Are big fund managers’ sizeable holdings in companies hurting competition? The Competition Bureau thinks it might

Common ownership by the likes of BlackRock and Vanguard in airlines and soft drinks sectors have led to higher prices and less innovation in those markets, one analyst says

March 5, 2019 | 2:09 PM EST

Canada’s Competition Bureau, following the lead of other international regulators, is investigating an increased emphasis on common ownership in enforcing its antitrust mandate.

A handful of fund managers such as Blackrock Inc. and The Vanguard Group have accumulated sizeable holdings in many of the same companies, which has led to concerns whether the funds’ “common ownership” hurts competition among their portfolio companies, and violates antitrust laws.

But critics say that imposing restrictions on common ownership will have a deleterious economic impact.

“Enforcing common ownership restrictions will have a chilling effect on the investor community and businesses seeking money and investment,” says Toronto-based George Addy, formerly head of the Competition Bureau and now senior counsel at Davies Ward Phillips & Vineberg LLP.

Since last summer, the bureau has been having what one competition lawyer calls “quiet discussions” with a “laundry list” of institutional investors and law firms about common ownership.

Indeed, an email response from the bureau seems to confirm that the issue isn’t going away any time soon.

“The bureau has been reaching out to stakeholders to see if there are ways to improve consistency in our process of gathering the necessary information to complete our analysis of minority interests,” spokesperson Jayme Albert acknowledged.

As it turns out, “minority interest transactions” have been a component of the competition watchdog’s merger review guidelines since 2011. By their own terms, the guidelines are clear that that they are intended for use only in the merger context. Nowhere in the guidelines do the words “common ownership” or even “partial ownership” appear.

In this context, the bureau’s response to written questions as to why it is looking into minority interest is equivocal. After stating that “there is no change anticipated to the approach set out in our guidelines”, the bureau confirmed that it “will continue to collect the information necessary to conduct an assessment of minority interests.”

To be sure, it’s unclear to what extent common ownership prevails in Canada. Not a single institutional investor of the half-dozen asset managers, banks and pension funds contacted by Financial Post was willing or available to grant an interview on the subject.

What is known is that a number of large institutional investors have minority interests of varying sizes in a variety of Canadian corporations, including companies that compete with each other.

The influence of these minority investors can be enormous. Consider that after the Canada Pension Plan Investment Board, which was one of the institutions that did not respond to an interview request for this article, cast negative votes at shareholder meetings of 45 Canadian companies with no female directors in 2017. Half of those companies subsequently appointed a woman to their board.

While that move was commendable, there are concerns that the oversized influence can have anti-competitive effects.

“Some academic literature in the U.S. has concluded that common ownership by large institutional investors such as BlackRock, Vanguard, Fidelity and State Street in competing firms in concentrated industries such as airlines, banking, aluminum, soft drinks and mobile phones has resulted in higher prices and less innovation in those markets,” says Anita Banicevic, Addy’s colleague at Davies Ward.

But other research challenges these findings. Critics argue that the studies show an association between common ownership and a dampening of competition, but not a cause and effect relationship. Others argue that the data is inaccurate, or that proponents fail to recognize the different types of institutional shareholders with different interests an approaches, such as the distinction between passive index funds and active funds. Another criticism is that proponents have failed to consider the impact of reduced competition on customer or suppliers in a fund’s portfolio.

Still, developments around the world show an increasing scrutiny of common ownership in the antitrust context.
The European Commission, for example, has referenced common shareholdings for requiring divestitures in the merger between The Dow Chemical Company and DuPont Co. and continue to study their prevalence and impact. A December 2017 OECD Roundtable explored the competitive impact of common ownership; and India’s regulators are proposing to lower merger notification thresholds for common ownership to five per cent.

In the U.S., while antitrust authorities have stated that common ownership analysis is still too embryonic to drive policy changes, the Federal Trade Commission has devoted significant time to the issue at recent hearings after Democratic senators introduced a bill requiring the commission to do so.

To Addy, however, the Competition Bureau is wasting its resources.

“I don’t understand why the bureau is doing this,” he says. “It’s an enforcement agency, not a think tank, and needs to stop doing things just because other agencies are doing it — especially when other agencies, like the one in the European Union, works with a definition of competition that is different from the one we use in North America.”

Where and when all this is going will not likely be determined until the government appoints a new commissioner at the bureau. The post, which has been vacant since last summer when John Pecman retired, was finally filled on Tuesday when Navdeep Bains, Minister of Innovation, Science and Economic Development, appointed Matthew Boswell as Commissioner of Competition for a five-year term.

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