Developments in global antitrust theory and enforcement in recent years are increasingly affecting large asset management companies. At issue have been the potentially anticompetitive effects of “common ownership”. This term refers to minority stakes, typically a shareholding of less than 10 percent but of great financial value, held by one asset management company or several, in rival companies within the same industry or sector. So far, the industries at focus have been major chemical companies, financial institutions, airlines, pharmaceuticals and consumer electronics, to name a few. The suspects are often the leading asset management players, the likes of BlackRock, Vanguard and State Street. However, the consequences of enforcement can span across entire industries and may constrain new mega-mergers and acquisitions.

The concern, raised by industrial economic research and econometric studies, openly cited and supported by some antitrust regulators, is about the potential harmful effects, which portfolios of such minority shareholdings held by fund management firms may have upon the behavior of rival companies in the markets where such companies operate. This concern grows in parallel with the unprecedented growth of the index tracker funds that are passively managed funds simply following certain indexes. Because of this, the impact of certain behaviors by large asset management companies can have a multiplier effect within certain industries and sectors. The concerned economists have argued such common ownership in rival firms leads to increases in the prices charged by the rival companies in which the same asset management company holds the shares. This could become possible through increased influence by the portfolio investor on the executive management of the companies, resulting in reduced incentives of the rival companies to undercut each other’s prices and take away market shares. Such indirect shareholding links may also lead to reduced innovation competition and may be associated with a lower market output (reduced consumer welfare).  As a result, the industry’s overall performance dominates over the market performance of individual firms.  

As it often happens in antitrust theory, US economists have taken the lead with academic and econometric publications. ¹ This prompted an enforcement roundtable at the OECD in 2017,² which took the discussion to the Federal Trade Commission for a possible shift in enforcement,³ and this echoed across the Atlantic. In the European Union, the EU institutions and member states’ authorities have followed, and their steps are even more worrisome.

Bombarded by parliamentary questions on the effects of common ownership, the European Commission took issue with common shareholdings in the Dow/DuPont merger decision of 2017.⁴ This decision concerned an announced transaction between two agrochemicals giants, Dow and DuPont. Both merging parties, as well as all their major rivals, had shareholdings by the leading asset management firms in them. The Commission took the view that the market in which the merging parties operated (agrochemicals) had a higher concentration index due to the common shareholdings and was affected by significant common ownership: “the industry is […] characterized by the fact that only few common shareholders control, collectively, a significant share of each of the six competitors”. The European Commission considered such significant common shareholding in the agrochemical industry as an element in the context of analysis of significant restrictive effects on competition. It ultimately took the view that the significant common shareholding in the agrochemicals sector reduced innovation competition, and together with other concerns, concluded that the transaction would lead to significant lessening of competition in innovation. This required significant commitments from the merging parties to obtain clearance. The Dow/DuPont case was the first in which common ownership featured in the European Commission’s substantive analysis, but it will not be the last one.

On subsequent occasions throughout 2018, the European Commissioner for competition, Magrethe Vestager, has confirmed that the European Commission continues to scrutinize common ownership terming it “an especially important issue”. Among other issues, the European Commission focuses on collection of data on common shareholdings in Europe, as well as extent of the margin for, and the effects of indirect effective influence by portfolio investors on the executive management of companies in that context. The European Parliament has itself taken an interest in the matter, even though it is a legislative, and not an enforcement institution. The German consultative body for antitrust legislation, the Monopoly Commission, has updated its views and calls for collecting further evidence on common ownership in Europe.⁵

The transatlantic legal, economic and regulatory debate on common ownership has erupted, while larger asset management companies, as well as the companies in which such large financial actors hold minority shareholdings, should continue to be aware of those simmering concerns, and in the meantime prepare for more rigorous scrutiny of their M&A deals. In recent weeks, media reports that BlackRock has intensified its debate with economists concerning common ownership in the US and has filed opposing arguments to the US FTC. The story will continue in 2019, and in the meantime, while regulators remain cautious on ‘big’ enforcement and call for further empirical research and evidence, they should seek to strike the right balance between the imperatives of competition policy and the health of financial markets.  In any event, significant common ownership by one or few large fund managers, index trackers or not, would be a ‘red’ or ‘orange’ flag for most antitrust agencies examining a notified transaction in a merger clearance procedure.  

1. Earlier economic studies date from 2014, while a notable recent work is Azar, José and Schmalz, Martin C. and Tecu, Isabel, Anticompetitive Effects of Common Ownership (May 10, 2018). Journal of Finance, 73(4), 2018. ↩
2. http://www.oecd.org/daf/competition/common-ownership-and-its-impact-on-competition.htm, last accessed on 5.2.2019, see also https://one.oecd.org/document/DAF/COMP(2017)10/en/pdf ↩
3. FTC Hearing 8: Dec. 6, 2018, Remarks by FTC Commissioner Noah Joshua Phillips and SEC Commissioner Robert J. Jackson Jr.; Panel discussion: Institutional Investors, Diversification, and Corporate Governance.↩
4. Commission Decision of 27.3.2017 declaring a concentration to be compatible with the internal market and the EEA Agreement (Case M.7932 – Dow/DuPont), Brussels, 27.3.2017, C (2017) 1946 final.↩
5.  Common ownership, Excerpt from Chapter II of the XXII. Biennial Report of the Monopolies Commission (“Competition 2018”), ↩