PARTNER, JONES DAY LLP
EARLIER this year the Office of Fair Trading (OFT) published a report looking at the competition implications of firms taking minority interests in their competitors. Now the results are in, it looks likely that the regulator will take a closer look at this area.
The report examines minority shareholdings, interlocking directorships – where people hold directorships on the boards of competing companies – loans and contracts for difference (CFDs). It found that, even where minority interests did not confer control of the target on their purchaser, so UK merger control would not apply, they could be used to soften competition. This could mean higher prices and restricted output, to the detriment of consumers.
For example, long position CFDs in competitors may incentivise competitors to compete less aggressively because they benefit from the other firm’s success. And interlocking directorships facilitate anti-competitive collusion between competitors because information flows mean competitors can take account of each others’ conduct when deciding on their own.
The question arises whether the OFT has suitable tools to deal with these problems. The most obvious alternative to the merger control regime are the rules prohibiting agreements and abuses of dominant positions which adversely affect competition. For example, a dominant player’s provision of debt to, and acquisition of a passive minority shareholding in, a competitor may be abusive if it forces that competitor to take account of the dominant player’s position. An example was when Gillette acquired minority interests in its principal wet-shaving market competitor, which it was forced to dispose of. However, what if antitrust rules do not apply because no agreement can be demonstrated? This is conceivable with CFDs or exchange-traded company debt, for example, or if there is no dominant position to be abused.
Market studies offer one option. If the OFT considers a market may not be working well for consumers, it can review that market, even in the absence of a suspected breach of the antitrust rules. For example, last week it said it would undertake a market study into equity underwriting and associated services.
A market study may result in a number of outcomes. If the OFT has reasonable grounds for suspecting an adverse effect of competition, and this is confirmed by a Competition Commission investigation, it can impose structural or behavioural remedies. For example, the groceries market investigation resulted in supermarkets being required to release restrictive land covenants which had prevented competing supermarkets being built.
Notwithstanding the OFT’s report, it can be hard to judge the anticompetitive effects of minority interests in competitors. There may be a lack of cases on the point, and the OFT may be unwilling to dedicate the resources to considering such cases under the existing antitrust rules or via a market study. This breeds uncertainty as to what constitute acceptable minority interests in competitors.
The UK authorities could consider new tools to deal specifically with the problem. They could look to the US, where legislation specifically prohibits many horizontal interlocking directorships between competitors and the merger control regime applies to all sufficiently valuable acquisitions of shareholdings which substantially lessen competition or tend to create a monopoly, regardless of control.
In the meantime, companies acquiring minority interests in competitors should seek specialist antitrust advice, particularly where there may be increased information flows between competitors.