The Federal Trade Commission appears, at long last, to be paying attention to the effects an organization’s ownership of stocks in competing companies has on competition in general and mergers and acquisitions in particular. Cross-shareholdings in horizontal competitors raises significant antitrust issues, particularly in concentrated markets.
As reported in Bloomberg, “Economists and antitrust lawyers are raising concerns that the fund houses are harming competition among the companies whose shares they jointly own.” These concerns, which are intensifying, are not new.
In certain situations, antitrust law recognizes de facto mergers. Other forms of common ownership or control have been prohibited for over 100 years. Section 7 of the Clayton Act bans any stock acquisition “where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly,” and Clayton Act Section 8 prohibits interlocking directorates.
What Academia Says
Recent academic studies have focused on cross-holdings by financial fund firms. In a 2015 paper, noted antitrust scholar and Harvard Law Professor Einer Elhauge wrote that purchasing voting shares in competing companies can constitute de facto mergers. The net result of cross ownership can be to substantially lessen competition or even lead to monopolistic conduct in oligopolistic industries.
According to Elhague, “When two firms have the same shareholders, their actions on behalf of those shareholders will be precisely the same as if the two firms had merged or entered into a perfectly-enforced cartel ... . Such horizontal shareholdings can help explain fundamental economic puzzles like the use of seeming perverse methods of executive compensation, the current failure of corporations to use high profits to expand output and employment, and the recent rise in economic inequality.”
Elhauge concluded, “These harmful economic effects could and should be reduced by using current antitrust law to challenge the stock acquisitions that have created such anticompetitive horizontal shareholdings.”
Oxford Associate Professor of Finance Martin C. Schmalz’ studies have shown that common ownership affects consumer prices, the rate of innovation, executive compensation, and even a corporation’s competitive spirit. Asked how common ownership injures consumers, Schmalz cited CEO pay as an example. Executive compensation is increasingly less performance-sensitive when competitors are commonly owned, a dynamic that can impact a CEO’s motivation to compete aggressively.
The FTC signaled its interest in the subject on Sept. 10, 2019. Bilal Sayyed, director of the FTC Office of Policy Planning, said during a speech at Georgetown University Law Center that antitrust law “recognizes that minority ownership and cross-ownership—ownership stakes in a competing company—can have anticompetitive consequences. Some early empirical literature on common ownership and horizontal shareholding of airlines and banking firms suggests the possibility of a long-term, broad drag on competitive behavior. While other empirical studies have not reached the same conclusion, we place a high priority on determining the merits of this position and of any proposed remedies.”
To this point, the discussion has centered on financial firms’ cross-holdings. We have wondered for several years how far antitrust agencies would go to constrain financial firms in this regard. In some cartel cases, financial firm-sponsored conferences sometimes from parts of opportunity-to-collude allegations. However, other de facto mergers, including cross-holdings, appear in many forms in antitrust litigation, and for that reason deserve more vigorous attention from antitrust enforcers, including during merger reviews and other investigations.
The net result of cross ownership could be a substantial lessening of competition or even monopolistic conduct in oligopolistic industries, as Elhauge wrote. In our view, this extends to many de facto mergers and forms of cross-ownership, including those involving nascent competitors.
Increased scrutiny of cross-holdings could be a positive development for free markets, robust competition, innovation, and, ultimately, consumers. And we may soon see cross-ownership inquiries extend beyond financial firms.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Daniel Mogin is the managing partner of MoginRubin LLP, a national award-winning competition law boutique engaged in the full range of antitrust and related matters, including antitrust class actions, competitor cases, merger challenges, merger due diligence and opt-out cases. He has served as lead counsel in numerous large antitrust cases, chaired the Antitrust Section of the California Bar, taught antitrust law and was editor-in-chief of a leading competition law treatise.