The combined effects of:
-shareholder primacy, sp
-common ownership , co
-the concentration of asset management, cam
significantly influence the competitive strategies undertaken by the management of a corporation. They challenge the notion of ‘own-firm profit’ or ‘value maximisation.,,,,:
a. the ‘Fisher separation’ principle: ( given efficient capital markets, a firm’s choice of investment is separate from its owners’ investment preferences and therefore the firm should only be motivated to maximize profits.)
b. that shareholders, rather than opt for own firm profit maximisation, seek to maximise the value of their whole shareholding portfolio in all the firms they have invested. This results in the alteration of Director’s incentives to compete. particularly visible in the structure of the food value chain (‘FVC’) during the last few decades, in addition to the development of future markets in agricultural commodities.
mechanisms through which co is harming competition, consumers and the economy:
(i) unilateral effects or non-coordinated effects,
(ii) coordinated effects (i.e. ‘tacit collusion’),
(iii) vertical foreclosure through raising rivals’ costs strategies, and
(iv) vertical exploitative behaviour (i.e. gaining higher profit margins at the expense of reduced margins for the competitive segment of the value chain)
EU competition law applies to ‘undertakings’, not to ‘investors’. ‘Undertaking’ is any entity (a physical person or a company) ,engaged in economic activity.
There are two types of concentrations:
i) those that arise from a proper merger and acquisitions (‘M&A’) transaction between previously independent firms. can arise in one of two ways:
a.two or more firms merging and, thereby, ceasing to exist as separate legal entities.
b. the target firm being absorbed into the firm seeking to acquire it; this results in the target firm ceasing to exist as a legal entity whilst the acquiring firm retains its legal identity.
ii) those that arise from the acquisition of control. whilst the target firm does not cease to exist as a separate legal entity, its control is transferred, in a lasting way, to another firm or to multiple firms for it to be exercised jointly
under the current EU competition law regime, minority shareholdings can be addressed in one of the following ways:
a. They may constitute ‘decisive influence’ under the EUMR, thereby constituting a concentration.
b. They may be part of the substantive analysis of a concentration, e.g. minority shareholdings relevant to the assessment of whether there is a significant impediment to effective competition.
There have been cases in which the merging parties have been willing to dispose of, or reduce, their stakes either before or during the Phase I CMA/EC to obtain unconditional merger clearance, or to give formal commitments to divest, as a condition of clearance. However, had the same stake(s) been acquired post-acquisition, the EC/CMA would have lacked the necessary powers to intervene.
the EC/CMA’s cannot order the unwinding of a non-controlling shareholding that was part of a failed takeover. The Ryanair/ Aer Lingus cases have exemplified this problem:
Ryanair acquired shares in Aer Lingus on the stock exchange and, in parallel, launched a public bid. Although it had only been notified of the bid, EC asserted jurisdiction and treated the proposed acquisition as a single concentration and prohibited it. Thus, while the offer fell away, questions remained as to the stake. Although this had been part of a prohibited concentration, EC took the view that it could not be the subject of a sell-down order under Article 8(4) of the EUMR, which focuses on the unwinding of completed/prohibited concentrations.
The reason it could not be was because, by itself, the stake did not confer control. This position was upheld by the General Court. Article 101 TFEU can apply to agreements in which a minority interest is acquired and Article 102 TFEU can apply to acquisitions by a dominant company.
EC concluded that by limiting Aer Lingus’s ability to pursue its own independent commercial policy and strategy, Ryanair’s minority shareholding led to a reduction in Aer Lingus’s effectiveness as a competitor
In the Philip Morris and the Gillette cases, these Articles have been applied to minority shareholdings that give rise to “some (informal) influence” over the target, a threshold which may well be lower than the decisive influence (i.e. control) threshold required under the EUMR. However, Article 101 TFEU cannot be invoked unless it has been proven that there is an ‘agreement’ and/or ‘concerted practice’ between two or more undertakings linked to the minority share acquisition. Similarly, Article 102 TFEU only applies where it has been proven that there is a ‘dominant’ undertaking that has been ‘abusive’.
In the Philip Morris judgment of 1984, ECJ held that the mere acquisition of a minority stake could not amount to restricting competition for the purposes of Article 101, BUT could influence the commercial conduct of a competitor, thereby restricting or distorting competition, especially where the agreement provided for commercial co-operation or gave the acquiring shareholder the possibility of taking effective control of the target at a later stage.
ECJ emphasised the need to consider not just the immediate effects of the transaction but also the longer-term potential impact.
ECJ (on the possible application of Article 102 TFEU) held that the acquisition of a minority shareholding in a competitor could only amount to an abuse if it resulted in effective control, or at least some influence, over the target’s commercial policy.
In the Warner-Lambert v Gillette case, EC successfully challenged Gillette’s acquisition of a 22% non-voting interest in the parent company of its major competitor, Wilkinson Sword, on the basis of it infringing Articles 101 and 102 TFEU.
Given its potential for producing anti-competitive effects,the acquisition of minority shareholdings has attracted attention. EC has identified an ‘enforcement gap’ in respect of this type of acquisition, especially with regards to non-controlling minority but influential (on business conduct) shareholdings in the context of merger control.
EC suggested that the EUMR is applicable to transactions that involve structural links.
The EUMR’s Jurisdictional Notice:
“sole control can be acquired on a de jure and/or de facto basis”
With regard to the de facto basis, EC should assess whether “the [minority] shareholder is highly likely to achieve a majority at the shareholders’ meetings, given the level of its shareholding and the evidence resulting from the presence of shareholders in the shareholders’ meetings in previous years”. Indeed, “where, on the basis of its shareholding, the historic voting pattern at the shareholders’ meeting and the position of other shareholders, a minority shareholder is likely to have a stable majority of the votes at the shareholders’ meeting, then that large minority shareholder is taken to have sole control”.
A further element to take into account is the importance of shareholder fragmentation on effective control, in particular with regard to voting. EC found that an institutional investor was able to exercise decisive influence over the target despite controlling 39% shares, as the rest was spread among more than 100000 shareholders.
In a similar vein, EC found that a capital participation of 25.96% was sufficient to lead to a change of ownership or control, which was largely due to the level of participation in general meetings.
The dispersion of voting rights between a large number of minority shareholders has also led EC to accept that holding a significant proportion of the effective voting rights could signal control.
– it is also possible to find anti-competitive effects on the basis of the common institutional investors being both present and significant players in a specific market, ie.. whether it is possible to find anti-competitive effects on the basis of partial competitor ownership.
-Cross-ownership may also provide a for channel for information channel to be exchanged between competitors. Thus, it may provide “help in aligning the incentives of the coordinating firms”
-The parties have to self-assess whether a transaction creates a “competitively significant link” and, if so, submit an ‘information notice’. In the event that an information notice were to be submitted, the Commission would then decide whether to investigate the transaction and the Member States would decide whether to make a referral request.
-The Commission realised that the EUMR’s focus on the acquisition of control largely ignores the risks for competition associated with the acquisition of a passive minority interest. It fails to consider the potential anti-competitive effects that may result from the indirect and/or informal influence that may be exercised by passive investors, despite them not having ‘control’. As previously mentioned, recent empirical analyses of the U.S. airline industry and banking industry measured the potential (large) effect of common ownership on price levels rising above the competitive ones
-It has identified an ‘enforcement gap’ in respect of these types of acquisitions, especially with regards to noncontrolling minority shareholdings. It has also recognised a number of anti-competitive effects that may potentially emerge from minority shareholdings, including unilateral effects, coordinated effects and vertical foreclosure. There is evidence of a causal link between common ownership and price levels.
-stock acquisitions that create anti-competitive horizontal shareholdings should be considered illegal under current antitrust law. He calls for the break-up of the existing shareholdings and cites a range of negative outcomes, such as corporate executives being rewarded for industry performance rather than solely for individual corporate performance, corporations not using recent high profits to expand output and employment, and the rise in economic inequality over recent decades
– economists state that limiting investors to holding up to 1% of a company’s equity per oligopoly or shares of a single company in any oligopoly is a sufficient condition to guarantee free competition.
Common Ownership in the Food Value Chain (FVC) and Innovation Effects:
The Agro-Chem Mergers:
EC examined the possible anti-competitive effects of common shareholding on innovation incentives in the Dow/DuPont merger case
shares in the industry tend to underestimate the expected effects of the merger, due to the significant level of cross-shareholding between the main players.
EC proved significant common shareholding in the agro-chemical industry and the involvement of large minority shareholders, which, despite being labelled by some as “passive investors”, are, in fact, “active owners”. the existence of a significant level of common shareholding tends to lower rivalry. common shareholding of competitors reduces incentives to compete, as the benefits of competing come at the expense of firms that belong to the same investors’ portfolio”.
EC found that the presence of significant common shareholding in an industry is “likely to have material consequences on the behaviour of the firms in such industries”. eg may result in higher prices, due to the fact that common shareholders shape the monetary incentives of the Directors/CEOs, to align them with industry performance, which the common shareholders shape, so that provides the best returns for them across the industry, and not only their firm’s specific performance.
EC: innovation competition may also be reduced by such cross- and common ownership. “by increasing its efforts in R&D, a firm incurs a cost that decreases its current profits in expectation of future benefits brought by its innovation. Such future benefits would materialise through price competition of future products, which is mainly at the expense of its competitors. In other words, the decision taken by one firm, today, to increase innovation competition has a downward impact on its current profits and on the (expected future) profits of its competitors. This, in turn, will negatively affect the value of the portfolio of shareholders who hold positions in this firm and in its competitors. Therefore, the presence of significant common shareholding is likely to negatively affect the benefits of innovation competition”.
Common ownership also produces unilateral effects: EC decision in Dow/DuPont:
“assume that the ‘acquiring firm’ acquires a minority share in a competitor (the ‘partially acquired firm’). When contemplating a price increase, the acquiring firm anticipates that part of its customers will react to this price increase by diverting their purchase to its competitors, which will see their sales increase, including the one in which it has a minority share. The extra profits generated by the diverted sales to the benefit of the partially acquired firm will, in turn, be partially redistributed to the acquiring firm. As a consequence, when holding a minority share in a competitor, the acquiring firm has higher incentives to increase its prices, than in the absence of such a minority share”. Thus, “the impact on the acquired firm’s incentives depends on how the transaction affects the governance of the acquired firm, that is, on the acquiring firm’s degree of control, which can range from no control at all (silent financial interest), to partial control, to total control”.
Hence, for EC, measures of concentration, such as market shares or the HHI, are likely to underestimate the level of concentration and, thus, the market power of the merging parties.
Common shareholding is a reality in the agro-chemical industry, in terms of both the number of common shareholders and the level of shares possessed by these common shareholders.
EC: innovation competition in crop protection is less intense than in an industry with no common shareholding.
EC re-affirmed its stance in the Bayer/Monsanto merger. It noted that “(i) concentration measures, such as market shares or the HHI, are likely to underestimate the level of concentration of the market structure and, thus, the market power of the parties, (ii) common shareholding is a reality in the biotech and agro-chemical industry, thus, (iii) common shareholding in these industries is a significant impediment to effective competition”.
FINANCIAL COMPANIES AND CL
The Big Bang
Back in the 1980s, the Thatcher Government legislated for the Big Bang which transformed the City of London by ending fixed commission charges and breaking down barriers between market makers and traders. Following the Big Bang, the knights would allow the peasants to share the wealth, but subsequent over-weak regulation merely allowed one set of knights – thousands of millionaire bankers – to replace the old City clique.
Competition Inquiries
the financial industry has widespread competition problems, evidenced by its high profitability, its high salaries and bonuses, and its disdain for its customers, evidenced by mis-selling (eg PPE) and poor service quality.
The obvious response was to begin a market investigation, but experts agreed that the industry was just too big and complex to be able to reach appeal-proof conclusions within the statutory time limit of two years. And then there came the 2008 global financial crisis, where competition was further reduced by the need to wave through the emergency acquisition of HBOS by Lloyds TSB on public interest grounds. Wise heads recognised that this decision would look less clever once the emergency had passed – as it did, including to Lloyds TSB shareholders – but there genuinely seemed no alternative at the time.
The Independent Commission on Banking
One consequence of being seen to be ‘too big to fail’ is that such banks can attract deposits relatively cheaply, as its debts are in effect guaranteed by the government. But its equity is still seen as risky and so it costs a lot to raise equity capital. This in turn encourages the banks to raise as little equity as possible, and borrow as much as possible, so making the problem even worse.
The Commission published its ‘Issues Paper and Call for Evidence’ in September 2010, and contains many interesting observations:
- The 340 strong UK banking sector is relatively concentrated, compared with Germany (2,000 banks) and the US (8,000 banks).
- The banking sector is especially concentrated. The top 6 banks account for 88% of all retail deposits (cf. France 10 – 88%, Germany 7 – 68%, US 8- 35%).
- What matters is not competition per se but competition to provide what customers want. Where markets are not functioning well, suppliers may compete amongst themselves, but not necessarily in areas that customers care about. this is due to distortions like: (a) ill-informed choice by customers – leading to their being exploited,(b) mis-alignment of incentives between owners, creditors and managers of the firm – leading, for instance, to managers being unduly rewarded on the basis of short-term performance measures, and (c) implicit state guarantees – leading to excessive risk-taking.
The Commission’s final report in September 2011 recommended
- that retail banks should be ring-fenced from their riskier investment investment banking arms,
- that the banks should not be allowed to lend more than 25 times their capital
The Government accepted the first recommendation but, on the second, said that it intended to set the lending limit at 33 times capital so as to be more in line with international lending limits.
with the financial crisis of 2010 the United States authorities introduced the Volcker Rule which prevented banks from trading with depositors’ money. It was reported in 2018 that the Trump administration proposed loosening the rule so as to give banks more room for complex trades.
Retail Banking
The CMA accordingly concluded that low customer engagement, switching etc led to Adverse Effects on Competition, which needed to be remedied.
The CMA’s Final report was published in August 2016. Their main aim was to prompt customers actively to consider switching, to raise public awareness of the benefits that might arose from switching, and to facilitate price comparison. There were accordingly no radical measures such as breaking up big banks. Instead:
- Banks will be forced to share customers’ information with third parties to make it easier for them to find better deals.
- Customers will be able to manage all their accounts with different banks through a single app.
- Banks must cap unarranged overdraft charges and inform customers. They must send alerts to customers going into unarranged overdraft and inform them of a grace period to avoid charges.
- Banks must publish trustworthy and objective information on quality of service online and in branches.
- Banks must alert customers about the closure of a local branch or an increase in charges.
- Banks must fund the innovation charity Nesta to create comparison tools for small businesses.
“… if you look at how finance has evolved [since 2008] there are at least five features counter-intuitive:
- Start with the issue of debt. Ten years ago, investors and financial institutions re-learnt the hard way that excess leverage can be dangerous. So it seemed natural to think that debt would decline, as chastened lenders and borrowers ran scared. Not so. The American mortgage market did experience deleveraging. So did the bank and hedge fund sectors. But overall global debt has surged: last year it was 217 per cent of gross domestic product, nearly 40 percentage points higher — not lower — than 2007.
- A second surprise is the size of banks. The knock-on effects of the Lehman bankruptcy made clear the dangers posed by “too big to fail” financial institutions with extreme concentrations of market power and risks. Unsurprisingly, there were calls to break them up. The big beasts are even bigger: at the last count America’s top five banks controlled 47 per cent of banking assets, compared with 44 per cent in 2007, and the top 1 per cent of mutual funds have 45 per cent of assets.
- In 2008, the crisis seemed to be a “made in America” saga: US subprime mortgages and Wall Street financial engineering were at the root of the meltdown. So it seemed natural to presume that American finance might be subsequently humbled. Not so. American investment banks today eclipse their European rivals in almost every sense (share of deals, return on equity and stock price performance), and the financial centres of New York and Chicago continue to swell as London is troubled by Brexit.
- A decade ago, investors discovered the world of “shadow banks”. Regulators pledged to clamp down. So did the shadow banks shrink? Not quite: a conservative definition of the shadow bank sector suggests that it is now $45tn in size, controlling 13 per cent of the world’s financial assets, up from $28tn in 2010. A regulatory clampdown on the banks has only pushed more activity to the shadows.
- Back when lenders were falling over by the dozens, it seemed natural to presume that some bankers would end up in jail. But while banks have been hit with fines in the past decade, totalling more than $321bn, the only financiers who have done jail time are those who committed crimes that were not directly linked to the crisis, such as traders who rigged the Libor rate.
- these developments can be explained by a sixth counter-intuitive change: what has happened in the political sphere. A decade ago, it seemed natural to expect that the crisis would lead to a resurgence of the political left. In 2009 the Occupy Wall Street movement initially gained support. But today it is largely rightwing parties that have grabbed the biggest electoral rewards.