US Antitrust Agencies Continue to Focus on Common Ownership
February 22, 2019
In a series of recent statements, speeches, and public hearings, the United States antitrust agencies have made clear that they are closely studying the competitive impact of “common ownership,” which occurs when a single investor simultaneously owns non-controlling interests in competing companies.
While that phenomenon is not new—heavily diversified investors like mutual and index funds have long mitigated risk through broad holdings, even within single industries—recent academic studies claim there is empirical proof that common ownership leads to reduced competition and higher prices. In combination with a sharp increase in the assets held by institutional investors, and the importance of such firms in the capital markets,1 these studies have created a new and bright spotlight on common ownership.
This increased attention manifested itself last week, when Makan Delrahim, the Assistant Attorney General for Antitrust at the Department of Justice, declared that the DOJ would examine the competitive impact of common shareholding in light of the academic literature. The move mirrors similar steps recently taken by the Federal Trade Commission. Potentially impacted companies should be aware of several key takeaways:
- Despite the increased attention directed at the issue, the debate over common ownership remains in its infancy, and the economic research regarding the impact of common ownership is still evolving.
- Proponents of common ownership theory nevertheless contend that there is enough proof of anticompetitive effects to condemn the practice under existing antitrust laws. They also advocate for major changes to institutional investing, ranging from divestment of existing shares to limits on the number of competing companies in which any firm can invest. Such changes would have a significant effect on capital markets.
- The federal antitrust agencies, for their part, have urged caution. They have never prosecuted a case involving common ownership by a single institutional investor and have not yet adopted any changes to their policies or practices. Still, they are actively evaluating common ownership and may conduct their own investigations to determine whether there is compelling evidence of anticompetitive effects.
- Private plaintiffs are not as cautious, and claims related to common ownership are already appearing in private antitrust litigation.
- Potentially impacted companies should consult with antitrust counsel to manage their risks proactively.
The current debate over common ownership can largely be traced to two academic papers claiming that the practice leads to higher consumer prices in select industries.2 A related paper concludes that common ownership also results in executive compensation packages that weaken incentives for companies to compete.3
Accepting these economic conclusions, some legal commentators have argued that common ownership should be condemned as a violation of (1) Clayton Act § 7, which prohibits the acquisition, “directly or indirectly, [of] the whole or any part of the stock” of a company when the “effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly,”4 and (2) Sherman Act § 1, which prohibits all contracts, combinations, or conspiracies in restraint of trade.5 They have also proposed structural remedies ranging from divestiture of shares to hard limits on the stake (1 percent) any institutional investor can hold in more than one firm in the same concentrated industry.6
But these economic findings and legal recommendations are the subject of fierce scrutiny. Critics argue that there is no proven mechanism through which common shareholders lessen competition,7 which means (1) the relevant studies may be attributing to common ownership price effects caused by any number of other causes and (2) there is “little empirical evidence on which a court could rely to find antitrust liability and to reorganize the asset management industry.”8 Critics also contend that the legal theory around common ownership represents a “novel” and “dubious” application of the law since “there is no clear legal basis for antitrust liability under either § 7 of the Clayton Act or under § 1 of the Sherman Act.”9
Other commentators have explained that any relationship between common ownership and higher prices is dependent on considerations like industry-specific market conditions, shareholder incentives, and management objectives, which means any anticompetitive effects must be proven on a case-by-case basis; no economy-wide conclusions can be drawn.10 Still others question the underlying economic arguments supporting common ownership theory and advance divergent econometric findings.11
DOJ. The lively debate about common ownership and its impact on competition has caught the attention of the U.S. antitrust agencies. In early 2016, William Baer, then Assistant Attorney General for Antitrust at the Department of Justice, told Congress that the DOJ is “looking at” the “common ownership issue . . . in more than one industry.”12 Makan Delrahim, the current Assistant Attorney General for Antitrust, reiterated the same point last week, noting that common ownership theory is “a fascinating area to see whether or not competition laws pay attention” and that the DOJ is assessing whether impacted companies behave differently “from a competitive standpoint.”13 Delrahim specifically referenced the literature supporting common ownership theory, explaining that he does not “totally agree” with it, but that the DOJ would nevertheless examine whether anticompetitive effects exist.14
Principal Deputy Assistant Attorney General Andrew Finch made the same point in December 2018, explaining that “the Division is looking at common ownership and interlocking directorate issues more closely.”15 He noted in particular that “Section 1 of the Sherman Act may apply where common ownership results in firms—either directly or indirectly—agreeing to share competitive sensitive information, to allocate markets, or to otherwise pull competitive punches.”16 He emphasized that “real problems certainly can arise when a significant shareholder actively encourages competing firms to coordinate their conduct rather than compete against each other as they otherwise would in the ordinary course of business.”17
FTC. The Federal Trade Commission is similarly examining the impact of common ownership. As part of its Hearings on Competition and Consumer Protection in the 21st Century, it held a public hearing in December 2018 on the antitrust implications of common ownership. The hearing allowed the agency to hear from economists on both sides of the debate, as well as enforcers, market participants, and practitioners.18 Notably, both FTC Commissioner Noah Phillips and SEC Commissioner Robert J. Jackson offered insight into the government’s current thinking.
Commissioner Phillips explained that while common ownership scholarship requires careful study, “tectonic policy shifts should not be undertaken lightly” and that further examination is needed in a number of areas, including (1) the precise mechanism through which common ownership purportedly harms competition, (2) why company employees would put the interest of minority shareholders above other shareholders, and (3) how potential anticompetitive harms compare to the benefits of institutional investment. On the last point, Commissioner Phillips emphasized that “[l]arge institutional investors have, in many ways, made investing affordable for the average American” and any enforcement in this area could “alter the basic structure of the financial sector.”19
SEC. Commissioner Jackson similarly called for caution. He explained that restricting diversified institutional investing “would impose costs upon [ordinary Americans] that are potentially enormous” since such “holdings have delivered an enormously important product to American families who are saving for retirement and education.” Commissioner Jackson also made clear that “we’re at the beginning, not the end, of our conversation and what to do about it.”
Joint Statements. These positions echo the joint submission from the DOJ and the FTC to the Organization for Economic Co-operation and Development in November 2017. That statement made clear that the government thought “the empirical literature on the competitive implications of common ownership by institutional investors is still in its early stages.”20 Accordingly, the agencies were “not prepared at [that] time to make any changes to their policies or practices.”21 They explained that “any antitrust enforcement or policy effort in this area should be pursued only if an inquiry reveals compelling evidence of the anticompetitive effects of common ownership by institutional investors in concentrated industries,” which would “not be predicated on general relationships suggested by academic papers.”22
The Road Ahead
Although much remains unsettled, this much is clear: The common ownership issue is not going anywhere. Academics and practitioners on all sides of the debate continue to research and publish on the issue, and both antitrust agencies have publicly expressed their commitment to examining the phenomenon. Given the scope of the issue and the scale of disruptions resulting from any future investigations, potentially impacted companies should manage the issue proactively:
- Consult antitrust counsel to assess the circumstances in your industry.
- Be prepared for agency investigations, particularly in concentrated industries, and understand what is required if you receive investigative requests.
- Be prepared to recognize and appropriately respond to requests to “pull competitive punches,” especially when made by common shareholders.
- Continue to comply with existing antitrust laws. This means, among other things, (1) no collusion to fix prices, reduce outputs, or allocate markets; (2) avoid sharing competitively sensitive information with competitors or common shareholders; (3) avoid interlocking directorates whereby one individual serves as a director at both your company and a competitor’s; and (4) ensure compliance with premerger notification requirements, including those related to investment-only acquisitions.
1 JOECD, Hearing on Common Ownership by Institutional Investors and Its Impact on Competition, Note by the United States at ¶ 1 n.1 (Nov. 28, 2017) (passively managed index and exchange-traded funds doubled their assets under management between 2011 and 2014); Fiona Scott Morton & Herbert J. Hovenkamp, Horizontal Shareholding and Antitrust Policy, 127 Yale L. J. 2026, 2029 (2018) (intuitional investors are the largest shareholders in more than 80 percent of S&P 500 firms).
3 Miguel Anton et al., Common Ownership, Competition, and Top Management Incentives (Sep. 19, 2018).
4 15 U.S.C. § 18.
5 Einer Elhauge, Horizontal Shareholding, 129 Harv. L. Rev. 1267, 1302-1316 (2016).
6 Eric A. Posner et al., A Proposal to Limit the Anticompetitive Power of Institutional Investors, 81 Antitrust L.J. 669, 670 (2018); Scott Morton, supra note 1, at 2047.
7 Daniel P. O’Brien & Keith Waehrer, The Competitive Effects of Common Ownership: We Know Less Than We Think, 81 Antitrust L.J. 729 (2017).
8 Douglas H. Ginsburg & Keith Klovers, Common Sense About Common Ownership at 4, 14 (Apr. 27, 2018).
9 Id. at 5-6, 20-29.
10 Menesh S. Patel, Common Ownership, Institutional Investors, and Antitrust, 82 Antitrust L.J. 279 (2018).
11 Edward B. Rock & Daniel L. Rubinfeld, Defusing the Antitrust Threat to Institutional Investor Involvement in Corporate Governance (Mar. 1, 2017); Pauline Kennedy et al., The Competitive Effects of Common Ownership: Economic Foundations and Empirical Evidence (July 24, 2017); Jacob Gramlich & Serafin Grundl, The Effect of Common Ownership on Profits: Evidence from the U.S. Banking Industry.
12 Oversight of the Enforcement of the Antitrust Laws: Hearing Before the Subcomm. on Antitrust, Competition Policy, and Consumer Rights, 114th Cong. (Mar. 9, 2016).
13 Amy Miller, Institutional investing’s potential anticompetitive effects to be examined by DOJ, top antitrust enforcer says, MLex Market Insights (Feb. 12, 2019).
15 Andrew Finch, Concentrating on Competition: An Antitrust Perspective on Platforms and Industry Consolidation (Dec. 14, 2018).
20 Note by the United States, supra note 1, at ¶ 12.
21 Id. at ¶ 15.
22 Id. at ¶ 3.
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