Common Ownership and Coordinated Effects

• Date: 01 January 2020

COMMON OWNERSHIP AND COORDINATED EFFECTS

E

DWARD

B. R

OCK

D

ANIEL

L. R

UBINFELD

*

Can shareholders act in ways that interfere with competition in the product

markets of firms whose shares they own? Are shareholders that own shares of

competitors (“common shareholders”) better able or more likely to do so than

shareholders that own shares in only one competitor (“non-common share-

holders”)? If so, how? What are the channels through which shareholders

transmit anticompetitive signals? Can shareholders increase the likelihood of

anticompetitive coordination between competitors by facilitating the detection

and punishment of cheating? Are common or non-common shareholders

more or less dangerous? Should antitrust law address these problems and, if

so, how?

In this article, we explore a variety of factual scenarios that potentially raise

significant antitrust issues from both an economic and a legal perspective.

Although we do not believe that a case has been made that common owner-

ship has systemic anticompetitive effects, as some have argued, we do believe

that in particular factual contexts shareholders (common and non-common)

can behave in ways that cause the firms in which they have an ownership

interest to act anticompetitively. When they do, antitrust enforcers may need

to intervene.

As a result, although we oppose broad market-wide reforms that would

force divestiture or limit share ownership by large institutional investors, we

do believe that antitrust enforcers should remain vigilant in scrutinizing coop-

erative behavior facilitated by shareholders. This article analyzes the specific

contexts in which coordinated anticompetitive effects resulting from low

levels of common share ownership (less than 15 percent) are plausible and

* Edward B. Rock is the Martin Lipton Professor of Law at NYU; Daniel L. Rubinfeld is

Professor of Law, NYU, and Robert L. Bridges Professor of Law and Professor of Economics,

Emeritus, U.C. Berkeley. We are grateful for helpful comments from participants in the NYU

Law and Economics seminar, the NYU/Penn Law and Finance conference, the NYU/Tel Aviv

Comparative Corporate Law conference, David Gilo, Doron Levit, and from the referees of this

journal.

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[Vol. 83

then assesses how the law can strike the difficult balance between procompe-

titive and anticompetitive effects without unnecessarily chilling shareholder

involvement in corporate governance. Our analysis is, by necessity, prelimi-

nary because the application of Section 1 of the Sherman Act and Section 7 of

the Clayton Act to particular factual situations will be context-specific.

With the shift from individual shareholding to holding through investment

intermediaries, the distribution of shareholding has been transformed. In place

of the old “dispersed ownership” model in which individuals directly owned

shares, the overwhelming proportion of shares in U.S. corporations are now

held by institutional investors of one sort or another: mutual funds, insurance

companies, pension funds, and endowments. One consequence of this “de-

retailization” has been increased concentration of shareholdings. In recent

years, with the increased popularity of passive investment strategies (e.g., in-

dex funds and exchange-traded funds (ETFs)), the fund families that manage

the largest index funds and ETFs—BlackRock, Vanguard, and State Street—

have become the largest shareholders of many or even most public compa-

nies. Often the “big three” will each hold in excess of 5 percent of the shares

and many times more than 6 or even 7 percent.

Along with the increased concentration of shareholding, shareholders have

become far more active in corporate governance than in the past. We are liv-

ing in a period of “shareholder engagement.” Activist hedge funds identify

firms that they believe are underperforming, offer new strategies, and, if com-

panies resist, sometimes use proxy contests or the threat of proxy contests to

elect new directors who will try to implement those strategies. Decades of

efforts to encourage institutional shareholders to become involved in corpo-

rate governance have been modestly successful, with most of the largest insti-

tutional investors creating proxy voting groups that meet regularly with the

management of the portfolio companies they own. Likewise, actively man-

aged mutual funds engage regularly with companies as they seek to identify

investments that will increase in value, and sometimes intervene in manage-

ment decisions to push companies in one direction or another. The old model

of shareholder passivity has been transformed.

Recently, some economists have argued that this increase in shareholder

concentration (which has led to greater common ownership) has led to an-

ticompetitive effects in the product markets of firms in concentrated indus-

tries, focusing on airlines and banking.

1

In a widely discussed article, Jose

Azar, Martin Schmaltz, and Isabel Tecu (AST) argued that ticket prices in the

airline industry are as much as 10 percent higher than they would have been

1

Jose Azar et al., Anticompetitive Effects of Common Ownership, 73 J. F

IN

. 1513 (2018);

Jose Azar et al., Ultimate Ownership and Bank Competition (2019), ssrn.com/abstract=2710252.

2020] C

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had shareholding been dispersed.

2

Based on these findings, Einer Elhauge has

argued that the current distribution of shareholdings—both in these two mar-

kets and more generally—is anticompetitive and violates Section 7 of the

Clayton Act.

3

Eric Posner, Fiona Scott Morton, and Glen Weyl, likewise

building on AST, have argued that diversified shareholders should either limit

their holdings to 1 percent in any concentrated market or commit to complete

governance passivity (“put the shares in a drawer”).

4

These views have attracted widespread scholarly attention and have even

begun to exert some influence on enforcement authorities because they sug-

gest that there is a systemic problem that should be treated with a systemic

reform. For example, in the European Commission’s review of the 2017 Dow/

DuPont merger, the Commission devoted a lengthy appendix to reviewing the

common ownership literature and, relying on AST’s “unilateral effects” anal-

ysis, the Commission concluded that “current market shares and concentration

measures such as the HHI underestimate the market concentration and the

market power of the parties.”

5

As we have explained in a prior article, we are unconvinced by AST’s

“unilateral” effects analysis and thus unconvinced that there is sufficient justi-

fication for broad reforms.

6

On the other hand, the increased concentration of

shareholdings could make coordination of conduct among competitors easier

and more effective. These potential “coordinated effects” require increased

antitrust scrutiny.

7

“Coordinated effects” are traditionally at the core of both

2

Azar, Anticompetitive Effects of Common Ownership,supra note 1.

3

Einer Elhauge, Horizontal Shareholding, 129 H

ARV

. L. R

EV

. 1267 (2016); Einer Elhauge,

The Growing Problem of Horizontal Shareholding, 3 CPI A

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. (2017). For an

important earlier treatment of cross-ownership that provides a foundation for the more recent

debates, see David Gilo, The Anticompetitive Effect of Passive Investment, 99 M

ICH

. L. R

EV

. 1

(2000).

4

Eric A. Posner et al., A Proposal to Limit the Anticompetitive Power of Institutional Inves-

tors, 81 A

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L.J. 669 (2017).

5

Case COMP/M.7932—Dow/DuPont, Comm’n Decision, Annex 5, p. 17 (Mar. 27, 2017),

ec.europa.eu/competition/mergers/cases/decisions/m7932_13668_3.pdf. In fact, a positive MHHI

is not necessarily indicative of an increased likelihood of tacit collusion. See, e.g., Menesh S.

Patel, Common Ownership, Institutional Investors, and Antitrust, 82 A

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L.J. 279,

319–20 (2018).

6

Edward B. Rock & Daniel L. Rubinfeld, Antitrust for Institutional Investors,82A

NTITRUST

L.J. 221 (2018) [hereinafter Rock & Rubinfeld I].

7

Antitrust analysis distinguishes between two separate channels through which competition

in markets can be impaired. First, in some cases a change in market structure (e.g., through a

merger between the third and fourth largest producers in a concentrated market) will lessen

competition post-merger by changing the incentives of post-merger firms to compete. Thus, by

eliminating the competition between the two merging firms, a merger may by itself substantially

lessen competition in a relevant market. In some cases, the post-merger firm will find it profita-

ble to raise its prices assuming no change in the behavior of its competitors. The adverse conse-

quences are referred to as “unilateral effects.” U.S. Dep’t of Justice & Fed. Trade Comm’n,

Horizontal Merger Guidelines § 6 (2010) [hereinafter HMG]. Second, sometimes a change in