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The dark side of partial ownership and financial investment in Europe: What price to pay for consumers and society?

Periodic Reporting for period 1 - PARTOWNEU (The dark side of partial ownership and financial investment in Europe: What price to pay for consumers and society?)

Reporting period: 2019-09-01 to 2021-08-31

What happens when you acquire a shareholding in a rival firm? Are you expected to continue competing on the market as before? While partial ownership is ubiquitous, its competitive implications are traditionally underplayed under the dogma ‘small is innocent’. Yet, this project asks: Is this EU legal position justified; to what extent; in what cases? Ultimately, what is the price for EU consumers or society to pay for any harmful effects of partial ownership beyond any efficiency gains? If the price is high, should Europe move up a gear? Or are there countervailing costs and trade-offs to be considered before deciding legal reform? With increasing stock market investing, financial intermediation and diversification, and “dispersed” ownership of public companies (with numerous minority shareholders) in Europe too, potential concerns gain new dimensions. EU policy may not just be inert but in a wrong direction: one-sided push for a Capital Market Union or increased shareholders’ rights may amplify the EU competition law problem. By means of legal, economic, and empirical analysis, the research aimed to explore the hidden costs and long-term consequences of partial ownership in the EU context and to assess whether there is a regulatory gap in Europe and if so, a solution is necessary and desirable.
This research has offered a much-needed holistic examination of the problem bringing together different strands of scholarly literature (competition law and economics, corporate law and governance) in a meaningful new framework with practical policy application. It was concluded that the problem studied in Europe is significant and potentially producing anticompetitive effects under certain circumstances and that there is a need for updating the existing EU competition law framework and developing enforcement guidelines in line with the newly revealed dynamics.
Over the two-year period of this MSCA project, theoretical legal and economic analysis as well as comparative legal and institutional analysis of the problem studied was undertaken, empirical data informing the dimensions of the problem both in the US and Europe have been compiled and a novel taxonomy was developed to further illuminate the qualitative aspects and the distinct supporting mechanisms of the different varieties of the phenomenon studied.
The three completed publications relating to this MSCA project, culminating in the last one on “Varieties and Mechanisms of Common Ownership: A Calibration Exercise for Competition Policy”, develop a tailored, and comprehensive law & economic framework for the analysis of both cross- and common ownership. The work undertaken is ground-breaking in that it taps on and combines knowledge from different areas not only of law but also of economics (competition law & economics, corporate finance and governance) to produce novel insights with significant implications both for established theory and policy. The research undertaken exposes the limits of traditional concepts and tools used in merger control and its narrow fit to capture and address new types of partial ownership, e.g. of small, passive shareholdings of rival firms by overlapping institutional financial investors. This new variety of partial common ownership has been identified as “diffuse” common ownership in contrast to “concentrated” common ownership that has been dominating corporate governance theory and the substantive assessment and jurisdictional design of merger law frameworks. The study illustrated the limits of the EU merger control regime in comparison to other jurisdictions, as it relies on a formalistic conception of control, and the need to go beyond antitrust formalism. It was further shown that the formalism exposed has not only legal but also economic origins. That is, the existing economic models and theoretical assumptions informing analytical and quantitative tools used during merger control reviews are not well fit to the real dynamics involved in cases of “diffuse” common ownership. Given data collected from EU sources and legal and economic scholarship, it was confirmed that the EU competition law gap is real as the extent of the partial common ownership problem by large institutional investors in Europe is significant and growing, and not merely a US phenomenon as argued until recently. It was further illustrated how surrounding institutional, market, ownership and governance conditions in each jurisdiction may affect the plausibility and magnitude of potential effects, thus generalising the conceptual and analytical framework developed to holistically assess partial ownership in other legal systems beyond the EU. Based on this dual legal and economic assessment, the need for antitrust guidelines was highlighted. Concrete policy recommendations were put forward after comparing the costs and benefits of different policy and enforcement options.
The novel insights from this research have been communicated to competent EU policymakers and public enforcement agencies (European Commission, OECD, Swedish and Hellenic Competition Authorities) and to the wider academic, research and business or investment communities during conferences, public engagement and other policy-related or popular events.
The ground-breaking insight is that institutional investors as “diffuse” common owners (i.e. widespread, minority owners invested simultaneously in multiple firms) in their capacity as shareholders of competing firms may create competitive harm, even if their individual shareholdings and standalone control may be small or seemingly passive from a corporate governance perspective. When pervasive within a highly concentrated industry, they may produce “cumulative” anticompetitive effects. The passive financial investment and diversification strategies and portfolio-wide governance model of “diffuse” common owners-institutional investors do not undermine but rather support this conclusion. Yet, this phenomenon goes undetected by most merger control regimes that are premised on a paradigm of “single firm dominance” in the product market and a “single blockholder investor” in firm governance. The paradigmatic case of the new “diffuse” common owners is index funds that have parallel, symmetric holdings in competitors. Their parallelism and symmetry in financial interest in rival firms make any notion of control not only obsolete as a legal matter but also irrelevant as an economic mechanism. A novel “effects-based” theory of harm associated with multiple, diffuse common shareholdings is outlined that illustrates the shortcomings of the EU merger control regime and is flexible yet delimited in its practical application so that it is administrable and not overreaching with the risk of chilling investment and innovation incentives.
The intersection of new finance and corporate governance with competition law and economics is an underexplored area yet with profound implications for the operation of financial markets, product markets and the welfare of consumers and citizens. This MSCA research has precisely underscored the tensions and trade-offs involved for EU competitiveness and industry performance between actively pushing for a Capital Markets Union, institutional investor stewardship and enhanced shareholder rights on the one hand and potential adverse effects on competition, M&A activity and market entry on the other.
Diffuse common ownership