From: Grant Bishop and Jacob Greenspon
To: Matthew Boswell, Commissioner of Competition
Date: November 22, 2019
Re: Canada should tread carefully on “common ownership” concerns
With the growing role of institutional investors with diversified investment strategies in equity markets, competition authorities are increasingly attuned to the potential competition concerns from “common ownership,” where a shareholder holds a minority position in multiple competitors operating in the same markets.
The main concern is that such common ownership could reduce firm's incentive to compete against rivals with shared ownership.
For example, the European Commission’s 2017 decision following its review of the Dow/Dupont merger, examined common shareholdings across relevant product markets, and found that the industry is characterized by significant common shareholding (through “passive” shareholders). The Commission found that large minority shareholders “exert influence on individual firms with an industry-wide perspective” and concluded that common shareholding was relevant context around impediments to competition in agrochemicals.
In its recent meeting, the C.D. Howe Institute’s Competition Policy Council considered the appropriate approach to common ownership issues for merger reviews in Canada. The consensus was that the Competition Bureau would validly examine common ownership where the relevant market already raises concerns of market power, reduced competitive intensity or coordinated effects. When common ownership exceeds 10 percent of voting rights in multiple competitors, the Bureau would appropriately examine whether the common shareholders exercise material influence over those companies. This follows the approach under the Bureau’s Merger Enforcement Guidelines.
However, certain Canadian practitioners believe the Bureau’s formulaic approach to minority shareholding represents a disproportionate response to an unsubstantiated issue that risks “chilling” companies’ access to capital. They point out that passive institutional investors play an increasingly important role in capital markets – particularly for public companies.
The recent attention to common ownership internationally partly stems from emerging academic research (principally relying on data on US markets) that has indicated increasing concentration through “horizontal shareholdings” and observed correlation with rising consumer prices in sectors with concentration through common ownership. Empirical studies have found higher prices associated with common ownership in the air travel, retail banking, pharmaceutical, and agri-seed industries as well as relationships with executive compensation and acquisition bids (although causal evidence is limited). Other research has proposed causal mechanisms and theoretical models for how common ownership affects prices in general.
Certain scholars hypothesize that this common ownership prompts firms’ managements to maximize the cumulative returns for investors who also invest in its competitors – either through unilateral easing of its own competitive intensity or tacit collusion with other commonly owned firms.
Nonetheless, correlation between such common ownership concentration and above-market returns does not clearly demonstrate causation. Common ownership across multiple firms across a sector can hedge against the risks facing a single company, and institutional investors may often hold minority positions in a cross-section of competitors as a legitimate diversification strategy.
Moreover, many question whether theories of harm around common ownership are a practical concern. For common ownership to reduce a firm’s incentives to compete, minority shareholders would have to possess significant influence over a firms’ managers – such that the managers will weigh the joint returns for those minority owners over the returns for other shareholders. Diversified investment strategies, and index funds that rely on them, have also arguably increased stability and accessibility for regular investors.
Therefore, any potential effect from common ownership would be mitigated where the competitors have distinct controlling shareholders. A controlling shareholder will push managers to maximize the firm’s profits alone and will not be threatened by minority shareholders with interests in other firms.
All of this points to the need for the Bureau to tread carefully on common ownership. Various practitioners argue that theoretical possibilities, which are unlikely to arise practically, should not dictate the Bureau’s default screening processes for regular merger reviews.
In its recent communiqué on the issue, Council members also generally agreed that common ownership would rarely be determinative in merger reviews. At most, common ownership is likely to be a contextual factor in analyzing the potential for reduced competition in an already concentrated market. Even so, given the uncertainty about whether the concerns identified in US studies on common ownership apply in the Canadian context, Council members also supported further empirical work to assess the state of common ownership in the Canadian economy.
Grant Bishop is Associate Director, Research at the C.D. Howe Institute.
Jacob Greenspon is a Master of Public Policy candidate at the Harvard Kennedy School.
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The views expressed here are those of the authors. The C.D. Howe Institute does not take corporate positions on policy matters.
