The Competition Commission of India (CCI) recently announced that it will study common ownership by minority shareholders through private equity (PE) funds and its impact on competition. This announcement has drawn attention to competition concerns surrounding common ownership.
Common ownership occurs where a common set of large, diversified financial investors, simultaneously hold non-controlling minority equity shares or ownership interests in several competing firms. Usually, the acquisitions are purely for investment purposes and the investors exercise no control over the companies.
However, academicians are increasingly con- cerned by the impact of common shareholding on competition. Such concerns over common ownership stem from two questions: whether institutional investors with shareholdings across an industry have an incentive to dampen competition and whether the institutional investors have the ability to influence the decisions of an enterprise’s management.
The theory of coordinated effects suggests that common ownership could encourage the common owner to facilitate coordination by its portfolio of companies. The theory of unilateral anticompetitive effects suggests that the common shareholding may lead to short-term price increases and a decline in quality, variety or innovation, due to fewer incentives to compete. Studies show that the management of the enterprises will be incentivized to act in the interests of diversified shareholders.
Assuming the theories to be valid, merger control rules are designed to assess and mitigate the risks stemming from acquisitions by non-controlling minority shareholders. However, the acquisition by non-controlling minority sharehold- ers may not be addressed by the merger rules in various jurisdictions. Either the narrow scope of decisive control determines the scope of reviewable transactions, or there are exemptions for acquisitions that are purely investments.
Policymakers globally are struggling to change current rules and practices, to ensure that they capture such cases. Recently, in the merger review of two large chemical producers, the European Commission shifted from its narrower notion of control (decisive control) to analyse the levels of common ownership between competitors and their effects on competition.
The CCI recognizes the existence and rise of common ownership in the current economic reality in two ways. Firstly, the scope of reviewable transactions is determined by the notion of control with certain exemptions.
The CCI, in certain merger reviews, has adopted a more expansive definition of control with a restricted interpretation of the pure investment exemptions. Many PE transactions and pure financial investments have, therefore, become subject to review by the CCI.
Secondly, the CCI has noted that mere cross-holdings in competitors by themselves raise no competition concern, but any approval does not give immunity to future conduct in violation of competition law.
This approach is not limited to merger approval cases. In a matter of collusive bid rigging, the CCI held that common ownership, by itself will not lead to the investigation of alleged collusion. While examining allegations of the anti-competitive effects of Softbank’s common ownership in Ola and Uber, the CCI recognized that it could not rule out possible effects on competition through unilateral horizontal incentives to compete or through incentivizing collusive behaviour. However, in that case it did not find any evidence to support the theory.
The potential risk of common ownership has been recognized by the CCI and changes will occur to merger control, enforcement and corporate governance in line with the new theories of harm associated with common ownership. The 2019 Competition Law Review Committee report recommended expanding the scope of control in merger reviews to include more mergers.
The risk is currently theoretical only. It is, therefore, important to ensure that regulatory changes do not interfere with minority protection rights and impede pro-competitive investments. A balance must be struck between effective review and the genuine rights of investors. The study by the CCI will be a unique opportunity to understand fully the ways in which common ownership may lead to anti-competitive effects or efficiencies and to provide a road map for merger control and antitrust enforcement.
Deeksha Manchanda is a counsel and Vishnu Suresh is an associate at Chandhiok & Mahajan