Common Ownership and Coordinated Effects

Can shareholders act in ways that interfere with competition in the product markets of firms whose shares they own? Are shareholders that own shares of competitors (“common shareholders”) better able or more likely to do so than shareholders that own shares in only one competitor (“non-common share- holders”)? If so, how? What are the channels through which shareholders transmit anticompetitive signals? Can shareholders increase the likelihood of anticompetitive coordination between competitors by facilitating the detection and punishment of cheating? Are common or non-common shareholders more or less dangerous? Should antitrust law address these problems and, if so, how?

In this article, we explore a variety of factual scenarios that potentially raise significant antitrust issues from both an economic and a legal perspective. Although we do not believe that a case has been made that common owner- ship has systemic anticompetitive effects, as some have argued, we do believe that in particular factual contexts shareholders (common and non-common) can behave in ways that cause the firms in which they have an ownership interest to act anticompetitively. When they do, antitrust enforcers may need to intervene.

As a result, although we oppose broad market-wide reforms that would force divestiture or limit share ownership by large institutional investors, we do believe that antitrust enforcers should remain vigilant in scrutinizing coop- erative behavior facilitated by shareholders. This article analyzes the specific contexts in which coordinated anticompetitive effects resulting from low levels of common share ownership (less than 15 percent) are plausible and then assesses how the law can strike the difficult balance between procompe- titive and anticompetitive effects without unnecessarily chilling shareholder involvement in corporate governance. Our analysis is, by necessity, prelimi- nary because the application of Section 1 of the Sherman Act and Section 7 of the Clayton Act to particular factual situations will be context-specific.

With the shift from individual shareholding to holding through investment intermediaries, the distribution of shareholding has been transformed. In place of the old “dispersed ownership” model in which individuals directly owned shares, the overwhelming proportion of shares in U.S. corporations are now held by institutional investors of one sort or another: mutual funds, insurance companies, pension funds, and endowments. One consequence of this “de- retailization” has been increased concentration of shareholdings. In recent years, with the increased popularity of passive investment strategies (e.g., in- dex funds and exchange-traded funds (ETFs)), the fund families that manage the largest index funds and ETFs—BlackRock, Vanguard, and State Street— have become the largest shareholders of many or even most public compa- nies. Often the “big three” will each hold in excess of 5 percent of the shares and many times more than 6 or even 7 percent.

Along with the increased concentration of shareholding, shareholders have become far more active in corporate governance than in the past. We are living in a period of “shareholder engagement.” Activist hedge funds identify firms that they believe are underperforming, offer new strategies, and, if companies resist, sometimes use proxy contests or the threat of proxy contests to elect new directors who will try to implement those strategies. Decades of efforts to encourage institutional shareholders to become involved in corporate governance have been modestly successful, with most of the largest institutional investors creating proxy voting groups that meet regularly with the management of the portfolio companies they own. Likewise, actively managed mutual funds engage regularly with companies as they seek to identify investments that will increase in value, and sometimes intervene in management decisions to push companies in one direction or another. The old model of shareholder passivity has been transformed.

Recently, some economists have argued that this increase in shareholder concentration (which has led to greater common ownership) has led to anticompetitive effects in the product markets of firms in concentrated industries, focusing on airlines and banking. In a widely discussed article, Jose Azar, Martin Schmaltz, and Isabel Tecu (AST) argued that ticket prices in the airline industry are as much as 10 percent higher than they would have been had shareholding been dispersed. Based on these findings, Einer Elhauge has argued that the current distribution of shareholdings—both in these two markets and more generally—is anticompetitive and violates Section 7 of the Clayton Act. Eric Posner, Fiona Scott Morton, and Glen Weyl, likewise building on AST, have argued that diversified shareholders should either limit their holdings to 1 percent in any concentrated market or commit to complete governance passivity (“put the shares in a drawer”).

These views have attracted widespread scholarly attention and have even begun to exert some influence on enforcement authorities because they suggest that there is a systemic problem that should be treated with a systemic reform. For example, in the European Commission’s review of the 2017 Dow/ DuPont merger, the Commission devoted a lengthy appendix to reviewing the common ownership literature and, relying on AST’s “unilateral effects” analysis, the Commission concluded that “current market shares and concentration measures such as the HHI underestimate the market concentration and the market power of the parties.”

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