32 Pages Posted: 4 Jul 2004
When a firm extends credit to a competitor, or a bank or an investment fund holds debt in two or more competing firms, the question arises whether these investments are likely to substantially lessen competition or unreasonably restrain trade. Conceivably, the lender could exploit its contractual position to exercise control over the borrower and/or to gain access to the borrower's confidential information. In addition, holding a financial interest in the debtor might create an incentive for the creditor to unilaterally raise prices following the investment or enable the creditor, the debtor, and other firms in the industry to engage in coordinated interaction that harms consumers.
This article examines whether debt investments are, in fact, likely to produce meaningful competitive effects of that nature. Taking comparable minority equity investments as a benchmark, the answer is mostly negative. Unlike partial ownership, debt investments do not significantly reduce the investor's incentives to compete and are largely ineffectual as commitment devices. With respect to corporate control and information exchange, the answer depends on the financial condition of the target. As long as the borrower is solvent (and, as a consequence, has viable refinancing options), the creditor's influence will generally not be meaningful. However, once the creditor can accelerate the loan and thereby cause the borrower's bankruptcy, the creditor's de facto influence over the target increases significantly and may even exceed the influence conferred by comparable equity investments (unless the creditor eliminates competitive concerns by making its debt investment passive). Based on these findings, the article recommends deferential treatment of most debt investments in competitors under the federal antitrust laws. Unless the investment has certain clearly defined features that permit an inference of probable competitive harm and the creditor refuses to eliminate such concerns, debt investments are presumably efficient.
Keywords: Antitrust, Debt Investment, Game Theory, Partial Ownership
JEL Classification: C72
Suggested Citation: Suggested Citation
Kaiser, Hanno F., Debt Investments in Competitors under the Federal Antitrust Laws. Fordham Journal of Corporate and Financial Law, Vol. IX, pp. 605-36, 2004. Available at SSRN: https://ssrn.com/abstract=561011