APPC Homepage

Recently, there is a growing number of works of literature that discusses the problem of “horizontal shareholding,” a case where an institutional investor owns shares of multiple companies competing in the same relevant market. As a result, the OECD organized a seminar to discuss the anti-competitive effect of such horizontal shareholding, while some scholars also write papers that criticize such practices.

Economically, if the same investor owns shares of direct competitors in the same industry/relevant market, the incentive of those competitors to compete reduce. In a perfectly competitive market, a company would generally decrease the price to take over market shares of its competitors and maximize profits. However, if there is a common owner over such competitors in the same market, it may increase the incentive of not to compete among the competitors, as it may maximize the common owner's dividends and stock prices.

In some cases, an institutional investor owning multiple competitors may influence the decision-making of such portfolio companies, and act like a “cartel ringmaster” who induces agreement/concerted actions of the portfolio companies and monitor such agreement/concerted practice. In such case, the institutional investor may act as a “hub” in a “hub-and-spoke” cartel.

Interestingly, in the OECD's discussion paper, the chance for the institutional investor to facilitate anti-competitive actions when exercising its right as a shareholder may be smaller than the theory. However, one must point out that such an institutional investor has at least several measures to exert its influence by 1) appointing board members; 2) voting; 3) direct communication with the portfolio company; and even 4) acquiesce. In addition, there may be cases where the different interests of the institutional investors may prevent the portfolio company from engaging in an anti-competitive action.

On the other hand, some scholars argue that the horizontal shareholding practice is very similar to the pre-Sherman Act “trust,” which requires close scrutiny and strict regulation under the antitrust law.

Once there is an anticompetitive action resulting from the horizontal shareholdings, the DOJ/FTC may invoke Section 7 of the Clayton Act and/or Sections 1 and 2 of the Sherman Act. In the case of the European Union, the TFEU Articles 101 and 102 may be invoked by the European Commission or national competition authorities. At the same time, the Korean Fair Trade Commission may invoke Article 3-2 and 19 of the Monopoly Regulation and Fair Trade Act (MRFTA).

Considering the potential anti-competitive effect of horizontal shareholding, the competition authorities may need to monitor the possibility that one or more institutional investors may take the role of “hub” of a “hub-and-spoke” cartel. In addition, the horizontal shareholders may have to set up a system to report anti-competitive practices of their portfolio companies and require a strict compliance system on the portfolio companies.