Minority shareholdings can help to stabilise cartels

Minority shareholdings were long seen as fairly harmless to industry competition because it does not give these shareholders any formal control of the company. Recently, however, economists have increasingly begun to question this view. ZEW competition economist Sven Heim answers questions on the consequences of minority shareholdings for competition and how the issue should be handled by authorities.

What are the economic effects of minority shareholdings?

Minority shareholdings can indeed have negative effects on competition, in particular horizontal minority shareholdings whereby companies in the same sector hold minority stakes in each other. When it comes to these anti-competitive effects, we primarily distinguish between unilateral and coordinated effects. Unilateral anti-competitive effects emerge when a company is financially invested in one of its competitors, as it has less interest in gaining a competitive advantage over said competitor because the company directly participates in the competitor’s profits and losses in terms of potential dividends. Furthermore, a minority stake in a competitor can also be used to hamper that company’s strategic decisions in cases where the stake constitutes a blocking minority. Coordinated effects can also damage competition. For instance, cartel agreements are more easily enforced when companies have financial stakes in each other. Minority shareholdings give companies a privileged view into the commercial activities of their rivals, making it easier to identify when a company is not adhering to cartel agreements. In addition, companies also have fewer incentives to violate cartel agreements since doing so would lead to lower dividends.

How relevant is this problem in the European Union?

 On the political side of things, the European Commission is currently assessing whether it makes sense to extend merger control to include minority shareholdings. Current trends seem to clearly point in this direction. In some countries, including Germany and the US, minority shareholdings already fall within the remit of competition authorities. In practice, however, this rarely means that minority shareholdings are subjected to the same intensive auditing as full acquisitions. In the US only one per cent of all minority interests are investigated by the relevant authorities and even fewer are then blocked as a result. However, this number is still very high in comparison with other countries. Up until this point research into the effects of minority shareholdings has been almost entirely theoretical. However, some empirical results have shown that minority shareholdings in the US have led to higher prices. A recent ZEW paper has for the first time found evidence that minority shareholdings in practice are in fact used to stabilise cartels. Companies within the same sector are significantly more likely to have minority stakes in one another when cartel leniency programmes which undermine the stability of cartels are introduced. Large companies in particular then take shares in each other in order to re-stabilise the cartel.

Is a reform of the EU merger control regime necessary?

A reform of merger controls at the European level has been a subject of discussion for a number of years. One argument against potential reform was that expanding regulations to cover minority shareholdings would be extremely costly for both companies and public authorities. Furthermore, the true extent to which minority shareholdings damage competition was for a long time not entirely clear. Only recently have we had access to empirical research results which clearly show that a reform of merger control involving greater oversight of minority shareholdings appears necessary.

How does German competition law address minority shareholdings?

What the findings of our study really bring home is that more can definitely be done. An increase in the number of horizontal minority shareholdings from around 30 to 50 per cent following the introduction of a leniency programme is clearly an indication that companies are making more intensive use of minority shareholdings as a means of stabilising cartels than previously thought. With this in mind, the German Federal Cartel Office ought to make greater use of its legal expertise to investigate minority shareholdings and in particular those among large companies.

What effects do minority shareholdings have on the pricing and investment decisions of the companies involved?

Minority shareholdings can lead to a decline in pricing competition even when no explicit pricing agreements have been made. This is because a company’s profit function is influenced by that of its competitor that it has a minority stake in. It is now rather unambiguous that this is what is happening in practice. Investment decisions can also be influenced by minority shareholdings if these policing or strategic decisions require a majority vote, usually around 75 per cent. This means that a larger minority interest can lead to invested companies influencing planned investment decisions, increases in capital or changes in the firm’s direction in terms of location or new products, in order to keep competitive pressures minimal.