The Joint Research Centre (JRC) and the European Commission’s (Commission’s) science and knowledge service published a report on common shareholding in Europe in September 2020 (the Report). The Report (available here) was published at the request of Directorate-General for Competition (DG Comp) and focuses on companies active in the EU in 2007-2016 with a focus on the oil and gas, electricity, telecommunications, trading platforms and beverages sectors. This blog post sets out our key takeaways from the Report that may be of interest to investors not only in these sectors, but more generally.
The Report’s findings are limited and the Report itself cautions against drawing any sweeping conclusions from the results. As the empirical analysis of common ownership is still at its infancy, regulatory and legislative changes do not appear imminent. However, this is the first time that DG Comp has commissioned a study on the topic, which suggests that regulators may be looking for an opportunity to test the theory. Accordingly, investors (particularly those in the listed sectors) should remain mindful of the potential need to take steps to manage risk – it certainly cannot be precluded that common shareholding could still become the subject of possible antitrust enforcement action or, perhaps more likely, an area of focus in merger control.
Background
Common shareholdings exist where an investor has minority shareholdings in competing businesses that are active in the same (or adjacent) markets. The potential competition issues that may arise from this have tended to be focused on two main concerns:
- That common shareholdings may lead to a reduction in the incentives for competition between those businesses. As noted by Margrethe Vestager, “It’s becoming more common for the same investors to hold shares in different companies in the same industry. And for those investors, fierce competition might not seem so appealing” (Margrethe Vestager, EU Commissioner for Competition and Executive Vice President, Speech at FIW Symposium, 16 February 2018); and
- That a common shareholder may have access to competitively-sensitive confidential information relating to two competing businesses and could facilitate information sharing.
The topic of common shareholding has been of interest to the Commission for some time. Commissioner Vestager refers to common shareholding in her February 2018 speech above and this issue was considered in the review of the Dow/DuPont merger in 2017. This interest appears to have led to the present Report. However, while common shareholding is “widely witnessed across the globe”, there remains a lack of conclusive, empirical evidence and academic research, particular in relation to European markets.
The German Monopolies Commission separately reviewed the German market (its report is available here) and called for further research on the link between common shareholding and any anti-competitive effects. The Monopolies Commission also highlights that, while there is risk potential, it would be premature to take either competition or regulatory measures to address those potential risks. Also, the Organisation for Economic Co-operation and Development (OECD) holds discussion forums on the topic (involving, among others, the Vice Chair of BlackRock and Professors of Law and Economics from Harvard and NYU respectively) and publishes various discussion papers. The conclusions from these are somewhat mixed, but the common theme is a need for further research.
Key findings
The Report is, in the words of the authors, “the first comprehensive study on [common shareholding] in Europe, including not only listed firms, but also a series of relevant unlisted corporations in select industries”. The findings are vague and the conclusions that can be drawn are limited and perhaps as a consequence, the Report does not call for, or support, any regulatory or legislative action. By way of summary, the key points in the Report are as follows:
- The JRC constructed a database setting out all listed firms active in the EU from 2007-2016, including data on each firm (such as historic ownership or financial information).
- The general picture from the analysis of the sectors specified above suggests a strong presence of common shareholding in all industries. For example, the Report identifies that 67% of all listed firms active in the EU are cross-held by common shareholders holding at least 5% in each company.
- The Report explores the link between common shareholding and competition by assessing the impact of the change in common shareholding induced by the BlackRock/Barclays Global Investors (BGI) merger in the beverages industry. The Report is heavily caveated but identifies a “positive association between common shareholding and market power”, which is approximated by an analysis of profitability as measured by the Lerner Index (a measure of the relative price-cost margin, which can be calculated using data from typical balance sheets and profit and loss accounts).
- The Report identifies that firms that were already held by BlackRock and/or BGI had a higher Lerner Index post-merger as compared to competitors not held by either party. The Report notes that this is driven more by increased revenues than decreased costs, with the effect increasing over time – but eventually self-correcting after eight years.
- As noted, the Report is heavily caveated, including by reference to the small sample size, the focus on limited sectors, the lack of certain data (such as granular pricing data), and the potential presence of future unobservable factors (such as network effects). The authors even note that “the findings of this study should be treated with caution”.
Analysis
As it stands, there is no obvious antitrust ‘sword’ available to agencies to address concerns surrounding common shareholding. First, there is no agreement between investors or between investee corporations in the same industries. Absent such an agreement, to establish an antitrust infringement, authorities would need to evidence that the relationship between a common investor and management of competing businesses has resulted in a tacit understanding on strategic market conduct leading to anti-competitive effects. For example, competition authorities may investigate so-called ‘hub and spoke’ information sharing, whereby the common shareholder receives sensitive commercial information from multiple portfolio companies and acts as a ‘hub’ to facilitate horizontal agreements between competing ‘spokes’. The US Department of Justice (DoJ) pursued this type of investigation in relation to four airlines in 2015. While the DoJ required the airlines to disclose information on meetings with key investors, it ultimately found no evidence of collusion facilitated by a common owner. Several airlines have separately settled out of court civil claims, while some litigation is still ongoing.
Perhaps more relevant is the extent to which common ownership may arise as a concern in the context of merger control proceedings. The Commission first substantively considered the implications of common ownership in its review of the merger between Dow and DuPont in March 2017. In its review, the Commission considered that common shareholders owned around 29% to 36% of Dow and DuPont and concluded that market power and common shareholding are “to be taken as an element of context in the appreciation of any significant impediment to effective competition”. While the Commission ultimately cleared the transaction subject to conditions, the Commission’s approach suggests that, in its view, normal concentration measures may understate the level of concentration and market power.
In our merger control practice, we have seen EU regulators ask for details of shareholders’ shareholdings in other corporations operating in the same sector. We should continue to expect that in certain cases authorities may continue to do this, particularly in the sectors listed in the Report and other sectors characterised by higher levels of concentration and common ownership. Additionally, as the Commission indicated that common shareholding may have an impact on R&D or innovation in Dow/Dupont, it should be expected that common ownership may play a bigger role in sectors where innovation is a key parameter of competition.
Conclusions / practical tips
The empirical evidence on the actual anti-competitive effects is still far from conclusive and any conduct case premised on common ownership theories of harm would be at the outer limits of the existing regime. That said, although regulatory and legislative action is unlikely to be imminent, common shareholding appears to remain on the minds of regulators. As such, prudent institutional investors should have in mind practical steps to manage their risk in this area, such as:
- Establishing a framework for participation: Scrutinise information flows for antitrust risk and take appropriate action to avoid acting as a conduit for information exchange, e.g. by setting up physical and IT information barriers.
- Considering the information investors require: Investors should consider the level of information they require from a portfolio company in order to exercise their rights as a shareholder, particularly when the investor also owns a share in competing businesses. For example, an investor could consider limiting their access to competitively sensitive information such as pricing policies or future investments.
- Considering investor representation: Investors should consider who is managing the investments into companies operating in the same sector and take action to limit having the same individuals managing investments in competing businesses.
Separately, corporates may increasingly need to take account of the degree of common ownership between the merging parties (and the sector more generally) as part of their antitrust risk assessment when assessing potential M&A activity.
Finally, the Report calls for further research, and common shareholding still may become an area of focus for the Commission, perhaps using new tools that may become available. The Commission is considering various ongoing proposals to expand its regulatory arsenal. Key examples include the proposed ex ante regulation of digital gatekeeper platforms in the Digital Services Act (DSA) and the proposed new competition tool (NCT) with the objective of regulating large platforms and addressing perceived gaps in competition enforcement (see our previous blogs here (on the DSA) and here (on the NCT)). While the focus is very much on digital platforms, given that common shareholding is seen as a potential structural concern it may be another area where we could see a possible NCT deployed in future.
