a way that influences their competitive behaviour.
Article 102 can also be of use here – particularly when horizontal shareholding creates a collective dominant position that leads to excessive pricing. When horizontal shareholding has anticompetitive effects, it is because it creates contractual and structural links between competing firms that diminish those firms’ incentives to compete with each other. Even if those links did nothing other than facilitate oligopolistic coordination among those firms, it would create a collective dominant position under EU competition law. Using the prohibition on excessive pricing to prohibit horizontal shareholding when it creates a collective dominance that leads to anticompetitive pricing would finally give the provision meaning, while remedying a serious anticompetitive problem.
Part IV argues that horizontal shareholdings have autonomous relevance for merger control.
Independently of whether common ownership can be tackled under the tools above, traditional merger analysis requires assessing whether mergers and cross-shareholdings have likely anticompetitive effects on competition. The likelihood of such anticompetitive effects is increased by horizontal shareholding in concentrated markets. Now that the high level of predicted anticompetitive effects from common ownership is known, agencies and courts should take it into account when assessing whether ordinary mergers or cross-shareholdings are likely to substantially lessen competition – in the relevant or related markets (e.g. markets where common investment have taken place). Further, the less our antitrust regimes do to directly tackle horizontal shareholding, the lower the concentration levels they can tolerate when doing traditional merger analysis. Since common ownership only poses problems in concentrated markets, if a regime allows unimpeded horizontal shareholding, mergers that create high concentration levels with no immediate anticompetitive effects would nonetheless fail prophylactic merger analysis whenever it seemed likely that post-merger horizontal stock acquisitions would combine with that concentration level to create anticompetitive effects. The other side of this coin is that continuing to allow unimpeded horizontal shareholding would thus provide strong support for those who currently argue that antitrust law should be far more aggressive about preventing market concentration.
Horizontal shareholding can also mean that a merger that would otherwise be deemed non-horizontal (because the merging firms compete in different markets) should instead be deemed horizontal if the merger increases shareholder overlap between the merged firm and its competitors. The reason is that even if the merging firms compete in different markets (making the merger non-horizontal under traditional merger analysis), the merger can increase shareholder overlap between the merged firm and its competitors in a way that increases horizontal shareholding levels and predictably lessens horizontal competition.
An earlier version of this paper was presented at the OECD, during an unusually heated session. This reflects how contested this topic is, something you may not get a sense from this summary. In effect, one of the reasons I reviewed this paper (and the one immediately below) is that the author provides a good overview of the arguments for and against antitrust action against common ownership in its efforts to argue for such intervention.
One of the consequences of this is that the paper is quite long. One could say there are two papers here. The first provides an overview of the literature on the effects of common ownership, and discusses whether there is enough evidence to intervene. Once it is established that intervention is justified, the second paper discusses what forms this intervention might take. I am unable to comment on the US aspects of the discussion, even if the proposed intervention mechanisms strike me as a bit toothless if the problem is as widespread as the author claims. In effect, I have some sympathy for concerns about the administrability of the proposed solutions – not as regard each individual case, but as regards the administrability of antitrust as an effective remedy to a systemic problem.
As regards EU law, however, I am more at ease – and my view is that the proposals are ambitious. The proposal to look at common ownership under merger control faces a number of significant challenges, as outlined in the paper below. In addition, I do not think that a common financial interest in having the target firm be more profitable can lead to ‘control’ for purposes of EU merger review. Should relevant transactions be nonetheless reviewable, the mechanisms through which common ownership can lead to anticompetitive effects would still need to be established to a certain evidentiary standard if the Commission is to be able to prohibit the merger. Demonstrating that common ownership can, in general, lead to anticompetitive effects may assist in meeting that evidentiary standard, but I would be surprised if it sufficed on its own to prohibit individual transactions – particularly since, as discussed last week, it emerges from the literature that these effects vary across industries. In effect, the papers I will review next week explicitly argue that a presumption of harm is not appropriate in such circumstances.
As regards the role of EU antitrust law, I would need to think more before issuing an opinion on its applicability here. What can nonetheless be said is that the author seems to adopt a very expansive reading of EU competition law. For example, the proposed approach to concerted practices goes against case law requiring a specific type of interaction between the investigated parties in order to establish the existence of a concerted practice – mere oligopolistic interaction would not suffice. Article 102 is also subject to a very expansive reading. My understanding is that joint dominance has very stringent thresholds – the relevant companies must act as one, instead of merely engaging in oligopolistic coordination. Similarly, excessive pricing is extremely unlikely to be triggered by marginal price increases.
In other words, I am not sure how EU antitrust rules could be engaged here unless the thresholds for engaging these EU competition law doctrines was lowered. While I can see the normative attractiveness of relying on the existence of contractual or structural links that reduce competition and raise prices for lowering such thresholds, I do not know how that can be achieved without legislative intervention. And this may well be appropriate – after all, a systemic problem may well require a systemic solution.