Common Ownership, Institutional Investors, and Antitrust

• Author: Menesh S. Patel
• Position: Acting Professor of Law, University of California, Davis, School of Law
• Pages: 279-334

COMMON OWNERSHIP, INSTITUTIONAL INVESTORS,

AND ANTITRUST

M

ENESH

S. P

ATEL

*

A potentially severe antitrust problem may be going uncorrected. It is well

known that institutional investors now hold a substantial amount of the equity

issued by U.S. companies—by some accounts nearly 70–80 percent of the

total market value of U.S. common stock

1

—and that a portion of these hold-

ings are in companies that actively compete against one another. Scholars

have argued that institutional investors’ ownership interests in rival firms are

diminishing firms’ competitive incentives and harming competition in a man-

ner inimical to the antitrust laws.

2

Given the large amount of equity held by

institutional investors, if institutional investors’ ownership interests in U.S.

public companies are in fact reducing companies’ incentives to compete, the

impact on consumer welfare could be great. The potential scope of the anti-

trust issue is so broad that some have described institutional investors’ exten-

sive ownership interests in competing firms as “the major new antitrust

challenge of our time.”

3

The antitrust issue is one of common ownership, a circumstance in which

one or more of a firm’s shareholders directly or indirectly has a concurrent

equity interest in one or more of the firm’s rivals. While common ownership

is not new to antitrust, it had largely been neglected by scholars until recently,

when a group of economists conducted empirical studies showing a potential

relationship between prices and the extent of institutional investors’ common

ownership in two market segments.

4

The analysis in these articles relied heav-

* Acting Professor of Law, University of California, Davis, School of Law. I thank Michael

Perry, as well as Merritt Fox, Thomas Hydrick, Gabriel Rauterberg, and participants at the De-

partment of Justice’s Competition Law & Policy Series for their helpful comments.

1

See infra Part I.A.

2

See, e.g., Einer Elhauge, Horizontal Shareholding, 129 H

ARV

. L. R

EV

. 1268 (2016); Eric A.

Posner, Fiona Scott Morton & E. Glen Weyl, A Proposal to Limit the Anti-Competitive Power of

Institutional Investors, 81 A

NTITRUST

L.J. 669 (2017).

3

Posner et al., supra note 2, at 670.

4

See Jos´e Azar, Martin C. Schmalz & Isabel Tecu, Anticompetitive Effects of Common Own-

ership, 73 J. F

IN

. (forthcoming 2018) [hereinafter Azar et al., Airlines article], ssrn.com/abstract

279

82 Antitrust Law Journal No. 1 (2018). Copyright 2018 American Bar Association. Reproduced

by permission. All rights reserved. This information or any por tion thereof may not be copied

or disseminated in any form or by any means or downloaded or stored in an electronic

database or retrieval system without the express written consent of the American Bar

Association.

280

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L

AW

J

OURNAL

[Vol. 82

ily on a modified metric of market concentration, called the Modified

Herfindahl-Hirschman Index (MHHI). The MHHI is based on the Herfindahl-

Hirschman Index (HHI) commonly used by courts and the federal antitrust

agencies in merger cases but adds to it an additional concentration metric that

incorporates common ownership, the MHHI delta. In addition to showing pos-

sible price effects in the two market segments, these and other related studies

documented high levels of common ownership in the United States and

demonstrated that the very same institutional investors are among the top

shareholders of competing firms.

These studies generated considerable concern in and outside of academia.

Some considered the high levels of common ownership in the United States

economy, coupled with the empirical findings, as evidence that common own-

ership was generating significant competitive harm and called on the federal

antitrust authorities to take action. One well-known proposal asks the Depart-

ment of Justice and the Federal Trade Commission to investigate any stock

acquisition that results in the MHHI and MHHI delta exceeding certain

threshold amounts.

5

A competing proposal would limit investors’ sharehold-

ings in certain industries through the adoption of a new enforcement policy by

the federal antitrust agencies.

6

A more recent proposal motivated less by a

concern that common ownership generates competitive harm and more by the

interest served in providing investors with litigation certainty would create an

antitrust safe harbor for investors who limit their holdings below a particular

threshold amount, refrain from board representation, and only engage in ordi-

nary corporate governance activities.

7

In order to capably assess whether common ownership actually poses a

significant antitrust concern and to formulate sound antitrust policy, it is nec-

essary to have a sufficiently developed understanding of whether and the cir-

cumstances under which common ownership can generate harm to

competition in a given market. Analysis of competitive effects underlies all of

antitrust law. However, because common ownership until very recently was

not an active object of scholarly antitrust research, the economic and legal

literature has relatively little to say about the competitive effects of common

ownership

8

compared to cognate sources of potential competitive harm, such

=2427345 (May 13, 2018); Jos´e Azar, Sahil Raina & Martin Schmalz, Ultimate Ownership and

Bank Competition (July 23, 2016) (unpublished manuscript) [hereinafter Azar et al., Bank Com-

petition paper], ssrn.com/abstract=2710252.

5

See Elhauge, supra note 2, at 1302–03.

6

See Posner et al., supra note 2, at 678, 708–10.

7

See Edward B. Rock & Daniel L. Rubinfeld, Antitrust for Institutional Investors, supra this

issue, 82 A

NTITRUST

L.J. 221, 270–73 (2018).

8

See, e.g., Jonathan B. Baker, Overlapping Financial Investor Ownership, Market Power,

and Antitrust Enforcement: My Qualified Agreement with Professor Elhauge, 129 H

ARV

. L. R

EV

.

2018]

C

OMMON

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WNERSHIP

281

as mergers and firms’ partial acquisitions of rivals, which have both been the

source of considerable legal and economic analysis and, especially in the case

of mergers, a robust body of case law and agency consent orders. The relative

lack of attention to developing a comprehensive understanding of common

ownership’s competitive effects is an impediment to devising good antitrust

policy.

This article takes an important step in filling this gap in the literature by

conducting a systematic analysis of the competitive effects of common owner-

ship. The article presents a number of key findings concerning common own-

ership and antitrust.

As a preliminary matter, it is generally understood that common ownership

can potentially generate competitive harm. The basic intuition is that if a

firm’s shareholders have ownership interests in a rival firm, then a decrease in

the intensity with which the firm competes increases its rival’s profits, which

are ultimately returned back to the firm’s shareholders through their owner-

ship interests in the rival. In other words, common ownership can incentivize

a firm to trade off its profit for the profit of its rival, which can cause the firm

to compete less intensely, resulting in higher prices and competitive harm.

This potential harm to consumer welfare is a unilateral effect (i.e., non-collu-

sive price increases by the firms subject to common ownership) that arises

because of changes in pecuniary incentives, apart from common owners exer-

cising any control of or communicating with the firms in which they invest,

though any such control or communication can amplify the potential competi-

tive harm. Common ownership also may potentially generate competitive

harm through coordinated effects (i.e., collusive conduct or tacit coordination

by firms in the relevant market).

The potential for competitive harm, however, does not answer the ultimate

question of interest—whether, and under what circumstances, common own-

ership actually will substantially lessen competition in a given market. This

article shows that there is no simple answer to this question. Instead, whether

and the extent to which common ownership will result in competitive harm

depends on numerous factors, such as the nature and extent of common own-

ership in the relevant market, the structure of the market, shareholder incen-

tives, managerial objectives, and other factors.

For example, the extent of the competitive effects of common ownership

will depend critically on the structure of the relevant market. The competitive

effects of common ownership in a market where all products are close substi-

tutes will differ from the competitive effects of the identical configuration of

F. 212, 217 (2016) (“[T]he magnitude and scope of the problem [of common ownership] ha[s]

not been fully established in the economic literature.”).