What is at Stake?

“Common ownership” – an investor holding economic interests in different competing businesses at the same time – has been a recurring topic in antitrust debates. More recently, there have been calls in the EU for closer antitrust scrutiny of simultaneous board representations, where executives from one company serve on the board of a competitor. This alert reflects on the current discussion concerning “cross-board memberships” and puts it into perspective.

The Case of Common Ownership

Common ownership has been a focal point for EU policymakers for quite some time. Last year, Competition Commissioner Vestager voiced concerns about common ownership, considering the increased numbers and influence of institutional investors that hold partial ownership in competing companies. The major concern is that common ownership can facilitate an information exchange between competitors either through direct collusion or by way of a so-called hub-and-spoke cartel where asset managers pass on competitively sensitive information from one competitor to another.

Concerns surrounding common ownership shift the discussion on minority shareholdings in a new direction. In 2014, the Commission proposed to extend EU merger control to deals that imply the acquisition of non-controlling minority shareholdings; however, the proposal was dropped after the Commission concluded that it is extremely rare for acquisitions of less than 10% of the shareholding to raise anticompetitive concerns.

Vestager’s more recent concerns about common ownership follow the Dow/DuPont decision (case M.7932), in which the Commission said that common shareholding must be taken into account in the competition analysis. In its decision, the Commission examined the effects of common shareholding on market shares and concentration measures. It stated that “large shareholders have a privileged access to the companies’ management and can, therefore, share their views and have the opportunity to shape the companies’ management’s incentives accordingly.” Proponents of this approach cite economic research on the U.S. airline industry, linking increased consumer prices to minority stakes that asset managers hold in rival companies.

However, there are alternative views. Several research papers challenge the assumption that common ownership has an adverse effect on competition. Among the critics is the German Monopoly Commission, an independent advisory committee. It has said that it would be “premature” to address the issue through laws or regulation. In practice, it is challenging to prove how institutional investors are able to influence the behavior of competing firms so as to distort competition.  

The Case of Cross-board Memberships

At a recent antitrust conference, the president of the Belgian Competition Authority, Jacques Steenbergen, argued that the EU should extend its scrutiny to cross-board memberships because they are more likely to harm competition within the EU than common ownership. In his view, insider information is more likely to be shared through the same person being on the boards of multiple, competing firms than through an investor’s common ownership in competing firms. He argued that intervening in cross-board memberships would be more effective in the fight against collusion than the control of common ownership. 

For now, Steenbergen appears to be a lone voice amongst competition authority heads in the EU to promote antitrust enforcement on cross-board memberships. However, where there are fewer “classic” cartels, competition authorities are generally on the lookout for the more subtle ways in which competition may be adversely affected. At first sight, the proposal to control cross-board memberships seems to rely on a simple logic: Isn’t information sharing easy when the information is passed from one board to another through the same person being a member on both boards?

However, existing (non-antitrust) laws already address the matter. For example, Germany’s stock corporation laws explicitly acknowledge that supervisory board members shall not be subject to non-compete obligations and are thus free to accept board nominations from competitors. Moreover, members of a board are bound by confidentiality and fiduciary duties under stock corporation laws. These provisions require board members to keep any sensitive information to themselves. Board members are required to be loyal and to safeguard the interests of their company. They would therefore violate their legal obligations if they shared information in their role on the board of a competing company.

The potential of cross-board memberships to have a chilling effect on competition is therefore unclear. Competition authorities would — in the end — be confronted with the same problem of evidence that they are confronted with in the cases of common ownership. How can it be proven that shareholders or board members influence competing companies in such a way that the rivals have less incentive to compete intensively?