15 - Common Ownership and Minority Shareholding at the Intersection of Competition and Corporate Law

Summary

Common ownership is the talk of the town in antitrust land. The competitive implications of rival firms being partially owned and controlled by a small set of overlapping owners are both fascinating and hotly contested. Could the source of potential harm be minority shareholder control in a setting of widely held companies? Critics question the extent and mechanisms of common owners’ influence driving any pro- or anticompetitive effects. This chapter aims to present a comprehensive account of partial ownership, capturing the incentives and effects of both individual and institutional investors and also cross- and common shareholding. It illustrates the early historical unity between corporate and competition laws in regulating shareholding acquisitions but also their progressive quiet disconnect. Triggered by the contemporary common ownership (hypo)thesis, it puts forward a taxonomy of shareholding types and their control characteristics from a competition law perspective, with emphasis on commonly thought passive and diversified investment holdings. The chapter concludes by urging competition and corporate governance and finance policymakers towards harmonic regulatory solutions to address common ownership. It also offers a quantum theory of the corporate property “atom”, drawing cautionary tales about the dynamic and ambiguous qualities of minority common shareholding for antitrust enforcers.

15.1 Introduction

Common ownership is the talk of the town in antitrust land. Surrounded by mystery and noise, the competitive implications of rival firms being partially owned and controlled by a small set of overlapping owners are both fascinating and hotly contested. The fascination comes from the fact that the source of potential competition harm may be minority shareholder control in a setting of widely held companies.¹ In fact, the common ownership phenomenon is so pervasive, in particular in the US,² that if this new theory of harm is true, most markets could be beset by serious antitrust concerns. At the same time, scepticism among academics and policy-makers abounds. Most notably, critics wonder about the likely prospect, quantum and mechanics of common owners’ influence driving any pro- or anticompetitive effects.³ It is often stressed that the antitrust analysis of common ownership is clearly distinguishable from that of cross-shareholding links between competitors.⁴ Indeed, the novel concern caused by common shareholdings derives from indirect, and possibly partial, shareholder overlaps across rival firms rather than directly from competitive overlaps in product markets. A comprehensive account of partial ownership, capturing the competition dynamics of both cross- and common shareholding and the incentives of both individual and institutional investors, is notoriously missing.⁵ Yet, so far, the spirited debate between antitrust and corporate law and economics scholars centres on whether this ‘knowledge gap’ is material, set to be filled by better understanding and experience as a matter of course or whether it is a fictional problem and an empty inquiry that is theoretically implausible and empirically unrealistic to unfold.⁶

Against this backdrop, this chapter aims to illuminate some of the latent connecting points in this debate, by looking back into the past and then fast forward to the future. There are two key takeaways from this analysis. The historical split of corporate and antitrust laws and their gradual specialisation in targeting different issues with distinct objectives in mind has unwittingly created regulatory gaps. This is the source of the present-day problem posed by minority and common shareholdings for competition law. With this understanding clear, the analysis moves on to offer a new taxonomy of (partial) shareholdings in light of their partial control characteristics, with distinguishable classifications based on competition and corporate law, as compared to broader economics-focused notions of control. The industrial organisation perspective reveals that commonly thought passive and highly diversified minority holdings are not necessarily innocuous in terms of their competitive implications. Rather, minority common shareholdings may give rise to actual or potential ‘competitive influence’ under certain circumstances (‘influential’ shareholdings).

The corollary is that antitrust cannot afford to neglect such corporate ownership structures and for this reason, it is called to look into the actual corporate governance dynamics in the substantive assessment of cases and in designing appropriate remedies. Yet, the historical and economic analyses further suggest that merger control needs to recalibrate its jurisdictional scope and embrace a ‘structural’ approach, combined with ‘case-by-case’, fact-specific analysis, also for shareholdings falling below legal thresholds of control. This reorientation would not only fill enforcement gaps and capture new theories of harm relating to common shareholding but also reconnect merger control to its corporate law origins in a way that holistically addresses agency costs and market power concerns linked to such shareholding. At the same time, corporate law and governance should be cognizant of these parallel developments and tread softly when shaping their own regulations so that they do not augment any antitrust concerns.

The structure of the chapter is as follows. Section 15.2 provides relevant background on the two-sided history of regulating shareholding acquisitions under corporate and competition laws. Section 15.3 illustrates antitrust’s embeddedness in pre-existing corporate laws and forms, documenting the early unity and progressive quiet disconnect of the two fields in regulating ownership structures and intercorporate links. Section 15.4 presents the contemporary common ownership (hypo)thesis and the distinct challenges and opportunities that it poses for both antitrust and corporate law. Section 15.5 develops a working taxonomy of (minority) shareholding types and their (partial) control characteristics from different perspectives with a particular focus on competition economics. Section 15.6 focuses on the economic attributes and competitive effects of common shareholding seen and analysed through the lens of corporate property rights theory. Section 15.7 concludes with an urge to competition and corporate governance and finance policy-makers for harmonic progression in seeking regulatory solutions to address common ownership and with further implications for competition law following the preceding analysis.

15.2 Mergers and Minority Shareholding: A Two-Sided History

Minority shareholding is an old story in the realm of competition or antitrust laws. It takes us back to the origins of antitrust, or even to preceding developments in corporate law that led to its birth.⁷

Ever since its inception, antitrust was designed to tackle a rampant wave of mergers and acquisitions fuelled by technological and industry developments as well as holding structures (‘trusts’)⁸ between competing companies that essentially led to concentrated economic power and monopolistic market outcomes. The antitrust movement was an immediate reaction to evolving corporate laws. The emergence of the trusts and multistate corporate mergers was the result of a ‘race to the bottom’⁹ with US states ‘competing’ for corporate charters and New Jersey being the first to enable ‘interstate’ holding structures intended to monopolise or cartelise national industries.¹⁰ US federal antitrust law was born in 1890 in an attempt to rein in this ‘accommodating’ interstate competition in corporate laws among different states. Up to that point, state law treated jointly ‘issues of antitrust and corporate authority’.¹¹ Yet, not all anticompetitive mergers or restraints of trade were captured by those initial antitrust laws. In fact, the Sherman Act originally targeted ‘loose’ combinations (cartels) rather than ‘tight’ ones (mergers)¹² but later case law (1904) also applied it to the holding company (‘single business firm’).¹³ Stock acquisitions only became a specific antitrust target of US merger control with the coming into force of the Clayton Act in 1914.¹⁴

Similarly, the founders of the EU avoided incorporating rules controlling corporate ownership structures in the Treaty of Rome, which included solely behavioural rules on cartels and abuse of dominance. Only in 1990, EU Members States agreed to have a pan-European Merger Regulation (‘EUMR’) in place to address cross-border mergers and acquisitions. Till then, the available EU antitrust rules were used as a de facto merger control regime.¹⁵ Indeed, over time, EU authorities decided to make use of Article 102 TFEU to address mergers and ‘majority’ acquisitions.¹⁶ While later on, EU case law further applied Article 101 (and 102) TFEU to minority shareholdings linking competitors and giving rise to ‘some influence’.¹⁷ In fact, part of the reason for the adoption of the EUMR was the foregoing ‘expansive’ use of Articles 101 and 102 TFEU by the European Commission to go after ‘minority’ share acquisitions in competitors.¹⁸ Under pressure, Member States decided to compromise by yielding part of their regulatory powers checking anticompetitive mergers, acquisitions, and joint ventures under national law rather than be de facto completely swept away by creeping EU antitrust competence. The end result of this pragmatic political settlement was that the EUMR was designed to jurisdictionally cover only cases of ‘concentrations’ that give rise to a ‘lasting change of control’, i.e. multistate corporate combinations that confer upon the acquirer positive or negative ‘decisive influence’.¹⁹

Perhaps counterintuitively and for different reasons, US and EU merger control laws shared a little noticed, common trajectory in their origin. Their absence was conspicuous in the inaugural design of cross-Atlantic antitrust rules. EU antitrust law had a ‘top-down’ inception inspired by a high-level political commitment towards an internal market integration objective. Coming only later and independently, EU merger control was the political product of Member States agreeing to a ‘lesser evil’ against pressing supranational antitrust expansion.²⁰ Initially, however, cross-border mergers were seen as a positive force furthering European integration and the competitiveness of its industry rather than in need of any legal constraint.²¹ In contrast, US antitrust law had clear ‘bottom-up’ origins reflecting populistic sentiments of the time against cartelising business trusts and monopolistic merger combinations. US merger control also came into force later but predominantly to fill the gaps left by state corporate laws. Accordingly, the initial omission of merger law both in the EU and the US from the traditional body of antitrust law was not a random policy choice. US antitrust legislators consciously chose to break free from the ‘formalities’ of state corporate law and its ‘structural model’ of dealing with the ‘trust problem’ while opting for a ‘strategic model’ merely governing agreements and combinations in restraint of trade ‘based on economic theory that purported to distinguish between competitive [and] anticompetitive’ ones.²² The distinct concern of the antitrust approach when examining a merger or combination was ‘its object or effect’ on market competition, not ‘its form’.²³ In addition, it was initially believed that issues of firm formation, ownership transfer agreements, and the sale and purchase of property or stock acquisitions, either by a corporation as a legal business entity or by its business owners as physical persons, were beyond the regulatory ambit of antitrust rules.²⁴

Seen in this light, the noted ‘foundational deficit’²⁵ of EU competition law in reaching to partial ownership structures and share acquisitions has not been a singular EU story. Traces may also be found in US legal history, albeit in subtler forms. Yet, what is noteworthy about US antitrust law is its ability for fast(er) adaptation to emerging business and economic realities, such as the disaggregation of state corporate and antitrust policy and the proliferation of multistate business firms, as well as to the rapidly changing content and scope of state corporate laws towards more liberal and enabling rules favourable to private ordering. Indeed, jurisdiction and substantive review under US merger control now resolutely rely on ‘effects-based’ tests, whereas EU merger control jurisdiction retains its ‘formalistic’ reliance on a narrow legal conception of ‘control’.²⁶

15.3 Antitrust Embeddedness in Corporate Forms: The Quiet Disconnect

But the interplay between competition and corporate laws goes one level deeper. Antitrust choices regarding rules or analytical frames had been implicitly premised on pre-existing corporate law and practice in the formative era. Early corporate law in the US till the end of the nineteenth century was much more restrictive and unitary in nature in regulating business entities, their structure and operation, as a legal and social phenomenon. Corporate law not only included far more outright prohibitions (mandatory rules) rather than balancing or enabling rules regarding ownership structure and governance practices within any individual firm but also strictly regulated intercorporate relations. Indeed, in the early days of US corporate law agency problems within the firm were not a major concern as the law and surrounding circumstances at the time ensured there were:²⁷

1. i) no ‘separation of ownership and control’,²⁸

2. ii) no ‘separation of ownership and consumption’,²⁹

3. iii) no ‘separation of control (voting rights) and investment (financial interests)’.³⁰ Or even further, from the perspective of shareholders:

4. iv) no ‘separation of ownership from ownership’,³¹ and

5. v) no ‘separation of ownership and awareness’.³²

The first legally organised companies had been novel combinations of ‘private investment and state-granted monopoly privileges’ to undertake important community projects under special charters.³³ Once chartered companies obtained ‘perpetual existence’ and ‘strong entity shielding’, shareholders acquired a legal ‘right to sell their shares without the consent of other owners’ in exchange for their lost ability to withdraw from the joint venture at will.³⁴ Such monopoly grants served two purposes, one balancing against the other. Monopoly rents were the bait to attract self-interested investors against the risk of ‘control-person opportunism’.³⁵ At the same time, the public interest was also served by enabling large-scale ventures that would not have been possible otherwise. With the corporate form becoming widely available under general incorporation statutes,³⁶ exclusive privileges were no longer a priori guaranteed. Democratisation of the corporate form paved the ground for free market competition. Success in the marketplace was now the driver of private profit-seeking venturers and also the only assurance for firm survival. Competition among independently operating companies was the new modus operandi for serving the public and consumer welfare.

Thus, although anachronistic today, it is no surprise that in its early days, US corporate law was primarily seen as a response to problems of monopoly and market power rather than concerned over agency problems inside the firm.³⁷ Prominent examples are rules regarding voting (caps) or purpose restrictions (ultra vires doctrine),³⁸ prohibition of separately allocating cash flow and control rights or splitting shareholders’ property interests in the firm (bar on the separation of ownership/ investment and control),³⁹ prohibition of acquisitions of foreign (out-of-state) companies,⁴⁰ prohibition of ‘intercorporate stock ownership’ (interlocking shareholding or ‘common stockholders’)⁴¹ and ‘intercorporate influence’ (interlocking directorates or ‘shared directors’).⁴² During this era, it was not obvious that separate corporate entities could acquire or own property or equity interests (shareholding) in others or engage in combinations (mergers) of assets (productive facilities) or stock (capital).⁴³ The legal and economic environment of the time was in other words quite different to what is observed today.

Progressively, however, most of these restrictions were abandoned as corporate law relaxed and redirected its focus on the ‘internal affairs’ of firms,⁴⁴ aiming to minimise agency costs and conflicts of interest. Companies were gloriously emancipated from early state (corporate) control; at the age of adolescence, the only credible constraint on their market and transactional activities was (federal) antitrust law.⁴⁵ Given its liberalisation trends, corporate law was now oriented on developing alternative means of protecting investors, mostly notably minority shareholders,⁴⁶ rather than providing any form of consumer protection against them. While antitrust grew to fill in those gaps, it only comprehensively did so with regard to mergers. Minority share transactions have been loosely regulated especially in the EU whose merger control rules imported corporate law norms, conceptions, and formalities to single out controlling acquisitions from presumably harmless ‘non-controlling’ ones.⁴⁷ Thus, the staggering specialisation of corporate and competition laws on firms and markets, respectively, had its own unintended consequences as the regulation of minority shareholding came to ‘fall between the cracks’.

15.4 The Common Ownership (Hypo)thesis: Corporate Sensibility or Antitrust Overkill?

Nowadays, concern over potentially anticompetitive minority shareholding has taken novel forms. The buzzword is ‘common ownership’⁴⁸ or ‘horizontal shareholding’.⁴⁹ The dramatic growth of large institutional investors⁵⁰ and the indirect concentration of (partial) ownership of publicly listed firms it brought with it, not only signalled the promise of improved corporate governance⁵¹ but also created a major ‘challenge to market competition’⁵² or indeed the ‘greatest anticompetitive threat of our times’.⁵³ More fundamentally, however, common institutional shareholding has both deep and mixed implications for corporate as well as for competition laws.⁵⁴ Arguably, parallel horizontal shareholdings by institutional investors may be perceived as the ‘new trusts’: a modern version of horizontal shareholder structures interconnecting competing firms.⁵⁵ The interest and curiosity in increasing common ownership by institutional investors arouse not only due to its a priori ambiguous welfare effects⁵⁶ but also even more because it challenges the fundamentals of antitrust (and organisational) conventional wisdom.

Traditionally, minority cross-shareholdings have been a natural object of competition law concern and attention considering the direct competitive overlaps between firms operating in a (horizontal or vertical) competitive relationship.⁵⁷ Now, a new ‘economic blockbuster’⁵⁸ has become the epicentre of ground-breaking competition law and economics scholarship: the same group of large, concentrated, and diversified financial intermediaries partially own and control significant parallel shareholdings in the major competing firms within a given industry across the economy. On the one hand, the stakes held by each institutional investor in individual firms are small in absolute terms, thus considered ‘non-controlling’ on a stand-alone basis from a governance perspective, and often ‘passive’ given the indexation and portfolio diversification investment strategies employed by institutional investors from a finance perspective. However, empirical and theoretical economic research reveals that they may (and do) nonetheless affect competition outcomes in product markets.⁵⁹ Modern finance theory and the evolution of capital markets have transformed the investment landscape towards increasing diversification and institutional investment, with indirect (and unintended) consequences for corporate ownership, governance, and industry structure.⁶⁰ The intriguing possibility raised by the ‘common ownership hypothesis’ is that the combination of institutional re-concentration of ownership and portfolio diversification has systemic corporate governance and market competition effects.⁶¹ In the case of minority common shareholdings, the (partial) shareholder overlaps in the ownership structure of the major competitors in concentrated industries that are said to (indirectly) increase the ‘effective’ market concentration and also produce competition harm and possibly productive efficiencies.⁶² In effect, the common (financial) owners of rival (industrial) firms may have the incentives and ability to affect the operation of firms and markets away from individual profit maximisation leading to increased prices and reduced industry output.⁶³

The fundamental antitrust question is: is this ‘new wine’ that needs to be distilled and fit into ‘old (legal) bottles’ or would such a fit simply be unnatural – an ‘antitrust overkill’? The myriad of new concerns and possibilities common ownership raises in a variety of legal and economic fields may easily let the debate go astray. Yet, the intimate relation between competition and corporate governance and finance lay at its heart, both in terms of theory and practice. What policy-makers decide on either side shall have profound implications on the way firms are organised and governed as well as on how financial and product markets operate.⁶⁴ Therefore, the aforementioned functional regulatory schism offers no excuse for overlooking the systemic consequences of the issue in point.⁶⁵

15.5 Shareholding Types and Antitrust: The Controlling, the Passive, and the Influential

Let us then take a step back and refocus the analysis in order to better appreciate where we stand. From a competition perspective, the interesting cases of minority shareholding have been those involving ‘non-controlling’ or ‘passive’ financial stakes acquired in rival firms, which may escape antitrust scrutiny.⁶⁶ Despite the gradual updating of antitrust rules to capture new forms of potentially anticompetitive practices, it remains a matter of debate whether their scope or interpretation extends to ‘partial’ ownership of a competitor⁶⁷ when participation in the share capital is limited to a minority position (nominal equity holding) and not accompanied by majority voting control (corporate legal control),⁶⁸ or any other form of active influence (by means of governance actions or activist intent) over the commercial activity of the competing company.⁶⁹ Complex theoretical and factual issues at the intersection of competition and corporate laws naturally arise in the analysis of those cases. Changes in the ownership structure (shareholder base) of firms may impact corporate governance (managerial and firm behaviour) which in turn affects competition (market concentration and industry performance).

Usually, control is seen as a key determinant of an antitrust theory harm and also part of the mechanism that translates (partial) common ownership into suboptimal corporate and market outcomes.⁷⁰ Yet, ‘control’ is a complex and multifaceted concept, and ‘partial’ control arising from minority shareholding is not clear or well established in legal or economic theory.⁷¹ Indeed, it is often a form of ‘factual’ control situation that may heavily depend on the surrounding context and specifics of the particular case.⁷² At this point, it becomes both interesting and instructive that minority shareholding alludes to the ‘many faces’ of ownership⁷³ and ‘shades’ of control, with each combination leading to different kinds and degrees of competition effects. The variety in effect contrasts sharply with our limited word stock that is often misleading or inaccurate given the overlapping use of common terms such as (ownership or) control for different purposes and bodies of law. In order to dissolve some of the unnecessary confusion and elucidate the competitive harm potential of distinct shareholding types, I elaborate on the different layers of control attending a given minority position. Accordingly, minority shareholding can be classified as follows:

1. i) controlling or non-controlling – from the perspective of (EU) competition law – depending on whether the acquirer is able to exercise formal (legal) control over the target or not;⁷⁴

2. ii) solely or jointly (partially) controlling – from the perspective of (EU) competition law – depending on whether there is a single dominant shareholder with clear (de jure) sole control over the target or control is (de facto) shared among many individual minority shareholders, in ex ante unascertainable ways (e.g. if joint control exists on the basis of ‘changing coalitions’ and no ‘stable’ majority can be established even in the presence of equal equity positions and identical rights among the shareholders⁷⁵);

3. iii) active or passive – from the perspective of corporate law – depending on the acquirer’s ability to exercise some active (economic) influence over the target or not, usually given its shareholder rights or corporate governance actions;⁷⁶

4. iv) totally or partially controlling⁷⁷ (actively influential)⁷⁸ – from the perspective of competition economics and corporate governance – depending on whether there is a dominant shareholder with clear total (legal) control, due to either a majority or a minority equity holding, or a formally non-controlling minority shareholder with some (economic) influence over the target, due to a de facto ‘blocking minority’ (veto power) or some other situation of ‘informal influence’ arising out of statutory corporate law or contractual rights (e.g. voting rights, information rights, disproportionate board representation, board observer seats);⁷⁹ and

5. v) actively or passively (strategically)⁸⁰ influential – from the perspective of competition economics and corporate governance – depending on whether an ‘active’ shareholding directly affects the behaviour of the acquired firm given the acquirer’s ability to exercise active influence over the target, by operating within its corporate governance, or a formally ‘non-controlling’ or ‘passive’ shareholding affects the acquirer’s own incentives to compete due to the strategic interaction between rival firms in oligopoly even if the competitors are linked by purely financial interests without any apparent influence or control in the target’s governance.⁸¹

The above exposition reveals that the legal and economic views of the different shareholding types are not fully overlapping. That is, some shareholdings that are: a) only ‘partially’ or not standalone controlling or b) completely ‘non-controlling’ and ‘passive’ as a matter of competition or corporate law, and possibly outside the reach of antitrust or merger laws, may still turn out to be ‘competitively influential’ as a matter of industrial organisational theory. The economics perspective also vividly illustrates that there is a continuum of effects on competition due to the multiple shades of control and non-control that accompany minority shareholdings. Effectively, this economics-informed analysis adds another shareholding type in the traditional legal dichotomy – controlling, influential, passive – that may be of competition concern. That said, this continuity in effects does not necessarily suggest that there is a linear progression in terms of the magnitude of potential harm: occasionally a totally controlling shareholding (active sole control) may be quantitatively more detrimental to competition than a full merger,⁸² or similarly, partially controlling or mutually influential shareholdings (de facto joint control) may be equally harmful to a full merger.⁸³

A visual representation of the taxonomy of shareholding types based on their control qualities from the three distinct analytical perspectives employed above is shown in the following table. The cells highlighted in grey illustrate the potentially problematic (competitively influential) minority shareholdings that may escape competition scrutiny in certain jurisdictions such as the EU or others that follow its example and the underlying reasons that trigger this situation, i.e. legal gaps due to formalistic definitions of shareholdings in competition or corporate law. In light of the above, it is also important to realise that both active and passive minority shareholdings may give rise to ‘competitive influence’, which may flow from either governance influence or strategic influence, respectively.⁸⁴ The table thus visually reflects how precisely and what specific types of minority shareholding came to ‘fall between the cracks’.

Taxonomy of shareholding types
Competition law	Non-controlling	Actively influential	Controlling
Corporate law	Passive	De facto controlling	Active
Competition economics	Strategically influential (pure financial interest)	Partially controlling (jointly controlling)	Totally controlling (solely controlling)

Seen from the broader economic point of view, competitively ‘influential’ minority shareholding may be further subcategorised, considering the time horizon, intensity of economic control, and degree or reciprocity of profit internalisation, as follows:

1. i) statically or dynamically influential – depending on whether the acquirer is able to exercise current influence over the target, and thus have an observable impact on competition (present effects) or possibly exercise future influence (potential effects), in light of its theoretical shareholder rights that could put into use (e.g. voting or other special contractual rights such as rights of first refusal);⁸⁵

2. ii) proportionately or disproportionately influential – depending on whether the acquirer’s degree of internalisation of rival profits (the ‘profit weight’ as a function of financial interest and control⁸⁶) is proportionate to its partial shareholding investment in that rival (the ‘control weight’ is equal to the nominal percentage of the equity position⁸⁷) or disproportionate (the actual degree of control vis-à-vis the target’s management discretion (‘agency costs’) is more or less than the nominal equity position);⁸⁸

3. iii) one-directionally or bi-directionally influential – depending on whether only the acquirer is induced to internalise its partially acquired rival’s profits, due to its financial interest linked to its shareholding investment, or also the target is induced to take into account the acquirer’s shareholding,⁸⁹ due to the latter’s corporate influence exercised in the target firm’s governance,⁹⁰ or due to target’s own parallel shareholding and financial interest in the acquirer.⁹¹ Importantly, a ‘bi-directionally influential’ minority shareholding (mutual internalisation) need not be harmful to competition (softening of competition or collusion) due to the internalisation of competitive externalities but may also be welfare enhancing (pro-competitive or efficiency creating) due to internalisation of productive or innovation spillovers.⁹²

15.6 Common Shareholding in Antitrust and Corporate Governance: From Competition Effects to Property Rights

It follows from the above analysis that minority shareholding that is considered ‘non-controlling’ or ‘passive’ in the legal sense may well be de facto competitively ‘influential’ in the economic sense given its present or potential impact on the corporate control and competition dynamics. Further, from a corporate perspective, so long as the shareholding is ‘voting’ stock it is not really a passive one but rather dynamically influential in that the power of the vote may always be exercised later in the future,⁹³ or in fact, the implicit threat stemming from its mere existence may produce current results and change equilibrium outcomes given its deterrent disciplining effect.⁹⁴ In addition, so long as stock is voting and ‘freely tradable’ (either as a package of share plus vote or simply the vote), there is no real ‘separation of ownership and control’⁹⁵ in the sense that corporate control is contestable.⁹⁶ Management is disciplined by both the stock market and the market for corporate control, while shareholders remain ‘residual claimants’⁹⁷ with the power to hold/exercise and buy/sell their votes. The latter bear both the residual risk and the corresponding residual rights to control of the corporate property (due to their equity share in the corporation’s profits). Thus, the ‘atom of property’,⁹⁸ albeit diffused among many shareholders and partially split between principals-passive owners and agents-actual managers in large public corporations,⁹⁹ is remarkably solid: out of all corporate constituents, only shareholders as a class generally bear the marginal gains and losses of corporate actions or omissions and thus have the right incentives at the margin to check and redirect management towards improved corporate performance by the (actual) use or (deterrent effect of) possession of voting rights.¹⁰⁰ Consequently, shareholders’ private profit motive remains the (valid) driver for financial investment in corporations and management discipline as well as for more efficient use of an industrial property. Private property, free markets, and competition reassuringly remain the ‘holy triad’ upon which modern corporate and industrial organisation solidly relies.¹⁰¹

The above analysis also makes clear that investor ‘passivity’ does not necessarily translate into permanent corporate ‘silence’ or would justify an a priori antitrust immunity.¹⁰² If the minority shareholding is accompanied by voting rights and the shares or votes can be exchanged, potential control persists. Yet it is difficult to tell ex ante if and how such shareholder power may be exercised.¹⁰³ Considering this ex ante uncertainty and the importance of the surrounding factual circumstances (shareholder control dynamics, market and legal constraints) to assess the competitive significance and effects of any minority shareholding, it is unlikely that a purely ex ante merger control regime will be effective in distinguishing and addressing potentially harmful cases of minority cross- or common shareholding. This is so even if such prophylactic regimes were not structural (corporate law model) or formalistic (as in EU merger control) but effects-based (as in US merger control).

Nonetheless, the US merger regime has a resolutely sound economic structure: its open-ended scope for liability (no safe harbour for any actual ‘lessening of competition’) combined with its ‘passive investment’ exemption from filing a notification provide both flexibility and reduced regulatory burden yet leave the door open for ‘residual ex post enforcement’ in case a ‘passive’ investor’s initial intent changes later and becomes ‘active’. Furthermore, the ‘solely for investment’ exemption explicitly does not apply in case of cross-shareholding (the acquirer is a competitor) or interlocking directorates (a controlling shareholder, director, officer, or employee simultaneously serves as an officer or director of the issuer), and more generally if the holder of voting securities (1) nominates a board candidate or is represented in the corporate board; (2) submits a shareholder proposal for approval; or (3) solicits proxies.¹⁰⁴ Therefore, US merger law is fit to capture a range of potentially problematic minority acquisitions by applying: i) an ex ante licensing regime (transaction filing and regulatory approval) when the potential of harm is most likely to materialise (active financial investments) and foreseeable (present corporate influence) and ii) an ex post safety valve (potential future liability and enforcement) when passive intent is negated by the acquirer’s subsequent corporate governance actions (ex post opportunism) or actual competition harm is evidenced (passive financial investments, individually or collectively). Seen in this light, ‘passive’ minority shareholding merely indicates cases where a full fact-specific antitrust analysis is required. If needed, such analysis will become relevant after the actual acquisition.

While investor passivity and the vertical agency problem are an inherent part of the modern corporation model and no obstacle to antitrust enforcement, the real challenge for both corporate and antitrust law is investor diversification. Common shareholding that is not only ‘passive’ but also ‘diversified’ changes the analysis completely: it surely can be ‘influential’ in the antitrust sense (in terms of its competition impact) but in counterintuitive ways (in terms of its mechanics). The ‘separation of ownership from ownership’¹⁰⁵ and the ensuing horizontal agency problem (potential conflicts between diversified versus undiversified shareholders) challenge long-standing foundations and analytical frames in corporate finance and governance (shareholder unanimity¹⁰⁶ or homogeneity as a class¹⁰⁷) and competition law (control-based and entity-centric antitrust analysis¹⁰⁸). The ‘democratisation of investment’¹⁰⁹ brought about by the ‘index investing revolution’¹¹⁰ has triumphantly enabled access to low-cost, widely diversified portfolios via a single investment product for a wider part of the population. However, this paradigmatic shift towards passive portfolio investment strategies has transformed not only the investment landscape but also it has created far beyond ripple effects yet to be fully appreciated. For one, the resultant widely diversified ownership structures (shareholder overlaps in many competing firms across industries) may well make firm-specific or market structure irrelevant, signalling a fundamental change not from firm ‘independence’ to inter-firm ‘control’ (the focal point of traditional antitrust analysis), but from shareholder ‘focus’ to investor ‘indifference’ (the new corporate reality brought about by financial innovation).¹¹¹ Diversified investors are rationally interested in the aggregate return gained from their portfolio investments,¹¹² following a portfolio-wide investment and governance strategy,¹¹³ and less so in the individual performance of portfolio companies¹¹⁴ or spurring atomistic competition in product markets.¹¹⁵ Common diversified shareholding takes the ‘depersonalisation of ownership’ of the public corporation¹¹⁶ one step further: private property interests have become not only ‘split’ as in the age of managerial capitalism (specialisation of ownership and management functions) but also ‘parallel’ and ‘concurrent’ in the current capitalism era of professional portfolio managers and savings planners¹¹⁷ (many small shareholders are partial ‘co-owners’ not only of a single but also several competing corporate enterprises at the same time). Corporate ownership is rendered both diffuse and collectivised at the same time: the concern now is not the ‘objectification of the corporate enterprise’¹¹⁸ (with business management separate and independent of its own shareholders – ‘owners’) but rather the ‘institutionalisation’¹¹⁹ of investment and savings (with institutional intermediaries separate and independent from any individual business corporation, and its undiversified shareholders). Consequently, the cherished image of a (homogeneous) shareholder as a corporate ‘property owner’ is shattered, and we may no longer speak of individual shareholders (even if passive investors) as ‘residual risk bearers’ identifiable with a distinct corporate organisation¹²⁰ as they may not fully bear any firm-specific risk or be concerned about targeted governance actions.¹²¹

The horizontal ‘separation of capital from capital’¹²² creates a ‘double split’ in the ‘atom’ of corporate property, both with regard to the unity and identity of its key actors (shareholders) and components (shares). On the one hand, institutionalisation has produced two sets of ‘owners’: ‘ultimate’ owners, who retain investment authority (but not necessarily voting control authority) and the associated risk for their investment choices, and ‘beneficial’ owners, who are only entitled to a future stream of profits from the invested funds (a claim that is more of a fixed contractual than residual nature).¹²³ It will depend on the circumstances to decide whether and who of any institutional or individual investors have in fact residual or beneficial ownership status. On the other hand, diversification introduces another form of ‘decoupling’¹²⁴ financial interests (risk) from corporate control (influence).¹²⁵ That is, diversification of investment may render (legal) ownership ‘empty’¹²⁶ and (voting) control ‘hidden’:¹²⁷ the legal title is not congruent with economic interest and voting power need not follow the residual claim. As the economic link between cash flow and control rights is broken, economic and voting ownership is no longer proportionate to the nominal equity holding of a shareholder.¹²⁸ Thus, the nominal level of the shareholding does not automatically reflect the level of economic risk and governance power a ‘shareholder’ may have.

This ‘double split of ownership’ in equity shareholding – i.e. ‘two faces of ownership’ and the ‘risk-bearing dilution’ brought about by passive, diversified investment¹²⁹ – has important implications for corporate governance. First, it significantly complicates the analysis as to who and to what extent is a residual claimant and thus raises questions as to the actual allocation of property rights in firms (real versus nominal owners). Second, it may lead to ex ante unforeseeable or de facto ‘morphable’ control situations. Given the fragmentation of shareholding in large public corporations and in the absence of a large dominant block holder or special asymmetric governance structures, control is likely shared among several shareholders and not ex ante ascertainable or fixed.¹³⁰ Control is ‘morphable’ in that although no single shareholder has standalone control, some of them have the de facto ability to form control coalitions as a group.¹³¹ Third, it raises the possibility that the individual self-interest may become ‘destructive’ both for the corporation and society as the pursuit of private profit and the exercise of voting rights may produce externalities on third parties (e.g. undiversified shareholders, other stakeholders, consumers) under certain circumstances.¹³² Put differently, the concern is not only that individual investors may not be the ‘real’ owners and institutional investors are but also that no one is a truly responsible and concerned ‘owner’ in the traditional sense (sole proprietor).¹³³ With the (partial) separation between financial risk and control due to diversification, it is not that self-interest is extinguished but rather that the very diversified investors’ self-interest is oriented towards the maximisation of their collective interests flowing from the pool of their portfolio invested firms’ profits (portfolio value maximisation). In addition, there are actors (institutional investors and business managers) that could potentially implement such altered preferences – to the extent they come to benefit themselves from any strategic shift away from individual firm profit maximisation and atomistic market competition. Indirectly, this complex and opaque constellation of agency relationships and fragmentation of property rights may further raise concern as to the robustness of market forces (capital market, market for corporate control, product markets) to efficiently allocate financial or investment capital, to drive corporate management towards improved performance and to move economic resources to their most productive uses and users across society.

The implications for competition law are equally significant as diversification and common ownership by large institutional investors induce corporate shareholders to be both rationally ‘apathetic’ and ‘indifferent’¹³⁴ – a mutation of the archetype.¹³⁵ At this point, it is worth revisiting the potential competitive effects of common shareholding in light of the above taxonomy on the various ‘shades’ of partial control related to partial ownership. Accordingly, common diversified shareholding, although individually a minority one with no standalone control, may be dynamically influential (potential effects on competition)¹³⁶ as it may affect both the commonly held firms’ incentives to compete and their corporate governance.¹³⁷ Such common shareholding may further qualify as disproportionately influential (given the potential concentrated influence and financial interest of the common owners linked to the shareholding)¹³⁸ and also as bi-directionally influential (due to the potential mutual influence such shareholding may induce among the commonly held rival firms).¹³⁹ Thus, depending on the circumstances, minority common shareholding that is considered passive and diversified may lead to situations of either ‘hidden control’ (shareholder concentration) or ‘hidden reciprocity’ (internalisation of externalities) in terms of effects despite its form (direction or symmetry of equity holding). Potential aggregation of individually small passive shareholdings and their parallelism in interest may give rise to cumulative de facto control and interactive, compound or network-like, competitive effects.¹⁴⁰

The transformed quality of risk-diluted shareholding as closer to a debt holding in nature may add to such possibility. Interestingly, in this sense, ‘negative’ financial decoupling (disproportionate influence compared to the risk and size of a shareholding)¹⁴¹ may indirectly lead to ‘positive’ linking of profits between competing firms (de facto profit correlation due to the rivals’ competitive relationship and their common ownership links).¹⁴² Mutual internalisation of rivals’ profits may thus arise either due to common owners’ asymmetric corporate influence or their (symmetric) parallel financial interests, given their de facto control in portfolio firms’ governance and their aligned incentives to compete, or the induced financial dependence linked to their potential de facto position as largest shareholders and creditors of portfolio companies.¹⁴³ Besides, when ‘exit’ is excluded for index funds,¹⁴⁴ the ‘voice’¹⁴⁵ of diversified institutional investors is amplified, thus potentially having a greater weight in managerial and firm governance decisions and indirectly in competition outcomes in product markets.¹⁴⁶ Indeed, the voice of large ‘long-term’ institutional investors is actively encouraged by regulators and has become quasi-permanent (although ad hoc in its manifestation) and systemic (reaching their whole portfolio of invested companies).¹⁴⁷ It follows that there might be several ways through which passive diversified investors may be competitively influential, either at present or in the future, and not only in one direction but potentially bidirectionally.

15.7 Implications and Conclusions

Coming full circle and looking back to press forward, history teaches us that it repeats itself. New forms of minority shareholding pop up as new ways of aggregating capital and savings and linking businesses are devised. Common shareholding by institutional investors brings to the fore the early unity and much-needed congruence between competition and corporate laws. The lesson for their continued interaction is for each discipline to assume a measure of modesty rather than ‘going all the way’ – alone – in solving the ‘common ownership trilemma’.¹⁴⁸ ‘New finance’ with all the good that it brings for firms, markets, and people and the ‘new trusts’ with all their potential implications and distortions for the competition are one and the same problem: despite their modern functional split and specialisation, antitrust and corporate governance cannot bypass their deep interdependence both in terms of theoretical foundations and balanced regulatory solutions.

Yet, in this novel and unwieldy setting, a new role encounters antitrust: competition law enforcement may help rebalance and restore the initial allocation of property rights within firms (shareholders’ residual claim) and thus indirectly protect undiversified shareholders, to the extent corporate law control mechanisms (fiduciary duties) are ineffectual. Antitrust could therefore be used to protect noncommon shareholders who may be harmed – along with consumers – by suboptimal outcomes in the performance of individual corporate entities and industries. Developing an antitrust policy to tackle common ownership by large diversified institutional investors (shareholder concentration and diversification) and to supplement existing merger policy (market concentration) may unexpectedly return antitrust to its corporate law origins. Increasing diversification in financial investment and concentration and parallelism in corporate ownership calls antitrust to shift its operation from a pure conduct-oriented (‘strategic model’) to a structure-oriented approach: acting as a de facto early corporate law-like ‘structural model’ of checking the corporate structure and shareholder property rights exchange, internalising portfolio investment and governance externalities, and ensuring ongoing private versus public interest balancing.¹⁴⁹

While antitrust is to retain its focus on economic effects, the source of potential competitive effects from minority shareholding and common ownership originates in changed corporate ownership structures well below any formal competition law threshold of ‘control’ (as in EU merger control). The foundations of competition and merger control when designing their scope and aims may be challenged, however, considering: i) the liberalisation of corporate law lifting intercorporate ownership and influence restrictions and ii) recent organisational and financial market developments undermining early corporate law assumptions (no separations of ownership or investment from control or consumption) that antitrust inherited. By turning its look inside corporate governance and shareholder structures, antitrust could provide an effective alternative tool to holistically capture problematic minority shareholdings that create both agency problems or conflicts of interest and market power concerns (just as early corporate law regulation of mergers and shareholding acquisitions did). Such a solution would not only rebalance disperse shareholders’ private interests (property rights) inside the firm but in view of the historical split between corporate and competition law, it would also aim to safeguard and prioritise the public interest (consumer welfare). Against this backdrop, antitrust can simply not afford to not look closer at minority shareholding structures that ‘came to fall between the cracks’. Essentially, and unlike the main antitrust rules that target behaviour (Sherman Act Sections 1 and 2; Articles 101 and 102 TFEU), merger control rules within modern competition law regimes have inherited and preserved to a certain extent corporate law’s ‘structural’ regulatory approach. The question now is that merger control adjusts its jurisdictional ambit and tools below and beyond obsolete legal thresholds and economic assumptions. The concentration of corporate ownership through novel shareholding structures and intermediaries may produce competitive influence, in significant although unfamiliar ways, which impels antitrust to be alert in shifting its attention and finetuning its enforcement tools. Curiously, as the new reality of the such evolved capitalist environment and organisational structure sets in, ‘anti-trust’ may be found anew to be well worth its name.¹⁵⁰

At the same time, on a substantive level, common institutional shareholding calls antitrust to be not merely future proof but ‘future perfect’: new intriguing possibilities, both with regard to novel theories of harm and efficiencies, will have to be acknowledged and incorporated into competition law enforcement if it is to remain relevant. In light of its mixed effects, competition law should go past imposing hard limits or any per se prohibition against common ownership, even if a ‘structural’ approach is systematically employed to assess ad hoc their competitive significance and effects in the specific case. In such case, antitrust will have to enrich, refine, or complement its merger law-based measurement tools (HHI and MHHI), depending on the circumstances. In other words, the ‘structural’ approach will need to be combined with case-by-case analysis based on the specific factual context. In this connection and as illustrated above, it is important to realise that the combination of concentration and diversification related to common institutional ownership lends corporate property rights ‘dual’ or ‘quantum’ qualities: 1) minority shareholding may be both ‘passive’ and ‘dynamically influential’ at the same time, so long as there is some competitive relationship between the interlinked firms that may be undermined;¹⁵¹ 2) diversified shareholders may be both ‘owners’ of the firm but ‘empty’ of any economic interest in its performance, challenging their residual claim status; 3) control may be ‘hidden’, concentrated and disproportionate in its actual ex post manifestations compared to its ex ante hypothetical properties considering the size and risk attached to a stand-alone shareholding; 4) in the presence of common ownership, the quantum ‘atom’ of corporate property may be composed of not only ‘solid particles’ (control rights) but also ‘invisible waves’ (parallel interests), the latter fundamentally changing the traditional identity of an equity share and a shareholder.¹⁵² Yet, the existence and impact of these parameters are hard to pin down in the abstract; better observation and empirical evidence are needed and also bold theoretical leaps forward to fill gaps in our understanding of the emerging reality. While by no means easy, ‘the only way out is through’.¹⁵³

Generations of law and economic scholars will no doubt devote lifetimes to unravel the ‘gordian knot’ presented by common ownership. As Minority Report¹⁵⁴ reminds us one may not be able to predict the future from the past or credibly form a single-minded assessment of the likelihood of harm materialising or not. Still, it is possible to change the future once one is aware of its prospect. For the sake of a sustainable capitalist future and society, may both public officials and economic agents be mindful of the power they possess and use it with wise restraint and prudent foresight.