Minority Shareholdings: New Competition Law Issues?

New competition law issues with respect to minority shareholdings?

A topic that recently became prominent in the competition law community and beyond is whether so-called "common ownership" may have a negative effect on competition. "Common ownership" describes the situation where large institutional shareholders (such as investment funds, foreign wealth funds, pension funds, etc.) hold large minority stakes in a number of companies that are active in the same industry and compete with each other.

The negative effects that have been described in two recently published studies may have an impact on how competition authorities assess minority shareholdings by institutional and strategic investors, which is of importance for institutional investors structuring their portfolio, for strategic investors who pursue an investment strategy targeted at a given sector, and also for companies that seek to attract specifically such institutional or strategic investors. The importance attached to this issue is demonstrated by the fact that the German Monopolies Commission (an advisory body to the Federal Government) covered this issue in its latest biennial report released on 20 September 2016. It appears likely that competition authorities around the world will examine closely such shareholdings in the future, either on the basis of currently existing legal provisions, or even on the basis of new, or amended, legislation.

Debate triggered by economic studies

The current debate has been triggered by two recently published economic studies. The studies found that there is empirical evidence that - at least in concentrated markets - competition is weakened, and consumer prices may increase, if there is a significant degree of common ownership. By way of example (the sectors examined in the studies were airlines and banking in the US): Out of United Airlines' seven largest shareholders, who hold 60% of the voting shares, five were also among the ten largest shareholders of Southwest and Delta Airlines respectively. Airline ticket prices were found to be 3-11% higher due to common ownership, compared to prices to be expected absent common ownership. The interest sparked by the studies has to do with the fact that common ownership has increased over the last decades - investment funds today manage billions of Euros.

Why may common ownership lead to a lessening of competition?

Absent common ownership, firms compete in order to gain market shares at the expense...