Common Ownership and the Merger Guidelines

Abstract

The 2023 Merger Guidelines include, for the first time, reference to common ownership, the unilateral theory of competitive harm popularized in the academic literature that posits that shareholders’ concurrent equity interests in rival firms can lessen those firms’ incentives to compete even in the absence of any control or communication by the common shareholders. As a matter of economic theory, common ownership has the potential to inflict competitive harm by distorting competitive incentives, but it will actually distort these incentives only in certain circumstances. The 2023 Merger Guidelines do not provide any guidance on those circumstances and are silent on exactly how common ownership without any control or communication by the common owners could disrupt these incentives.

This Chapter endeavors to fill that gap by elucidating the primary factors that bear upon the specific theory of unilateral harm embedded in the 2023 Merger Guidelines that common ownership by itself can lessen the commonly held firms’ incentives to compete. As the Chapter explains, while considerations such as the common owners’ interests in adjacent markets and the structure of the relevant market are essential to the competitive effects analysis, the most important factor pertinent to the incentives-only theory of harm the 2023 Merger Guidelines is whether the challenged common ownership modified a firm’s managerial incentives to compete. Unless common ownership causes firm managers to focus less on the maximization of own-firm profits than they would if there were no common ownership, competition will not be lessened.

As the Chapter further explains, in evaluating whether the challenged common ownership modified managerial incentives to compete, which is a precondition to the incentives-only theory of competitive harm articulated in the 2023 Merger Guidelines, the analysis must be undertaken with express reference to, and framed by, the specific governance structure in which those managerial incentives are set. The Chapter deploys that governance-centric approach to assess the specific manifestation of common ownership that has been the primary focus of the academic literature—the common ownership of publicly held firms arising from the significant growth of broad-based index funds. The Chapter explains why the corporate governance infrastructure in which the incentives of managers of publicly traded firms are set makes it highly unlikely that present levels of common ownership are diminishing those managers’ competitive incentives.

Keywords: Common ownership, merger guidelines

JEL Classification: K21, L40