Academic journal article The Yale Law Journal

Horizontal Shareholding and Antitrust Policy

Academic journal article The Yale Law Journal

Horizontal Shareholding and Antitrust Policy

Article excerpt


Horizontal shareholding occurs when a number of equity funds own shares of competitors operating in a concentrated product market. For example, the four largest mutual fund companies might be the four largest shareholders of all the major U.S. airlines. (1) A growing body of empirical literature concludes that under these conditions, market output is lower and prices are higher than they would otherwise be. (2) Due to the twin trends of increases in the mutual fund industry and the rise of concentration in the U.S. economy, the impact of lessening competition due to common ownership by mutual funds has a potentially adverse effect on consumer welfare. We argue here that the "effects" test articulated for mergers in Section 7 of the Clayton Act permits challenges to such mergers, whether or not the precise mechanism by which such mergers elevate product prices in a particular case is precisely known. (3)

We adopt two assumptions throughout this Feature: first, the firms in a concentrated product or service market are not fixing prices in a way that would subject them to liability under Section 1 of the Sherman Act; second, the managers of the funds that acquire interests in their shares are not agreeing with each other about how to purchase or vote the shares or otherwise influence the behavior of these firms. If either of these two horizontal agreements existed, it would be independently actionable under Section 1 of the Sherman Act. Rather, this Feature considers the extent to which antitrust can be brought to bear against horizontal shareholding without proof of one of those two forms of illegal agreement.

Part I discusses the development of large-scale mutual fund ownership and evaluates the resulting threats to competition. Part II examines the antitrust legal theory justifying enforcement, including the Clayton Act's plain language "effects" test. Part III explains why an "efficiency defense" is relatively unimportant to such mergers. Then Part IV considers the Clayton Act exemption for stock acquisitions "solely for investment." Finally, Part V considers the use of post-acquisition evidence. We conclude that to the extent the empirical evidence warrants the conclusion that large scale horizontal acquisitions threaten reduced product output and higher prices, the existing tools of antitrust merger enforcement are sufficient to support challenges to those acquisitions.


A. The Increasing Competitive Significance of Mutual Fund Ownership

In the United States, the diversified mutual fund industry arose in the 1970s. (4) This model of saving and investing greatly benefits consumers by allowing them to invest small amounts in a huge range of assets at low cost. The development of the index fund also freed consumers from paying high fees for professional stock-picking and instead allows them to invest in the whole market at low cost. (5) Economies of scale in running a fund allow large funds to offer lower fees and greater diversification, two attributes desired by consumers. Funds like Vanguard and Fidelity were early and successful movers in the space and today have large market shares, along with BlackRock and State Street. (6)

By "institutional investors," we refer to asset managers, companies that manage mutual funds, sovereign wealth funds, and any other entities that manage stock market investing on behalf of final owners. Institutional investors today own roughly 70% of the U.S. stock market. (7) While the large mutual fund companies listed above hold in the range of 4-6% of the U.S. stock market each, thousands of smaller asset management organizations together hold the remaining approximately 50%. (8)

Competition economists initially failed to recognize the impact of institutional investors on competition, perhaps because the funds held small shares in competitors in absolute terms. …

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