Vishal Mehta and Megan E. Gerking
Antitrust Law, Antitrust Law | Litigation, and Antitrust Law | Mergers + Acquisitions
On December 6, 2018, the Federal Trade Commission (FTC) held the latest in its series of 10 public Hearings on Competition and Consumer Protection in the 21st Century, examining the antitrust implications of “common ownership.” The U.S. antitrust agencies have defined common ownership as the simultaneous ownership of noncontrolling interests in competing companies, particularly by institutional investors such as index funds, mutual funds, and other asset managers. The hearing convened enforcers, scholars, market participants, and practitioners to discuss key issues in the debate around whether common ownership presents a structural antitrust problem, including: (1) recent economic research analyzing potential anticompetitive effects of common ownership; (2) the incentives of asset managers, corporate executives, and other players in the corporate governance ecosystem with regard to competition; (3) the mechanisms through which common ownership could lead to competitive harm; and (4) next steps that should be taken by antitrust enforcers and researchers in light of existing evidence. While the hearing was a significant step in advancing discussion of this important issue, it seems clear that the U.S. antitrust authorities remain unconvinced (for now) that common ownership standing alone harms competition and a policy shift is not on the immediate horizon.
Common Ownership Theory and Recent Scholarship
Much of the hearing focused on the origins of the common ownership debate and recent empirical research examining the links between common ownership and competitive harm. The debate stems from the ascendance of mutual funds, index funds, and other institutional investors beginning in the 1970s and accelerating in the last decade. As FTC Commissioner Noah Phillips observed in his opening remarks, “common ownership . . . is a reality of our modern economy,” as “Americans are increasingly utilizing the many and diversified investment options that large institutional asset managers offer, and the advent of indexing funds has opened important avenues through which average Americans can invest their retirement savings, sometimes at a low or even zero price.” By some accounts, as a result of the widespread popularity of these investment options, a small number of institutional investors are the largest shareholders in more than 80% of all firms in the S&P 500.
Against this backdrop, economists have long hypothesized that common ownership of competing firms by the same investors reduces the incentives of those firms to compete. The theory posits that common owners are incentivized to reduce competition between portfolio companies in order to maximize industrywide profits. Common owners may soften competition actively through corporate governance mechanisms such as proxy voting or executive compensation. Alternatively, competition may be diminished passively through no action at all, as firm managers are disincentivized to reduce costs, increase output, or lower prices in order to maximize benefits to their largest shareholders.
As SEC Commissioner Robert Jackson explained, in the last few years this theory has been tested through empirical research in a handful of seminal studies. In the first such papers, José Azar, Martin Schmalz, Isabel Tecu, and Sahil Raina demonstrated a correlation between measures of common ownership and price increases in the U.S. airline and banking industries. In a subsequent paper, Einer Elhauge expounded these findings and argued that common ownership is a legitimate target for public and private antitrust enforcement under Section 7 of the Clayton Act. Fiona Scott Morton, Eric Posner, and Glen Weyl took this argument further, urging U.S. antitrust enforcement authorities to limit institutional investors to holding no more than one firm, or a 1% overall stake, in concentrated markets. On the other hand, skeptics have questioned the causal link between common ownership and competitive harm; observed that this relationship is highly dependent on variables such as market conditions, shareholder incentives, and managerial objectives; and argued that policy proposals to address the purported effects of common ownership are premature and overzealous.
The hearing brought together leading scholars across the spectrum to discuss these issues, chart a course for future research, and identify areas for potential agency engagement. While there was disagreement over whether and to what extent the existing literature proves that common ownership causes competitive harm, the speakers roundly acknowledged the importance of research conducted to date, as well as the need for further empirical study. Several speakers urged the U.S. antitrust agencies to exercise their authority to collect data from companies to fuel additional research and to independently examine the issue. Professor Schmalz asserted that “the quality of this debate would benefit from better data access to researchers and independent [agency] analysis of product markets,” adding that “there are many questions academics can’t study because we don’t have the data for it . . . [,] [a]nd I think that’s where the regulators come in.” Along similar lines, Professor Scott Morton stated that “if FTC were to do one useful thing from these hearings, it would be . . . to open a . . . 6(b) study, and go out and get the kind of data that you would need to have to study this problem more seriously.”
Business Perspectives on Common Ownership
The hearing also provided a forum for business perspectives on common ownership, featuring a panel of corporate governance experts and representatives of large asset managers and industry organizations. Panelists addressed the nature, scope, and value of engagement between institutional investors and corporations (through voting or other means), stressing the following themes: (1) engagement is focused on high-level issues such as strategy, performance, executive compensation, and ESG – not on pricing or output – and is not a mechanism investors use to soften competition among portfolio companies; (2) engagement is a critical component of corporate governance that is necessary to facilitate transparency, hold corporations accountable, and protect shareholders’ assets; (3) regulating common ownership by limiting the holdings or influence of institutional investors would threaten these benefits and fundamentally disrupt U.S. capital markets; and (4) the boundaries of appropriate engagement by institutional investors are strictly enforced by SEC regulations and internal compliance protocols. The panel provided valuable perspectives on the potential for engagement to be used by common owners as mechanisms to actively lessen competition among portfolio companies. However, the core concept that common ownership may inherently harm competition with no action whatsoever taken by investors went largely unaddressed.
Enforcers’ Perspectives on Common Ownership
The hearing also featured keynote opening remarks from FTC Commissioner Noah Phillips and SEC Commissioner Robert Jackson. Both enforcers struck a measured tone, recognizing the importance of the common ownership issue, while emphasizing that the debate is in its early stages, and stressing the need for rigorous study before any policy shift is undertaken. Commissioner Jackson noted that the existing literature “presents us with a puzzle and . . . we’re at the beginning, not the end, of our conversation about common ownership and what to do about it.” Echoing other voices at the hearing, Commissioner Phillips identified several areas for further exploration, including: (1) the effects of common ownership across a broad range of industries; (2) the precise mechanisms (e.g., proxy voting or executive compensation) through which common ownership may harm competition; (3) a rationale explaining why managers would put the interests of minority shareholders above those of other shareholders; and (4) a rigorous weighing of potential anticompetitive harms of common ownership against the benefits of institutional shareholding.
Both enforcers strongly underscored the need for regulatory caution in light of the structural importance of institutional investors to U.S. capital markets and the significant benefits to the American public of diversification through institutional investors. Commissioner Phillips observed that “[l]arge institutional investors have, in many ways, made investing affordable for the average American.” He noted that antitrust enforcement in this area could “alter ‘the basic structure of the financial sector’ and transform the landscape of institutional investing,” warning that “such tectonic policy shifts should not be undertaken lightly.” Similarly, Commissioner Jackson stated that “diversified holdings have delivered an enormously important product to American families who are saving for retirement and education . . . [which] I’m sworn to protect, and to restrict their diversification would impose costs upon them that are potentially enormous.”
Antitrust Scrutiny of Common Ownership – Where Do We Go From Here?
The FTC hearing makes clear that (1) the U.S. antitrust authorities remain, for the time being, unconvinced that common ownership standing alone constitutes an antitrust violation and (2) a shift in policy or enforcement is not on the immediate horizon. This forecast is consistent with a recent joint submission by the DOJ and FTC to the OECD and statements by several prominent enforcers in other settings. In the joint submission, the agencies stated that “the empirical literature on the competitive implications of common ownership by institutional investors is still in its early stages” and “the U.S. antitrust agencies are not prepared at this time to make any changes to their policies or practices” in this area. The statement added that “any antitrust enforcement or policy effort … should be pursued only if an inquiry reveals compelling evidence of … anticompetitive effects” and such enforcement would “address actual or predicted harm to competition from a particular transaction, would not be predicated on general relationships suggested by academic papers, and would seek to avoid outcomes that would unnecessarily chill procompetitive investment.” Along similar lines, Bruce Hoffman, director of the FTC Bureau of Competition, recently said of common ownership that the “one thing I can say with some relative certainty here is that we’re very uncertain about it” and “don’t know exactly where this is going.” In addition, Barry Nigro, current Deputy Assistant Attorney General for the DOJ Antitrust Division, previously commented that an antitrust case against common ownership “is likely to encounter skepticism in the courts.”
Practical Guidance for Minority Shareholders
While a shift in U.S. antitrust policy with respect to common ownership is not imminent, minority shareholders — including institutional investors and other types of asset managers — should monitor further agency initiatives in this area as the debate continues. As noted above, there have been increasing calls for the agencies to gather additional data from companies across industries to inform further study of the potential competitive impact of common ownership, and to independently examine the issue. In response to these pleas, the FTC could exercise its investigative authority under Section 6(b) of the FTC Act and use compulsory process to obtain documents and information from a wide range of market players, including both investors and portfolio companies. Companies should consult antitrust counsel and be prepared in the event the FTC launches a 6(b) study and such a request is received.
In addition, notwithstanding expanded enforcement in the realm of common ownership, companies should continue to strictly comply with several existing laws that may apply to minority investments:
 OECD, Hearing on Common Ownership by Institutional Investors and Its Impact on Competition, Note by the United States, 2 (Nov. 28, 2017).
 Fiona Scott Morton & Herbert J. Hovenkamp, Horizontal Shareholding and Antitrust Policy, 127 Yale L.J. 2026, 2029 (2018).
 José Azar et al., Anticompetitive Effects of Common Ownership, 73 J. Fin. 1513 (2018); José Azar et al., Ultimate Ownership and Bank Competition (July 23, 2016) (unpublished manuscript), http://ssrn.com/abstract id=27o252.
 Einer Elhauge, Horizontal Shareholding, 129 Harv.L.Rev. 1267 (2016).
 Eric Posner, Fiona M. Scott Morton & Glen Weyl, A Proposal to Limit the Anti-Competitive Power of Institutional Investors, 81 Antitrust L.J. 669 (2017).
 See Daniel P. O’Brien & Keith Waehrer, The Competitive Effects of Common Ownership: We Know Less Than We Think, 81 Antitrust L.J. 729 (2017).
 See Menesh S. Patel, Common Ownership, Institutional Investors, and Antitrust, 82 Antitrust L.J. 279 (2018).
 Edward B. Rock & Daniel L. Rubinfeld, Antitrust for Institutional Investors, 82 Antitrust L.J. 221 (2018).
 FTC Commissioner Rohit Chopra also delivered remarks at the hearing, taking a slight detour from the agenda and focusing instead on the antitrust and consumer protection implications of rising corporate debt and executive compensation. He began his remarks by observing that “large corporations increasingly dominate the economy” and that “[they] are complex, sprawling, with significant power to exert over the economy and democracy.” With regard to debt, Commissioner Chopra stated that high levels of debt can encourage risky and anticompetitive behavior. He explained that “heavily indebted companies can get desperate . . . [and] have more incentive to save money by taking illegal shortcuts or make money by beating out competitors using illegal practices,” citing a recent example in the for-profit education sector. Commissioner Chopra next turned to executive compensation, characterizing it as “a virus in the economy that is distorting incentives” and arguing that stock options and other “performance-based incentives may actually lead to unnecessary risk.” He argued that the FTC should take into account the impact of corporate debt and executive compensation on incentives in enacting policy and considering remedies.
 OECD, Hearing on Common Ownership by Institutional Investors and Its Impact on Competition, Note by the United States (Nov. 28, 2017).
 Antitrust in the Financial Sector: Hot Issues & Global Perspectives, Fordham Law School (May 2, 2018).
 15 U.S.C. § 18. The exemption was specifically intended to minimize the impact of merger review on capital markets. See S. Rep. No. 94-803 at 66 (May 6, 1976).
 15 U.S.C. § 18a. The HSR form requires acquirers to identify certain shareholders, minority holdings, and “associates” under common ownership and/or investment control.
 In 2016, the DOJ obtained a record $11 million fine against ValueAct for violating the HSR Act by failing to file premerger notification for its acquisition of minority stakes in two merging parties — Halliburton and Baker Hughes — worth over $2.5 billion. According to the DOJ’s complaint, ValueAct’s reliance on the investment-only exemption was misplaced because it purchased the shares with the intent to influence the companies’ business decisions, including in relation to the merger. In addition to paying the fine, ValueAct was prospectively enjoined from relying on the exemption when intending to influence certain basic business decisions, including with respect to M&A strategy, corporate restructuring, and the pricing, capacity, or output. See DOJ Press Release (July 12, 2016). See also United States v. Third Point Offshore Fund, Ltd. (2015).
 15 U.S.C. § 19.
 In 2016, the DOJ reportedly investigated whether institutional investors facilitated collusion between major U.S. airlines on capacity and price. See Steven Davidoff Solomon, Rise of Institutional Investors Raises Questions of Collusion, NY Times (April 12, 2016). No enforcement action was taken.
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