Horizontal Shareholding: An Introduction
Horizontal Shareholding or Common Ownership refers to a stock investor’s ownership of minority stakes in multiple competing firms. The aforesaid term ‘Investors’ also encompass Banks, Companies, Pension Funds, Mutual Funds, Exchange Traded Fund etc.
Competition Law Scholars and Governmental Bodies in the recent years have expressed concerns regarding the anti-competitive nature of Horizontal Shareholding of firms in a certain sector. It is to be noted that ownership of such nature can severely undermine the extent of competitiveness among competing firms which in turn inflicts harm on consumers.
As opposed to Cross-Shareholding, where a firm owns shares of competitors in an industry, the implications of Horizontal Shareholding on Competition Law is relatively subtle. In other jurisdictions like the European Union (‘EU’), Horizontal Shareholding became a major cause for concern, as indicated in the case of Dow/DuPont where it was found that Horizontal Shareholding has the propensity to diminish competition. This led to Horizontal Shareholding being taken as an ‘element of context’ in the appreciation of any significant impediment of effective competition under the European Union Merger Regime (‘EUMR’).
In India, the CCI approved the minority acquisition of Intas Pharma by ChrysCapital on the condition that the latter would remove its nominee director and refrain from exercising voting rights over ‘strategic’ corporate actions in a competing firm. This clearly indicates that This piece seeks to elucidate on the anti-competitive effects of Horizontal Shareholding, its economic ramifications, the ability of the Indian anti-trust regime to address it.
Economic Implications of Horizontal Shareholding
In an ideal scenario, it is reasonable to expect a firm to compete with its competitors in pursuit of profits either by undercutting other competing firms by lowering prices or by enhancing the quality of its goods and services. Since Institutional Investors own shares of all the competing businesses in an industry, firms are not incentivized to compete. In this regard, the profits of the industry at large takes precedence over that of an Individual firm. Consequently, this can also hurt conventional investors (who wouldn’t necessarily hold shares in other competing firms) whose interests are greatly tied to the competitiveness of an enterprise. Even with mere non-controlling interest, Institutional Investors, on account of their expertise, organization and resources, are better positioned to influence a firm’s strategy and management. The ‘Theory of Harm’ suggests that Institutional Investors would even resort to threats to sell their shares, According to a study titled ‘Anticompetitive Effects of Common Ownership’, it was found that Horizontal Shareholding, particularly in concentrated industries in the United States such as Airlines, Pharma, and Retail Banking, increased the likelihood of Higher Prices, Collusive Behavior and Incentivization of profits of an entire Industry over Individual Firms.
Horizontal Shareholding via a vis Competition Act, 2002
Abuse of Dominance:
The presence of same set of investors in two or more competing enterprises in an industry enables a particular firm to function in a manner independent of its competitors and has the ability to affect the consumers (The reason why they function in such a manner has been explained extensively in the previous section-‘Economic Implications of Horizontal Shareholding). The presence of similar set of minority investors in multiple competing firms in an industry create contractual and structural links that would greatly disincentive competition among firms and influence their pricing strategy and other key decisions. The firms with common owners operate in a way as if they are a single entity. This clearly corresponds to ‘dominance’ as laid down under Sec. 4 of the competition act.
Competition Discrepancies posed by Horizontal Ownership can be neutralized by bringing acts of such character under the purview of ‘Abuse of Dominance’, as envisaged under Sec. 4 of the Act. So as to institute a claim of abuse of dominance, in this regard, it needs to be proven that firms with Horizontal Shareholding ought to be considered as a ‘group’. Groups, as mentioned in Sec. 5 of the Competition Act, not only pertains to enterprises that are in a position to exercise voting and directorial appointment rights but also includes control over the management or affairs of an enterprise. The harm that emanates from Horizontal Shareholding can be brought under the expanse of ‘Material Influence’— the lowest level of control which enables an enterprise to “influence affairs and management of the other enterprise including factors such as shareholding, special rights, status and expertise of an enterprise or person, Board representation, structural/financial arrangements etc”. The question of neutralising anticompetitive threats arising out of common ownership was brought up in Meru Travelswhere even though the CCI did concur with the possible anti-competitive effects of Common Shareholdings, it failed to act upon it on account of uncertainty and lack of adequate evidence. Ergo, it is highly imperative to construe ‘control’ as broadly as possible so that enterprises with common shareholders be brought under the purview of ‘group’ which in enables the CCI to address Horizontal Shareholding on the basis of abuse of dominance.
Since Common Shareholders own shares in competing businesses, they can be utilized as an intermediary for coordinating or establishing contact between the rival firms. For instance, enterprise, through common owners, can coordinate their activities and achieve a market outcome above the competitive level or facilitate the exchange of anticompetitive information In Meru, on account of overlapping shareholders in competing firms, the odds of exchange of price-sensitive and non-public anti-competitive information drastically increases.
Certain Market Structures are conducive for facilitating coordination between commonly owned enterprises. The said coordination can be either explicit (Express Collusion) or Implicit (Tacit Collusion). Common Owners would often operate as a conduit through which material information be shared between the competing firms. In the Meru Case, Ola and Uber was faced with allegations of coordination as a result of Softbank’s minority shareholding in both the firms. This paved way for the CCI to institute an antitrust inquiry wherein all anti-competitive allegations against Ola and Uber were rejected on the basis of lack of evidence. Nevertheless, CCI acknowledged the fact that Common Ownership might incentivise Collusion. Due to the broad nature of Section 3 of Competition Act, Coordination or Collusive acts arising out of Horizontal Shareholding be subjected to anti-trust scrutiny.
In view of the anti-competitive effects of horizontal shareholding, the CCI needs to factor horizontal shareholding into account when evaluating potential mergers and combinations. This is particularly relevant for highly concentrated markets. The said measure has already been implemented in the EU where Horizontal Shareholding is taken as an element of context in merger analysis. In addition, transactions which would likely result in increased common ownership such as mergers between institutional investors should be adequately scrutinised. Case in point being the merger between Blackrock and BGI which is found to have contributed to anti-competitive effects in the airlines industry. However, it’d be very demanding for the Anti-Trust regulatory bodies to scrutinise all non-controlling minority investments. It has been found that markets with a HHI level (which measures market concentration) of greater than 2500 tend to be the most vulnerable to anti-competitive effects arising out of horizontal shareholding. Ergo, for the sake of administrative ease, it would be reasonable for the CCI to screen those transactions that exceed the threshold of 2500 HHI. In addition, the definition of ‘Horizontality’ needs to be revisited in light of the anti-competitive effects resulting out of horizontal shareholding, for instance, Consider a scenario where firms from different industries decide to merge. On the face of it, this looks like a non-horizontal merger but if the acquiring firm shares the same set of shareholders with the target firm’s competitors, it would result in horizontal shareholding. Oligopolistic markets, in particular, need to be meticulously overseen by the CCI since it is at greater risk of being adversely affected by horizontal shareholding. Also, as done with regard to chryscapital, making removal of directors, non utilisation of voting rights conditional for approval of minority acquisition in a competing enterprise.
Minority Ownership held by Institutional Investors can diminish competitive intensity by exerting its voting rights, using its reputation or standing to influence the affairs of its portfolio companies or by acting as a conduit through which the competing firms coordinate with each other. On a positive note, CCI’s scrutiny of Chryscapital’s minority acquisition clearly indicates that horizontal shareholding is seen as a cause for concern. CCI must double down its efforts by undertaking its own inquiry into whether horizontal shareholding undermines competitiveness of firms. CCI should address this by improving pre-merger screening, tightening corporate governance rules and by according structural or/and behavioral remedies.