Investor Coalitions Through an Antitrust Lens

UC Irvine Law Review (forthcoming, 2024)

Bar Ilan University Faculty of Law Research Paper Forthcoming

65 Pages Posted: 18 Jan 2023 Last revised: 4 Mar 2024

See all articles by Danielle A. Chaim

Danielle A. Chaim

Bar-Ilan University - Faculty of Law

Date Written: January 14, 2024

Abstract

This Article offers a novel—antitrust—perspective on a growing phenomenon in capital markets: institutional investor coalitions. In recent years, a large group of powerful institutional investors, who collectively own significant equity stakes in most public companies, have created alliances on various corporate governance issues. Traditionally, corporate law has encouraged investor cooperation on these issues, regarding it as the solution to the well-known collective-action problem facing shareholders in public companies. As this Article shows, however, the prevailing positive view underscores a crucial point: members of the coalition are not only co-owners of companies but also competitors in capital markets. In the primary markets, institutional investors are competing buyers of shares, vying for share allocation. In the secondary market, they compete as asset managers, using their portfolio performances to attract retail investors and sponsors. The concern raised in this Article is that cooperation among institutional investors—even on seemingly benign governance matters—could facilitate tacit collusion and grant coalition members an unfair advantage in capital markets.
Focusing on one powerful investor coalition that emerged in recent years with the goal of limiting the use of dual-class stock in initial public offerings (IPOs), this Article demonstrates that when competing buyers of shares coordinate their response to a governance term at the IPO juncture, they effectively form a buyer’s cartel. Due to the coalition members’ collective dominance over the demand for public offerings, their orchestrated efforts lead to two potential economic distortions. First, abnormal underpricing of dual-class stock, which allows members to buy shares in the primary market below their fair market value. This price distortion explains the significant amounts of money often being “left on the table” by dual-class issuers. Second, the coalition can pressure issuers into adopting suboptimal governance arrangements, such as mandatory time-based sunset provisions, which may be value-decreasing. Both distortions can lead to the same sort of economic harm that antitrust law is designed to prevent.
The potential anticompetitive effects of investor coalitions require an immediate policy response. This Article thus proposes a multi-faceted regulatory reform aimed at curbing institutional investors’ collective actions that may limit competition. The suggestions include restricting collective actions in the primary market and, under certain circumstances, banning communication between institutional investors during public offerings. Furthermore, the Article emphasizes the need for targeted antitrust scrutiny of institutional investor consortia—advocacy groups that coordinate governance initiatives on behalf of their members—given their demonstrated capacity to facilitate communication and sustain collusive practices. The proposed policy measures seek to strike a delicate balance between the goal of corporate law to encourage cooperation among shareholders and the goal of antitrust law to restrain collaboration among competitors.

Keywords: Corporations, Dual-Class, Corporate Governance, Controlling Shareholders, IPO Pricing, Buyers' Cartels, Investor Coalitions

Suggested Citation

Chaim, Danielle A., Investor Coalitions Through an Antitrust Lens (January 14, 2024). UC Irvine Law Review (forthcoming, 2024), Bar Ilan University Faculty of Law Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4324567 or http://dx.doi.org/10.2139/ssrn.4324567

Danielle A. Chaim (Contact Author)

Bar-Ilan University - Faculty of Law ( email )

Faculty of Law
Ramat Gan, 52900
Israel

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