A debate has recently arisen about whether so-called “common ownership” may negatively affect competition. “Common ownership” describes the situation where large institutional shareholders (investment funds etc) hold large minority stakes in a number of companies that are active in the same industry and compete with each other.
As described in our alert, this discussion may affect how competition authorities assess institutional and strategic investors’ minority shareholdings (notably, the German Monopolies Commission covered this issue in its September 2016 report). This is of importance for institutional investors structuring their portfolio, strategic investors who pursue an investment strategy targeting a given sector, and companies that seek to attract such investors.
Debate Triggered by Economic Studies
This debate was triggered by two recent economic studies (available here and here), which found that – at least in concentrated markets – competition is weakened, and prices may increase, if there is a significant degree of common ownership. Absent common ownership, firms compete to gain market shares at their competitors’ expense. If a shareholder owns stakes of a similar range in several firms active in the same market, the benefit the shareholder gains if one firm increases its market share and profits is offset by the loss incurred because of the decrease of market share and profits of the other firm. Large institutional shareholders invested in several firms of the same industry are therefore interested in the performance of the industry as a whole, rather than in the performance of and competition between individual firms.
Impact on Competition Law Enforcement
These economic studies have attracted the attention of US and EU competition authorities. In Europe, at the EU level, the European Commission does not (yet) have jurisdiction to assess the acquisition of minority stakes under merger control rules. The mechanisms that have now been described may re-ignite a recent discussion about whether its jurisdiction should be expanded to the acquisition of minority stakes. Further, the European Commission might seek to address common ownership on the basis of general competition law provisions.
In Germany, acquisitions of minority shareholdings have long been subject to merger control scrutiny. Transactions have to be notified to the Federal Cartel Office, inter alia, if the acquirer gains “competitively significant influence” on the target (ie, acquisition of a (small) stake and “plus-factors” such as board representation). Based on the research described above, even more careful examination of minority shareholdings is to be expected. The Monopolies Commission (an independent advisory body to the Federal Government in Germany) considered the issue of common ownership in its latest biennial report. It clarified that the issues described do not only apply with respect to institutional investors, but also with respect to other diversified investors holding minority stakes in a number of different undertakings.
It is to be expected that competition authorities worldwide will monitor the effects of common ownership and adapt their interpretation of competition rules if necessary. This issue may even have an impact on future legislative reforms of the EU merger control rules, or in other jurisdictions.