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Five things investors and listed companies need to know about the common ownership debate and why it matters



Five things investors and listed companies need to know about the common ownership debate and why it matters

By Tilman Kuhn, Partner, White & Case and Cristina Caroppo, Associate, White & Case

Links between competitors based on investors’ parallel ownership of stock in them have come under the spotlight of the antitrust community. In particular, institutional investors – such as BlackRock, Vanguard or State Street – who invest into thousands of companies but hold only minority stakes that do not give them control (or “competitively significant influence” under German antitrust law), have become a focus of the recent debate. Although the empirical evidence that these shareholdings may have anti-competitive effects, and the underlying “theory of harm” is far from clear and convincing, the issue has found its way into at least the European Commission’s decisions and led to OECD meetings and FTC Hearings in the US. Therefore, it is likely here to stay, and investors and their portfolio companies (i.e., typically publicly listed companies) should take it into account when considering corporate transactions in industries with substantial common ownership.

Here are five things companies need to know about the issue.

What is the theory and where is it coming from?

In a nutshell: Critics claim that common ownership structures, i.e., where investors have parallel minority ownership in competitors, reduce competition in the industry concerned, because – allegedly – the portfolio companies’ managements will act in a way that maximises their investors’ total equity portfolio profits, rather than the individual profits of the companies they are leading. In that way, they would compete less vigorously with their rivals than without common ownership. Although it is not controversial that common ownership can harm competition – after all, a complete merger is a special case of common ownership –, many claims in the literature, merger decisions, and policy discussions, are based on an inconsistent and/or unpersuasive theory, or misapplications of well-understood theories.

In principle, the theory assumes that managers care about the returns to their owners, but because the owners typically have different common ownership interests, they have different preferences over the manager’s choices.  Therefore, the manager has to(i) know what the owners’ specific interests regarding specific competitive actions are, and (ii) decide how much weight to give each owner’s preferences in deciding what to do.

Who are the advocates of the theory and what do they argue?

The discussion is primarily based on three academic papers on the airline industry, the banking sector, and executive compensation. The airline paper, which is at the origin of the discussion, estimates an average ticket price increase of 3-7% based on common ownership in the industry.

Probably the most outspoken critic of common ownership has even argued that common shareholdings are unlawful under antitrust laws, calling it the “greatest anticompetitive threat of our time”.

On this basis, some authors have called for antitrust action, including (i) that acquisitions of minority shareholdings in “concentrated markets” should require merger control filings and review, (ii) regulatory approaches to limit common ownership either by limiting the size of the shareholding (e.g., to not more than 1%) or the number of companies institutional investors are allowed to acquire stock in, and (iii) tighter corporate governance rules for institutional investors.

However, the empirical work is neither comprehensive, nor convincing or mature enough to justify such drastic changes to well-established merger control concepts. In addition, the papers’ evidential value has been criticised heavily both regarding their empirical and theoretical foundations, due to inconsistencies in the data and counter-studies that failed at replicating the outcomes, as well as shortcomings in the applied methodology. One relatively obvious objection regarding the airline paper is that there were significant market changes during the period under review, such as 9/11 and airline insolvencies, which certainly had an impact on prices and were totally unrelated to any common ownership structure identified in the industry.

How does the issue come into play in antitrust practice?

The issue can be tackled from two angles  from a merger control perspective or under the “cartel prohibition” (prohibition of agreements or concerted practices restricting competition, e.g., Article 101 TFEU).[i] Further, under the pertinent merger regimes, it could be dealt with when (i) investors acquire minority shareholdings or when (ii) portfolio companies merge with competitors.

As regards (i), most merger control regimes do not capture minority acquisitions below the level of control or at least substantially below 25%. Even under the German concept of “competitively significant influence”, it would seem to be a stretch to consider the investor’s acquisition of stakes of less than 10% without board representation or other forms of governance positions or rights, and without controlling a portfolio company active in the same market an upstream or a downstream market, or a market closely neighboring to the target’s market, as a notifiable concentration. The US regime is an exception but provides for an “investment only” exemption in case of passive investments.[ii]

Hence, the discussion will likely primarily focus on mergers between portfolio companies, where it has two dimensions: (i) it may well be that mergers of competing companies in industries with substantial common ownership will be blocked at lower “thresholds” based on the theory that portfolio companies’ market shares alone tend to underestimate concentration in the industry, and that the remaining competitors will abstain from vigorous competition because they have common investors; (ii) where competition authorities require divestitures for merger clearance, they need to consider whether common ownership calls into question a divestiture buyer’s independence from the merging parties.

Regarding (i), there are two established types of anti-competitive effects that could arise from mergers between competitors, namely unilateral or coordinated effects. First, unilateral effects could arise from common ownership structures if management of several portfolio companies unilaterally decided to compete less vigorously with their competitors to maximize industry profit and please their common investors. Overall, this leads to reduced competition between the companies. Second, the common ownership structure could increase the incentives for tacit parallel behaviour (i.e., coordinated effects) between the competing companies due to increased market transparency.

The above-mentioned unilateral effects concerns are based on the model of “partial” or “cross-ownership, i.e., direct ownership of stock in one competitor by another. It is established that such direct ownership between competitors can potentially harm competition, due to (i) reduced incentives of the acquirer to compete with the target, (ii) the acquirer’s potential to influence the target’s strategy/conduct, and/or (iii) access to competitively sensitive information.

However, these assumptions are not per se applicable to the model of common ownership. While one may assume that each investor has a unilateral interest to maximize not only one portfolio company’s but the investor’s entire portfolio companies’ output, the theory lacks a reasonable explanation as to why the companies’ management might also have such an interest. Notably, in many cases, managers are compensated to a significant extent in stock (options) and, hence, they have at least an incentive to maximize their own company’s profit to secure and/or increase their own compensation.

The second theory, i.e., potential coordinated effects arising from common ownership, seems at first sight less far-fetched – management of competing companies could have an incentive to compete less vigorously if they can be sure that their rivals will act similarly. However, such tacit coordination between competitors is only realistic if certain key conditions are met.

In particular, the management of such companies would need to be able to identify the group of common investors that has common interests and how those interests translate into concrete action as well as be reasonably certain that their rivals also understand these interests and actions to be taken the same way. Moreover, the focal point for coordination of concrete competitive action is unclear. In any event, a common understanding between rivals would seem to require that the investors influence their portfolio companies’ management. And this assumption is what the authors believe weakens the theory of harm drastically. This is because there is no evidence that it is typically even possible for institutional investors to influence management’s competitive behaviour, and/or that investors have (parallel) incentives to do so.

As regards both factors, (institutional) investors and portfolio companies alike should take the chance to shape the current discussion. They should clarify whether and how investors’ contacts with portfolio companies involve competitive topics at all. Also, how the portfolio companies’ managers’ compensation schemes and other factors incentivise them to maximise only the profits of the company they are leading, not those of the entire industry. It seems highly doubtful that large institutional investors with stock in thousands of companies via different funds with different investment strategies actually have the capacity to engage with their portfolio companies’ management on specific competitive actions, and whether all institutional investors’ interests and incentives are aligned.

In the same vein, it is highly doubtful that investors with stock in upstream and downstream companies have the incentive to maximize profit at one level while simultaneously harming their investments in an upstream/downstream market. This is another key argument for investors to demonstrate how unrealistic the theory is in a real-world business scenario.[iii]

Is there already case-law?

While the debate is still at a very early stage, the discussion already found its way into US[iv]and EU merger control law. In particular, the European Commission picked up the issue in two recent agricultural merger decisions, i.e., Dow/DuPont and Bayer/Monsanto.

In Dow/DuPont (2017), the Commission assessed whether and how common ownership in the agrochemicals sector influenced the remaining competitors’ incentive to fill the (alleged) gap of industry innovation the merger was deemed to cause. Notably, the Commission did not find that shareholders had influenced the companies’ management; the only thing it found was “that large shareholders have a privileged access to the companies’ management and can, therefore, share their views and have the opportunity to shape the companies’ management’s incentives accordingly”. Based on this assumption, the Commission used common shareholding in the agrochemicals industry “as an element of context in the appreciation of any significant impediment to effective competition” and found that the remaining competitors would have less incentive to engage in vigorous innovation competition.[v]

In its Bayer/Monsanto decision (2018), the Commission went one step further and speculated – without finding any evidence – that “[i]n a hypothetical scenario, the 23 common shareholders of DowDuPont and Monsanto that have a total portfolio value in all firms of EUR 1,000 million or more could decide to vote in a coordinated manner in a view to maximizing the value of their portfolio in the seeds and traits, and crop protection industry.”

On the divestiture side, e.g., as regards BASF’s independence as a suitable remedy buyer, the Commission found “that the debate regarding common shareholdings is relatively recent and not yet entirely settled” and came to the conclusion that the remedy transaction would not increase the level of common ownership significantly. However, the Commission did not address the apparent inconsistency of finding issues with common ownership and the investors’ likely influence on the portfolio companies when assessing whether the main transaction impeded competition.

What will the near-term future bring?

The claims for action – i.e., increased merger regulation in “concentrated industries”[vi], regulatory approaches regarding limited investing opportunities, etc. – will not pass by without a trace and could in particular drastically decrease the benefits of passive index fund investments. It may also impede pro-competitive mergers between portfolio companies.

Especially in light of the far-reaching conclusions the Commission reached in its Dow/DuPontdecision, it will be difficult for companies to find arguments against the Commission’s critical attitude towards common ownership structures that fits the antitrust authorities’ currently prevailing perception that many markets are too concentrated and that income and wealth inequality is growing.

[i] The following will be limited to the merger control aspect.

[ii] As regards the US and its “solely for investment exception” under the Clayton Act, Elhauge requests US antitrust agencies could pursue future common ownership investments under a Clayton provision that prohibits “any stock acquisition that leads to anticompetitive impact”. However, the US focus seems to be and to remain on Section 1 of the Sherman Act and whether common ownership leads to agreements to improperly share competitively sensitive information, allocate markets, or fail to compete.

[iii]Besides the alleged investors’ influence described above, the scenario of coordination between competing companies only becomes realistic if all participants can determine whether there are “cheaters” and effectively sanction them, i.e., market transparency plays a decisive role in this theory of harm. However: it is unclear, how competing portfolio companies benefit from their common investors’ insight into their rival’s business activities if it wasn’t for the investors to ensure the companies coordinated their behaviour. This, however, would raise clear hub-and-spoke antitrust issues, and would require clear empirical evidence (which the theory still lacks).

[iv] In 2016, US investment company ValueAct entered into a settlement agreement with the US Department of Justice and paid USD 11 million to settle allegations that it (i) failed to submit a filing under the Hart-Scott-Rodino Act for its minority investments in Baker Hughes and Halliburton, and (ii) attempted to influence certain business decisions related to the Baker Hughes/Halliburton merger.

[v]Notably, the Commission came to a number of additional broad and far-reaching unqualified conclusions that will probably have an important impact on future merger decisions, e.g.: “[t]he economic literature provides empirical evidence showing that “passive” investors are active owners” and “[t]he economic literature show that firms’ incentives to increase prices increase with partial ownership of competitors.

[vi]Especially unspecific claims for measures in “concentrated industries” that lack a clear-cut checklist as to how to define such industries, lead to increased legal uncertainty for the companies’ self-assessment whether to notify an acquisition of shares.


Reuters Events Launch Global Investment Summit Online Edition Uniting Institutional Investors, Asset Owners & Financial Institutions



Reuters Events – today announced the agenda for their Global Investment Summit (Dec 3rd -4th). The 2-day strategic summit has been reimagined in the era of social distancing and will be broadcast free of charge to the public.

This Summit, with a diverse range of international voices and anchored by Reuters News-led sessions, is the only place for institutional investors, asset owners and financial institutions to come to terms with the events of 2020.

Click for more information and for complimentary registration to the online edition

The Energy Transition team report an industry leading speaker faculty for 2020, including:

  • Eileen Murray, Chair, Finra
  • Philip Lane, Chief Economist, European Central Bank
  • Gregory Davis, Chief Investment Officer, Vanguard
  • Hanneke Smits, CEO, BNY Mellon Investment Management
  • Pascal Blanque, Chief Investment Officer, Amundi
  • Desiree Fixler, Group Chief Sustainability Officer, DWS
  • Joe Lubin, CEO, Consensys
  • Bahren Shaari, CEO, Bank of Singapore
  • Mark Machin, CEO, Canada Pension Plan Investment Board

The agenda released by Reuters Events Investment is both ambitious and comprehensive, and will cover four key themes: Market Outlook, Asset Management Strategies, Industry Deep-Dives and the Future of Investment.

View the full agenda here

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Halliburton & Baker Hughes CEO’s join Reuters Events: Energy Transition 2020



Reuters Events – today announced that CEO’s of two of the world’s leading energy service companies, Halliburton and Baker Hughes, will join the speaker faculties for their flagship Energy Transition Summit.

The event will explore the creation of the future energy ecosystem and offer companies, from across the asset spectrum, a definitive guide to their net-zero strategies. The alignment of the two biggest O&G global service companies, Halliburton and Baker Hughes, represents a significant step in the transition to low-carbon energy

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

Alongside their CEO speaker representation, Halliburton join as Platinum sponsors of the North American edition. Baker Hughes join as gold sponsors for the European edition of the flagship energy transition program.

The Energy Transition team report an industry leading speaker faculty for 2020, including:

  • Lorenzo Simonelli, Chairman & CEO, Baker Hughes
  • Jeff Miller, CEO & President, Jeff Miller
  • Tristan Grimbert, CEO, EDF Renewables
  • John Pettigrew, Chief Executive, National Grid
  • Pratima Rangarajan, CEO, OGCI Climate Investments
  • Alex Schneiter, CEO & President, Lundin Energy
  • Gretchen Watkins, President, Shell Oil Company
  • Calvin Butler Jr., CEO, Exelon Utilities
  • Francis Fannon, Assistant Secretary ERB, S. Department of State
  • David Lawler, Chairman & President, bp America
  • Andreas Schierenbeck, CEO, Uniper

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

Governance & Cooperation – Does the energy transition face a ‘governance deficit’? To understand how the energy transition will develop over the next decade, it is crucial to understand the driving governing forces behind it. Will the Green Deal provide the first domino, how can we ensure progress in the shadow of Aberdeen and ensure that we translate targets into action?

Financing Energy Transition – We must address the elephant in the room; who is going to pay for it all? An understanding of where the funds are likely to come from is key to staking claim to the infrastructural projects that will redefine the modern world in the 21st century.

New Energy Infrastructure – Low-carbon energy supply and consumption will need a radical overhaul of infrastructure. As well as revamping the old, we’ll need entirely new assets and new systems of energy delivery. It’s an unprecedented opportunity with estimated spending at $70 trillion over the next decade. Knowing which technologies are ready to be scaled first is the key to understanding opportunity

Business Model Innovation – Who will provide leadership through the age of transition and how do we want our future energy system to look? Speed and timing will be crucial if you are to stay on the right side of the transition. Join us in setting business led, evidence based, targets as industry drives towards net-zero

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

At Reuters Events, we’re committed to tackling the Energy Transition head on; to shed light on the defining issue of our time and help energy companies meet a uniquely difficult challenge. That is, to be both an energy company of today, and the energy companies of tomorrow. In a period that will be defined by uncertainty we can, together, lighten the way forward.” – Owen Rolt, Head of Energy Transition, Reuters Events


Owen Rolt

Head of Energy Transition

Reuters Events

UK: +44 (0) 207 375 7596

E: [email protected]

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COVID-19 is changing people’s preferences when it comes to BTL investments



COVID-19 is changing people’s preferences when it comes to BTL investments 1

By Jamie Johnson, CEO of FJP Investment

Throughout 2020, investors have had to navigate increasingly treacherous and volatile market conditions as a consequence of the COVID-19 pandemic. No country has been immune to the coronavirus outbreak, particularly here in the UK.

Yet even as the country enters another phased lockdown of sorts, demand for UK property has remained strong. After a brief period of suppressed demand after initial lockdown measures were introduced in late March, the UK’s implementation of the stamp duty land tax (SDLT) holiday triggered a rush in demand for bricks and mortar. As a result, both house prices and transactional activity is rising.

With this new surge in demand resulting in an 18-year-high of UK house price growth, according to the Royal Institute of Charted Surveyors, buy-to-let (BTL) investments have also substantially increased in popularity.

It’s easy to understand why. BTL investments offer landlords both long-term capital growth and regular returns in the form of rental payments. And now, as the SDLT holiday deadline beckons closer, investors keen on taking advantage of the comparative discounts on offer must act quickly.

My advice to those considering a BTL investment in the UK is to understand and appreciate the longstanding market changes that have been brought about by COVID-19. Traditional BTL hotspots are being challenged by a rise in tenant demand for real estate in up-and-coming cities and regions.

For example, the COVID-19 pandemic has resulted in the majority of the workforce working remotely from home. Recent data from property listing site Rightmove makes clear the shift in demand away from central London and towards less densely populated regions; with areas like Cambridge and Oxford seeing 76% and 64% more rental searches respectively and searches in areas like Earl’s Court dropping by 40%.

This is the clear result of previously London-based professionals realising the benefits of working from home. As businesses identify the financial drawbacks and COVID contagion risks of having all their staff physically present five days a week, employers will seek out smaller commercial workspaces.

At the same time, we are also seeing workers looking to rent larger, cheaper properties that might be further away from their office. This is due to the fact that they are unlikely to need to commute every working day to their office, even once the COVID-19 outbreak has been contained.

But, where exactly are the best larger, cheaper properties to be found? Where are the UK’s emerging BTL hotspots that need to be on the radar of prospective investors? I explore these pertinent questions below.

Liverpool life

Those who have been closely following the UK’s housing market will know just how primed Liverpool is for BTL investment. As a key recipient of the UK Government’s Northern Powerhouse funding, and with massive developments like Liverpool Waters and Wirral Waters soon to be completed, the city’s housing supply is ready to meet the demands of those taking part in the aforementioned London professional exodus.

With Liverpool constantly ranking No.1 in rankings of UK cities for BTL investment, it’s evident why investors would be keen on completing purchases of Liverpool property before the end of the SDLT holiday. Though even after the SDLT holiday ends, there’re still plenty of reasons to be optimistic about Liverpudlian BTL investment. Prime Minister Boris Johnson’s government is firmly committed to ‘levelling up’ the North of England through regional regeneration, and planned high speed rail connections between Liverpool and other northern cities will only add to the investment potential of the city.

Leeds living

Although Liverpool boasts the highest rental yields for BTL landlords in real terms, Leeds was recently named the most profitable city to become a landlord in the whole of the UK by CIA landlord. By evaluating numerous metrics; including mortgage costs, average rent, average monthly landlord costs and average property prices, they determined that Leeds was the best city for potential buyers to make their first foray into BTL investment.

And, looking at recent trends, it’s easy to see why. Leeds may benefit more from the London exodus than other cities due to its unique position of being a brain gain city’, i.e. one where more students remain after graduation than move away. As a result, it boasts the largest financial services sector in the nation after London, making it an ideal locale for employers in the financial services sector who are seeking cheaper commercial rent outside of London; likely bringing investment and employees with them.

With its strong urban economy likely to be bolstered by its designation as a ‘Northern Powerhouse’ leading business hub, Leeds is ideally positioned for BTL investment over the long-term.

Cardiff’s regeneration

And finally, the capital of Wales brings much to the table when deciding between different BTL investment destinations. With a metropolitan area population of over 1.1 million residents, forecasted to grow by 20% by 2035, demand for property in the city is set to rapidly increase over the next decade. Those able to capitalise on this population growth will be able to access considerable long-term investment opportunities – as recent reports suggest.

Thankfully, it’s unlikely that there’ll be any shortage of housing supply in Cardiff for BTL investors to invest in. Cardiff Bay has emerged as Europe’s largest waterfront development, and the upcoming Central Quay and £500m coastal developments will assist in attracting further investment into the city.

BTL remains a sound investment opportunity

COVID-19 has made evident just how resilient British real estate is as an investment asset. By offering the best of both worlds, namely long-term capital growth and regular rental returns, BTL has successfully remained an attractive and popular investment choice. And, with demand for housing still outstripping supply, the market need for rental accommodation looks set to only grow.

COVID-19 has permanently changed the UK’s housing market and, as explained above, new BTL hotspots are surely due to emerge over the next year. With renters seeking out larger homes in cheaper areas, flexible working patterns will forever change the landscape of the UK’s residential real estate market, and those able to capitalise on it may benefit hugely as a result.

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