October 24, 2021

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Understanding the issue of common ownership by private equity investors across competing enterprises

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This article is written by Shubha Ojha who is pursuing a Certificate Course in Certificate course in Competition Law, Practice and Enforcement from LawSikho.

Table of Contents

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Although the current pandemic has resulted in a major slump in the economy, it has opened gates for certain opportunities that have thrived during the period. In India, the COVID-19 pandemic has failed to derail private equity investments, which have in fact transcended the quantum of foreign and strategic investments. In the anticipation of deployment of about $40 billion of private equity in the Indian market this year, the Competition Commission of India [hereinafter, “the CCI”] will very soon initiate a market study on private equity investments in India.

The trend involving private equity investments in various firms belonging to the same industry which results in product-market overlaps has necessitated conducting of the said market study in order to better comprehend the issue associated with common ownership by minority shareholders in firms and its subsequent implications upon competition. 

Einer Elhauge, a professor at Harvard Law School, took to Twitter to term such common ownership as the “greatest competitive threat of our times”. The CCI chief, Ashok Kumar Gupta, while delivering his keynote address at the CII Annual Conference (Virtual) on Competition Law and Practice, said that the market study aims at gauging the underlying motivations and incentives behind such investments made by the common PE investors, while highlighting the importance of looking at the rights that they acquire in order to safeguard their legitimate financial interests from their shareholdings. It must be analysed if these rights enable them to exert influence on the decision-making of a firm, thereby affecting competition or whether they could be classified under the category of ‘passive’ investors.

Thus, in a nutshell, the said study would facilitate the identification of the nature of rights acquired by common shareholders, the influential ability conferred upon them through these rights, and the protective policy framework of the companies for eliminating any competition concerns.

The above concern was highlighted in the case of Meru Travel Solutions Pvt. Ltd. v. ANI Technologies Pvt. Ltd. and Ors [hereinafter, “Meru Travel Solutions”]. With respect to common ownership, the CCI noted that due to the presence of common investors such as DidiChuxing and Tiger Global Management LLC, there was a probability of them falling under the same ‘group’ as defined under Section 5 of the Act. In this case, the informant also brought to notice the purchase of 12 to 20% stake in Uber by SoftBank, and argued that competition in the market would be affected in the relevant markets owing to the prevalence of common investors holding substantial shares in both Uber and Ola and the presence of SoftBank nominee directors on their respective boards.

Although the CCI did not order further investigation into the matter, it was noted that market dynamics subsequent to the said common investments were yet to fully effectuate. The CCI stated that it was a matter of potency whether the common investments, considered as an “error of omission” rather than an “error of commission”, would translate into control and whether such common ownership would create a competition concern.

The following discourse firstly delves into the anti-competitive effects of common ownership. Secondly, the author establishes a comparative mapping of the issue of common ownership across two major foreign jurisdictions- the European Union and the United States of America. The author then throws light upon the Indian legal framework in this context. The article finally culminates into concluding remarks with respect to the issue of common ownership and the corresponding role of the competition watchdog.

Amidst the ambiguity caused due to multiple theories and conjectures, it is yet to be seen how exactly common ownership paves way for the creation of competitive risks. According to Einer Elhauge, as a result of common ownership, the entities involved cease to operate independently owing to the creation of an indirect link between them through the common investors, which has a significant influence on their competitive behaviour and therefore, the “concept of concerted practices” or the idea of collusive behaviour would be applicable to common ownership as well.

Building upon the “common ownership theory of harm”, it has been claimed by many scholars that even when the private equity investors hold only non-controlling minority stakes, it may result in softening of competition amongst entities having such common investors because of reduced incentives to compete. ‘Harm theories’ dominating a market comprise ‘unilateral effect’ and ‘coordinated effect’ between firms with common ownership. The unilateral effects would be such that lead to unilateral increase of prices, or decline in quality and innovation, which could be detrimental for one entity, but advantageous for the investors holding shares in competitors.

Common ownership may also lead to coordinated effects wherein additional incentives are created for the common investors to facilitate concerted action amongst competing firms and derive illegal earnings from such a concerted action to the disadvantage of the consumers. 

In this context, the concept of hub and spoke arrangement also comes into picture. The aforementioned effects under the harm theory have a negative impact on the behaviour of the competing firms, thereby causing adverse effect on competition due to the exchange of private and competition-sensitive information amongst themselves leading to the establishment of a hub and spoke arrangement. In conventional terms, a hub and spoke arrangement refers to providing access to sensitive and non-public information amongst competitors through a third party, which acts as catalyst for the purpose of facilitating collusive behaviour of such competing competitors. In the present context, catalysts, in the form of common private equity investors, give rise to a hub and spoke cartel. In cases associated with cartelization, the CCI can invoke the enforcement provision of Section 3 of the Act that bars cartel-like behaviour amongst competitors.

Even under the merger control regime, the competition regulator might have to delve into a careful scrutiny of competition issues in case of combinations comprising PE investors. In order to analyse and approve combinations, the CCI may look into issues such as, (i) dampening of competition between the acquirer and the target having common investors; (ii) decline in innovation; and (iii) dominant position of PE investors resulting from common investment and its potential abuse.

Along with a hike in private equity investments in India, the afore-mentioned market study is a ripple down effect of debates, discussions and studies that are being conducted in other jurisdictions.

European Union [hereinafter, “the EU”]

In 2017, the EU took note of competition concerns surrounding common ownership for the first time in the case of Dow/DuPont. It was observed by the European Commission [hereinafter, “the EC”] in the case of Dow/DuPont that common shareholding has the tendency of lowering rivalry. The EC also pointed towards some new studies that indicated the existence of significant levels of common shareholding in a particular industry could materially influence the operations and the behaviour of the concerned firms.

The influence would be such that could result in higher prices and common shareholders shaping the policy related to monetary incentives of the executive of the firm to bring it in consonance with industry performance, and not just the specific performance of the firm. Also relevant is the decision in the case of BD/Bard, where it was noted that the Parties and Merit Medical Systems, Inc. had common shareholders holding over five per cent of their respective shareholdings. Nevertheless, the said shareholdings did not provide any special rights and did not confer any controlling powers and on the basis of this Merit’s independence was upheld and it was said to fulfil the ‘purchaser criterion’ of independence from and absence of connection with the Parties.

Similar issues were brought to fore by the EC, the following year, in the case of Bayer/Monsanto. The EC recognized the debates and discussions pertaining to the potential impact that the existence of common shareholders has on incentives of the competitors to indulge in competition in a particular industry and the main features/attributes of common shareholding that gives rise to such consequences. It was noted by the EC that the debates and discussions with respect to the issue of anti-competitive effects of common shareholding continue to be unsettled. The EC clearly recognized the importance of scrutinising the presence of common shareholding in agrochemical and biotech sectors as an element of context while conducting purchaser assessment, however, at the same time it was opined that the presence of common ownership should not as such disqualify a suitable purchaser.

In early 2018, the EC’s Competition Commissioner Margrethe Vestager announced that with companies getting more and more linked, the Commission has launched an investigation into the extent of common ownership and the anti-competitive impacts it might have. Recently, in September 2020, a report with respect to common shareholding in the European market was published by the European Commission and the Joint Research Centre [“hereinafter, “the EU Report”].

The EU Report has come to the fore as the first of its kind all-encompassing study by the EU in pursuance of what Vestager had stated in 2018. The EU Report does not mention any changes to be brought in the legislative or regulatory framework. It simply states that the issue of common ownership is a complex one and in light of several lines of logic or theory, the issue opens gates for further research. The EU Report, however, did observe that there existed a positive correlation between the aspect of common ownership and market power. 

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United States of America

The US antitrust authorities have not expressed a lot of interest in scrutinising common ownerships across competing firms, however, a hearing was conducted by the Federal Trade Commission to look into the matter. There have also been two empirical studies related to the issue of common ownership vis-à-vis competition. Both these papers are indicative of a direct relationship between common ownership in a particular industry and higher prices, the brunt of which is faced by the consumers.

The first paper, that is the ‘Paper on Common Ownership in Airlines’ examined instances of common ownership amongst US Airlines and concluded that there was three to seven per cent increase in the price of domestic tickets on the average US airline route and this situation would not persist if there were separate ownerships. The other paper, that is the ‘Paper on Ultimate Ownership and Banking Competition’ looks into the US Banking industry and arrives at similar conclusions with respect to the comparability between common ownership and surge in prices. These papers focus on the correlation between common ownership and the price outcomes. 

The literature with respect to common ownership in the USA is also at a nascent stage. Some American scholars have proposed policy measures aimed at controlling the anti-competitive effects of common ownership. Scholars like Eric A. Posner, Fiona Scott Morton and E. Glen Weyl have suggested imposition of limits on the ability of the institutional investors to indulge in simultaneous investments within the same industry, whereas another tranche of scholarly exposition warns against the harmful repercussions of such an imposition and emphasize application of a more measured approach. 

Therefore, even across developed foreign jurisdictions there has occurred a new realization of the economic reality related to the competition concerns of common ownership. Antitrust regulators in these jurisdictions are still exploring the nitty-gritty of the issue. Thus, a close scrutiny of this phenomenon by the competition watchdog becomes a necessity in the contemporary times.

The competition regulators of developed jurisdictions have taken into consideration the collusive effects of common ownership. For example, the EC has penalized private equity investors under the parental liability principle, according to which, liability can be imposed on a parent company exercising decisive influence over its subsidiary for the anti-competitive conduct of the said subsidiary.

The EC has also held in certain cases that liability can be attached to private equity investors if companies engage in cartelistic behaviour and if their portfolio companies commit any infringements. In the Goldman Sachs case, the European antitrust regulators upheld the parental liability of the private equity investors for the infringements that were committed by their portfolio company and observed as follows.

The exercise of voting rights regarding strategic decisions for the business conduct of the subsidiary, such as the appointment of top management and the approval of business and management plans, is evidence of a clear exercise of decisive influence rather than a purely temporary financial investment”.

The judgement gave rise to the much-needed clarity with respect to establishment of rebuttable presumption regarding anti-competitive infringement. The European Court of Justice held that the presumption would arise even when the parent company holds all voting rights instead of all or almost all shares of the subsidiary, thereby clarifying that it is the aspect of parent company’s degree of control over its subsidiary that gives rise to the presumption.

Under the Indian framework, the parental liability principle in case of passive investors has not evolved yet, however, the competition regulator while considering a complaint of Appreciable Adverse Effect on Competition [hereinafter, “AAEC”] caused owing to common investment of private equity investors in competing firms, may consider the following pieces of evidence:

  1. Evidence indicating active role of competing firms in taking a decision with respect to having common investors.
  2. Evidence suggesting compromise of competition amongst competing firms because of the common investor.
  3. Evidence regarding private investors having both common ownership as well as decisive influence over the competing firms.

Another case where the EC analysed the question of common ownership between competing firms was the case of Dow/DuPont. While examining if the transaction in question gives rise to anti-competitive concerns, common shareholding must be taken account of as an ‘element of context’. In this case the condition precedent for EC approval involved certain divestments to be made. Pursuant to this decision, common ownership as an ‘element of context’ may make it difficult to persuade the competition regulator that the combination would not have anti-competitive implications. 

In light of the new governmental initiatives viz., Startup India, Digital India, Make in India and the various endeavours towards the aim of facilitating ‘Ease of Doing Business’ and making India an investment-friendly destination, the Competition Act, 2002 [hereinafter, “Act”] already provides certain exemptions for promoting private equity investments in India. On a cursory reading of Explanation to Item 1, Schedule 1 of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 [hereinafter, “Combination Regulations”], it can be comprehended that passive investments (under 10%) made solely as an investment and in ordinary course of business by the private equity investors that are not likely to cause AAEC need not be notified to the CCI.

However, in practice, abundant caution even on part of the investors with investments below 10% has been observed in light of difficulty in conducting self-assessment of control rights and the true meaning of ‘passive investment’, the heavy penalties that non-notification attracts and the merger control regime’s suspensory nature. Even such investors end up notifying their transaction before the CCI, for example the Amazon.com NV Investment Holdings LLC/Quess Corp Limited combination (Combination Registration No -2019/08/680).

Analysis of minority private equity investment under the Indian framework involves the crucial question of whether the common ownerships of the private equity investors across the firms horizontally operating in the same industry is accompanied with a place in the management and the board or veto rights enabling the private equity investors to be active investor having the ability to exercise decisive influence/material influence on management and affairs of the competing firms.  For instance, the CCI, in Meru Travel Solutions, identified SoftBank, despite its minority/passive holding, as an ‘active investor’ having material influence over competing firms.

Furthermore, there might be instances where certain private equity investments might escape the eye of the competition watchdog, if the combining entities fall under the purview of the De-minimus threshold (assets or turnover of the target entity being below INR 3.5 Billion or INR 10 Billion- “target exemption”). Thus, the provision of target exemption affords statutory support to the minority investments of the private equity investors in India, especially in the venture capital space. 

From the above discussion, it can be gathered that there is a strong presumption that common ownership in firms can lead to anticompetitive conduct by these firms. The order delivered by the CCI in the aftermath of Meru Travel Solutions also evidences the fact that common ownership may lead to softening of competition.

In the context of the contemporary Indian merger control regime, certain changes are expected to creep in due to the draft Competition (Amendment) Bill, 2020 [hereinafter, “the Amendment Bill, 2020”] that was introduced in February 2020. Among other things, the Amendment Bill, 2020 recommended an amendment in the definition of ‘control’. Earlier, the definition of control under the Act did not lay down minimum standards required to establish control and so the CCI employed the yardstick of ability to exercise ‘decisive influence’ and ‘material influence’. The Bill proposes to statutorily recognise the standards of ‘material influence’ so that ‘control’ may include the ability to exercise material influence over management or affairs or strategic commercial decisions. If such an amendment is accepted then the standard of control will be further lowered which may require a competition examination of the impact of passive investments by the private equity investors. Such an amendment would ensure that a larger number of transactions are scrutinised.

This would require effective engagement of competition policy, particularly because of the evolving regulatory and market landscapes governing platform competition in the online economy. Finally, without appreciation of the dynamic harms that common ownership can cause and discussion of the various possibilities to incorporate its relevance in competition assessment, it would continue to evade the Indian regulator’s scrutiny.

Moreover, apart from the legal framework, there are also contractual stipulations incorporated for the purpose of circumscribing the scope of conduct of the private equity investors, the most common amongst them being “non-invest” stipulations. The investors either might be directed to not invest in competing firms or might lose board seats or suffer dilution of pre-emptive rights/ affirmative vote in case they invest in competing enterprises.

The first kind of non-invest provision is resisted by investors and might attract Section 3(4) of the act because it might amount to a barrier to entry. There might also be covenants imposing non-disclosure obligations, superimposition of default company law conflict obligations of directors on the investors as well, etc. In light of the increased regulatory scrutiny of the private equity industry, firms in the industry are increasingly centering their focus on internal compliance mechanisms to control data integrity and better handle competition-sensitive information.

In light of the above discourse associated with the looming threat of ‘horizontal shareholdings’ and the absence of consensus with respect to anti-competitive effects of common ownership, the market study by CCI on private equity investments will be a welcome move. It will serve as a timely respite to provide clarity in this area and will serve as a guiding framework for the private equity investors functioning in the burgeoning and dynamic private equity market.

  • After e-commerce and pharma, CCI zeroes in on private equity for market study, The Hindu Business Line, https://www.thehindubusinessline.com/economy/policy/after-e-commerce-and-pharma-cci-zeroes-in-on-private-equity-for-market-study/article33248554.ece.
  • Akanshha Agrawal and Anupriya Dhonchak, Relevance of Common Ownership in Competition Analysis in India, NLS Business Law Review (Vol. 6, 2020), https://nlsblr.com/wp-content/uploads/2020/09/Article-3.pdf.
  • Alec J. Burnside, Adam Kidane, Common ownership: an EU perspective¸ Journal of Antitrust Enforcement, March 06, 2020, https://academic.oup.com/antitrust/advance-article/doi/10.1093/jaenfo/jnz037/5788527.
  • Avimukt Dar, Harman Walia and Parumita Pal, CCI Studying Private Equity Ownership In Natural Competitors: Impact On PE/VC Sector, Mondaq, Jan. 5, 2021, https://www.mondaq.com/india/antitrust-eu-competition-/1021704/cci-studying-private-equity-ownership-in-natural-competitors-impact-on-pevc-sector.
  • Case M. 8084Bayer/Monsanto, European Commission, decided on 21 March 2018, https://ec.europa.eu/competition/mergers/cases/decisions/m8084_13335_3.pdf.
  • Case M. 8523 – BD/Bard, European Commission, decided on 12 December 2017, https://ec.europa.eu/competition/mergers/cases/decisions/m8523_1194_3.pdf.
  • Case M. 7932 – Dow/DuPont, European Commission, decided on 27 March 2017, https://ec.europa.eu/competition/mergers/cases/decisions/m7932_13668_3.pdf.
  • Case C-595/18 P – Goldman Sachs v. European Commission, decided on 27 January 2021, https://curia.europa.eu/juris/document/document.jsf?text=&docid=237046&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=1677282.
  • CII Annual Conference (Virtual) on Competition Law and Practice, https://www.cci.gov.in/sites/default/files/speeches/ChairpersonAddress_0.pdf?download=1.
  • Competition Comm to conduct market study on private equity investments: Chairperson, Outlook: The News Scroll, Dec 4, 2020, https://www.outlookindia.com/newsscroll/competition-comm-to-conduct-market-study-on-private-equity-investments-chairperson/1987327.
  • Einer Elhauge, How Horizontal Shareholding Harms Our Economy- And Why Antitrust Law Can Fix It¸ Harvard Business Law Review, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3293822.
  • Eric A. Posner, Fiona Scott Morton, & E. Glen Weyl, A Proposal to Limit the Anti-Competitive Power of Institutional Investors, Antitrust L. J., https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2872754.
  • Common Ownership by institutional investors and its impact on competition, OECD, December 6, 2017, https://www.oecd.org/competition/common-ownership-and-its-impact-on-competition.htm.
  • Lena Hornkohl, The ECJ expands the presumption of decisive influence (C-595/18 P – Goldman Sachs v Commission), Kluwer Competition Law Blog, January 27, 2021, http://competitionlawblog.kluwercompetitionlaw.com/2021/01/27/the-ecj-expands-the-presumption-of-decisive-influence-c%E2%80%91595-18-p-goldman-sachs-v-commission/.
  • Meru Travel Solutions Pvt. Ltd. v. ANI Technologies Pvt. Ltd. and Ors., 2018 Comp. L. R. 694 (CCI).
  • Rosati, P. Bomprezzi, M. Ferraresi, A. Frigo, M. Nardo, JRC Technical Report, Common Shareholding in Europe, (September 2020), https://publications.jrc.ec.europa.eu/repository/bitstream/JRC121476/jrc121476_jrc_commonshareholding_final.pdf. 
  • Rajiv Bhuva, Covid-19 failed to derail India’s investment banking, Fortune India, Jan 06, 2021, https://www.fortuneindia.com/investing/covid-19-failed-to-derail-indias-investment-banking/105009.
  • Samir Agrawal v. ANI Technologies and Ors., Competition Commission of India, Case No. 37 of 2018, https://www.cci.gov.in/sites/default/files/37of2018.pdf.

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