Senior Lecturer at Lund University, Faculty of Law, Sweden; Senior Research Fellow at UCL Centre of Law, Economics & Society, London, UK; [email protected]. This project has received funding from the European Union’s Horizon 2020 research and innovation programme under the Marie Skłodowska-Curie grant agreement No. 846270. My special thanks to the editors of this volume for inviting me to contribute and for their careful review of my work. This chapter is part of a bigger research project starting with my PhD thesis and continuing under the Marie Curie grant, which is to be condensed in a forthcoming monograph ‘Partial Ownership of Competitors in Europe: Economics, Law and Policy’ (Cambridge University Press). This project has greatly benefited from various discussions with José Azar and Giorgio Monti, who I wish to thank for the intellectual stimulation and inspiring exchanges. I am also very grateful to Alessandro Romano, Elias Deutscher, Pedro Caro de Sousa and Stefan Thomas for helpful comments and suggestions.

¹ A Tzanaki, ‘Varieties and Mechanisms of Common Ownership: A Calibration Exercise for Competition Policy’ (2022) 18 JCL&E 168; M Backus, C Conlon and M Sinkinson, ‘Common Ownership in America: 1980–2017’ Am Econ J: Microecon (forthcoming); cf A Dyck and L Zingales, ‘Private Benefits of Control: An International Comparison’ (2004) 59 J Fin 537.

² J Azar, ‘The Common Ownership Trilemma’ (2020) 87 U Chi L Rev 263, 267–268 (summarising the empirical literature); cf N Rosati and others, Common Shareholding in Europe (JRC121476, Publications Office of the European Union 2020).

³ See chapter 13 by E Rock and D Rubinfeld in this book.

⁴ A Burnside and A Kidane, ‘Common Ownership: An EU Perspective’ (2021) 8 JAE 456, 457–458.

⁵ Institutional common shareholding marks the double movement from ‘direct’ to ‘indirect’ ownership holding structures along the different stages of organisational evolution of capitalism. That is, from retail individual investors to professional intermediary investors (investment fund intermediaries), and from direct ownership links between competing firms to indirect shareholding links via non-industrial third parties (common shareholders-investors). See A Tzanaki, ‘The Common Ownership Boom – Or: How I Learned to Start Worrying and Love Antitrust’ (May 2019) CPI Antitrust Chronicle ‘Common Ownership Revisited’ 3 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3401209.

⁶ For an overview of the state of the literature see chapter 12 by M Schmalz in this book.

⁷ See chapter 1 by M Meagher in this book.

⁸ W Cary, ‘Federalism and Corporate Law: Reflections upon Delaware’ (1974) 83 Yale LJ 663, 664; H Hovenkamp, Enterprise and American Law, 1836–1937 (Harvard UP 2009) 259. Hovenkamp lucidly explains that the business and legal ‘geniuses who invented the trusts’ with the intention to evade state corporate law employed different, privately negotiated, trust arrangements but every such ‘late nineteenth-century acquisition was organized around one of three legal models: (1) the stock-transfer trust model; (2) the asset-transfer combination; (3) the holding company’.

⁹ On the ‘race to the top’ versus the ‘race to the bottom’ debate in corporate law scholarship, indicating states with corporate laws favoring shareholders and minimising agency costs versus states with management-friendly corporate laws, see R Romano, The Genius of American Corporate Law (American Enterprise Institute 1993). In this chapter, the ‘race to the bottom’ argument is employed in the broader context of regulatory competition among jurisdictions, which in attempting to outperform each other and attract business drive and lower standards to a minimum. Critically for our current discussion on minority shareholding acquisitions, these phenomena can play out at the same time: a ‘race to the top’ in corporate laws that are efficient for shareholders (and possibly firm value) may simultaneously produce ‘race to the bottom’ effects in terms of product market competition. In other words, what might be privately optimal for shareholders from an agency theory perspective is not necessarily socially optimal from a competition perspective (a classic instance of externalities that US federal antitrust law was enacted to remedy).

¹⁰ M Roe, ‘Delaware’s Competition’ (2003) 117 Harv L Rev 588, 607–610.

¹¹ Footnote Ibid. at 608 (noting that the two categories were severed when the US federal government took away antitrust from the states).

¹² Hovenkamp (n 8) 242, 248–249, 266. The logic was that while rigorous antitrust enforcement was considered ‘effective against interstate cartels, merger policy was [better] to be left to individual state [corporate laws]’. Yet, this early antitrust choice had its own unintended consequences as ‘the Sherman Act actually forced firms to merge than collude.’ At the same time, state corporate law lost its grip once anticompetitive mergers and combinations became ‘multistate creatures’ and thus ‘corporate law forced the common law trusts to reorganize as asset acquisitions or holding companies’. Ironically, the resounding success of federal antitrust and state corporate laws against the trusts led to renewed organizational ingenuity by businesses that sought to control markets.

¹³ Footnote Ibid. at 264–266.

¹⁴ E Posner, F Scott Morton and E Weyl, ‘A Proposal to Limit the Anti-Competitive Power of Institutional Investors’ (2017) 81 Antitrust LJ 669, 670–671.

¹⁵ A Tzanaki, ‘The Regulation of Minority Shareholdings and Other Structural Links between Competing Undertakings: A Law & Economics Analysis’ (DPhil Thesis, University College London 2017).

¹⁶ Memorandum on The Problem of Industrial Concentration in the Common Market, Commission, Competition Series No 3 (1966); and Case 6/72, Europemballage and Continental Can v Commission [1973] ECR 215.

¹⁷ Joined Cases 142 and 156/84, BAT and Reynolds v Commission [1987] ECR 4487 (‘Philip Morris’); Cases IV/33.440 Warner-Lambert/Gillette and IV/33.486 BIC/Gillette [1993] OJ L 116/21.

¹⁸ A Burnside, ‘Minority Shareholdings: An Overview of EU and National Case Law’ (2013) e-Competitions Bulletin No 56676 2.

¹⁹ EU merger rules make a clear reference both to a lasting structural change in corporate control as well as in industry control affecting competition. See Article 3(1) of the EUMR, and Recitals 6 and 20.

²⁰ To be sure, there had been previous EU proposals for a pan-European Merger Regulation, repeatedly rejected by Member States. However, once the European Commission grew in determination to employ existing antitrust law to scrutinise merger and minority shareholding transactions and use that position of power as a threat point against continuing non-adoption of the EUMR, the soil was ripe for Member States to retreat.

²¹ K Banks, ‘Mergers and Partial Mergers Under EEC Law’ (1987) 11 Fordham Int’l LJ 255, 257.

²² Hovenkamp (n 8) 244–249. The ‘trade restraints model’ chosen by the Sherman Act was the ‘weaker’ of the two ‘because of the “rule of reason” inherent in its application’, especially as applying to mergers, whereas state corporate law applied across the board (a categorical ‘per se’ approach) prohibiting all mergers or combinations of certain form, not merely the anticompetitive ones. The state corporate model was legal or ‘noneconomic’; antitrust had ‘economic’ grounding since the outset.

²³ H Hovenkamp, ‘Antitrust Policy, Federalism, and the Theory of the Firm: An Historical Perspective’ (1990) 59 Antitrust LJ 75, 87.

²⁴ Footnote Ibid. at 88–90; Tzanaki (n 15) 86, 102, 128. In the EU, share purchase agreements were initially presumed to be outside the scope of EU competition rules until the 1966 Memorandum (n 16). Later case law (n 17) abolished this complete immunity rule and established a ‘no influence’ safe harbour for minority shareholding up to 25% (ie corresponding to control of 25% of the voting rights and no other special contractual or corporate rights), relying on a formalistic presumption existing under national corporate law (eg Germany at the time). See Footnote ibid. at 113. Similarly, in the US, shareholders used to have an ‘absolute’ right to transfer their shares, unless restricted by the corporate charter or state law. Such share transfer agreements were only subject to state corporate law as they touched upon an essential feature of the very corporate form (ie the free transferability of shares). Thus, while it was later recognised that ‘every corporation is a “combination” of its shareholders’, potentially subject to antitrust review to the extent it resulted in ‘a merger [giving] the participants effective control of the market’, the ‘mere formation of such a combination should never be considered illegal’. See Hovenkamp (n 23) 89.

²⁵ M Corradi and A Tzanaki, ‘Active and Passive Institutional Investors and New Antitrust Challenges: Is EU Competition Law Ready?’ (June 2017) CPI Antitrust Chronicle ‘Index Funds – A New Antitrust Frontier?’ 7 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2996518.

²⁶ Economic conceptions of ‘control’ and theories of harm are notably broader than the legal definition of control under the EUMR, while some Member States have more encompassing national merger control statutes based on wider notions of ‘influence’ (‘material’, ‘significant’). A Tzanaki, ‘The Legal Treatment of Minority Shareholdings Under EU Competition Law: Present and Future’ in Essays in Honour of Professor Panayiotis I Kanellopoulos (Sakkoulas Publications 2015) 861, 863 (fn 10), 878–880. Indeed, the definition of a notifiable merger transaction can be based on different ‘objective’ or ‘economic’ criteria focusing on the potential mechanism of competitive harm. See OECD, ‘Definition of Transaction for the Purpose of Merger Control Review’ (2014) DAF/COMP(2013)25, 6. The Commission had proposed introducing an ‘effect-based model’, regardless of the applicable EUMR turnover thresholds establishing an ‘EU dimension’ of a notifiable ‘concentration’, which would practically have allowed it to retain an alternative “back door” to pursue non-controlling minority shareholding cases that would be subject to merger review in at least three Member States. See Commission, ‘Green Paper on the Review of Council Regulation (EEC) No 4064/89’ COM(2001) 745 final, paras 54–63. Recent EU policy has devised new ways to overcome jurisdictional limitations of EU merger control by allowing case referrals to the Commission by Member States of mergers that may not require notification under national law at all. See Commission, ‘Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases’ C(2021) 1959 final.

²⁷ The analysis that follows implicitly compares the position of contemporary US law applicable to large public corporations and surrounding market and investment conditions compared to earlier developments in the nineteenth century. The situation however may differ from country to country and for different types of companies, hence a closer look into the corporate law details and relevant context is warranted in such cases.

²⁸ A Berle and G Means, The Modern Corporation and Private Property (Macmillan Co 1932); E Fama and M Jensen, ‘Separation of Ownership and Control’ (1983) 26 JLE 301 (referring to the ‘separation of decision and risk-bearing functions observed in large corporations’).

²⁹ H Hansmann and M Pargendler, ‘The Evolution of Shareholder Voting Rights: Separation of Ownership and Consumption’ (2014) 123 Yale LJ 948; cf H Demsetz, ‘The Structure of Ownership and the Theory of the Firm’ (1983) 26 JLE 375. According to Demsetz, the ‘agency problem’ (or the cost of ‘on-the-job consumption’) is not a problem of agency – a single owner may similarly engage in corporate ‘waste’ if unchecked – but due to lack of competitive pressure or diverging objectives of the controlling owner or manager from the assumed pure profit maximisation motive. In essence, this problem distinguishes the ‘real modern corporation’ facing positive monitoring costs vis-à-vis the ideal ‘profit-maximizing firm of economic theory’ that is a ‘good approximation of precorporate real firms’ of the nineteenth century.

³⁰ F Easterbrook and D Fischel, ‘Voting in Corporate Law’ (1983) 26 JLE 395, 400, 410 (‘It is not possible to separate the voting right from the equity interest. […] Attaching the vote firmly to the residual equity interest ensures that an unnecessary agency cost will not come into being. Separation of shares from votes introduces a disproportion between expenditure and reward.’); H Manne, ‘The Publicly Held Corporation as a Market Creation’ (1981) 137 Zeitschrift für die gesamte Staatswissenschaft / JITE 689, 690 (‘The share can be viewed as a two-part package of the underlying investment value plus the value of the vote. […] If, however, the shareholders did not have the right to sell their vote, they would be left as residual claimants largely in name only, rather like the presumed beneficiaries of a not-for-profit organization. So long as the votes [whether as part of a share package or separately] can be bought and sold then the stock market will constrain managers to work in the shareholders’ interest.’); H Manne, ‘Some Theoretical Aspects of Share Voting. An Essay in Honor of Adolf A. Berle’ (1964) 64 Colum L Rev 1427, 1432, 1436–1437; cf G Rauterberg, ‘The Separation of Voting and Control: The Role of Contract in Corporate Governance’ (2021) 38 Yale J on Reg 1124. Voting is a proxy for shareholder power and the default mechanism for board control. Decisions are usually made based on a majority voting rule. The default rule for allocating voting rights among shareholders-owners of the corporation is ‘one share-one vote’, although contractual deviations are possible. As Easterbrook and Fischel, Footnote ibid. at 408–409, explain, the principle of the ‘presumptively equal voting right attached to shares’ is justified from economic efficiency perspective given that shareholders are the ‘residual claimants’ of the firm generated profits; any departure from this principle creates ‘(unnecessary) agency costs’.

³¹ U Rodrigues, ‘Corporate Governance in an Age of Separation of Ownership from Ownership’ (2010) 95 Minn L Rev 1822, 1826–1829 (crediting Leo Strine as the original inventor of the term); L Strine, ‘The Delaware Way: How We Do Corporate Law and Some of the New Challenges We (and Europe) Face’ (2005) 30(3) Del J Corp L 673, 687 (referring to this as the ‘separation of capital from capital’); cf J Fisch, ‘Securities Intermediaries and the Separation of Ownership from Control’ (2010) 33 Seattle U L Rev 877, 878–882.

³² H Hovenkamp, ‘Neoclassicism and the Separation of Ownership and Control’ (2009) 4 Va L & Bus Rev 373, 400–402 (noting that ‘the result of marginalist finance theory, particularly the efficient capital market hypothesis, was to take Berle and Means’ separation of corporate ownership and control one step further, to the separation of ownership and awareness. […] A random selection of stocks produces the same return as the most careful research. […] Shareholders of publicly traded corporations could invest with indifference and indiscrimination – a massive shift away from the nineteenth century vision of the corporation as a device to facilitate investment predominately by groups of active owner-operators who sought to limit their liability.’); cf Rodrigues (n 31) 1826 (noting that long-term investors are ‘indifferent as to how that long-term goal is achieved’).

³³ H Hansmann, R Kraakman and R Squire, ‘Law and the Rise of the Firm’ (2006) 119 Harv L R 1333, 1376–1377. As the authors point out, the inventor of the joint stock company was fourteenth century Genoa that ‘sold shares in state-backed monopolies’ engaged in various public-interested ventures. However, these commercial enterprises were small and ‘operate[d] under a rule whereby every owner had to consent to any sale of a firm’s shares’. England and the Netherlands followed this example in organising their own large-scale chartered companies in the seventeenth century such as their famous East India Companies but allowing shareholders to freely transfer their shares without prior consent from others.

³⁴ Footnote Ibid. at 1377 (explaining how ‘a company’s need for fixed capital’ was traded off against ‘a shareholder’s need for liquidity’). It is also implied that, for practical reasons, the unanimity rule for shareholder voting was set aside once shares were freely tradable.

³⁵ Footnote Ibid. at 1378–1379. It is further argued that the monopolistic scale of business was to facilitate an efficient market for corporate shares and their free transferability while charters were primarily granted for large fixed-asset investment (rather than manufacturing) projects where the risk of opportunism by firm controllers was minimal.

³⁶ Footnote Ibid. at 1386, 1394.

³⁷ Hansmann and Pargendler (n 29) 950–951 (‘In the late eighteenth and early nineteenth century, the main economic evil linked to the corporate form was not managerial or controlling-shareholder opportunism toward small shareholders, but rather Adam Smith’s first concern: monopoly. […] early corporate law and practice were frequently designed to minimize the abuse of that market power.’).

³⁸ Hansmann and Pargendler (n 29); Hovenkamp (n 23) 77 (the ‘rule that stock transfer trusts involved corporations in ultra vires partnerships condemned all mergers by stock transfer trust’).

³⁹ See n 30 above.

⁴⁰ Hovenkamp (n 8) 63–64, 258–262 (noting that a mere transfer of shares evaded this rule because in the holding company the shareholders were ‘foreign’, not the other corporation as in asset-acquisition mergers); cf Roe (n 10) 609.

⁴¹ W Roy, Socializing Capital: The Rise of the Large Industrial Corporation in America (Princeton UP 1997) 148–155; Hovenkamp (n 23) 77 (the ‘rule forbidding one corporation from owning the shares of another corporation forbade all holding companies’). Roy also discusses the progressive relaxation of rules on intercorporate stock ownership and its implications (151: ‘The social structure of ownership permitted by intercorporate stock ownership sharply contrasted with that of individually owned businesses [which] were structurally atomistic [and interacted] primarily through the market. […] proprietary relationships made it possible to control the market through two types of networks [of ownership], holding companies and communities of interest. When states began to allow corporations to own stock in other corporations, they gave birth to the holding company, a company that existed solely to own other companies. […] In a community of interest, competitors own a noncontrolling interest in one another, giving each an incentive to maximize their mutual benefit rather than competing by undermining their rivals.’). Interestingly, exceptions to the prohibition of cross-ownership were permissible primarily for firms operating ‘in similar lines of business’. Although surprising to a modern antitrust minded observer, the logic supporting this rule is understood considering that the ‘purpose’ of the corporate form or practice was the key criterion for assessing its legality under corporate law.

⁴² Roy (n 41) 155 (‘interlocking directorates helped to control competition among the firms in a market, facilitate raising capital from commercial and investment banks, solidify and reduce transaction costs with suppliers and customers, and coordinate the activities among firms with common ownership.’).

⁴³ Footnote Ibid. at 149–151 (explaining that under the ‘property’ conception of the firm, corporations were essentially ‘a contract among individuals to pool their resources [but] not be entities that themselves could hold property other than their physical assets’. Under the ‘entity’ view of the firm, the corporation was treated ‘as an individual [but] it did not necessarily follow that corporations could fully engage in owning any form of property’ as natural individuals. ‘Although judicial law generally held that corporations could own physical property […], there was a continuing debate over their right to own the stock of other corporations.’); Hovenkamp (n 23) 81, 85, 88–89 (noting that under corporate law ‘the acquisition of property had to be “useful or convenient” for the corporation’s operation of the business “for which it was organized.” As a result, horizontal acquisitions [of a competitor’s assets] were generally lawful.’; and that the holding company legal merger and share transfers among business owners were over time considered ‘merely a purchase and sale of property’ and generally legal under state corporate law, but case law had observed that ‘because a corporation is merely a fictional person and not a natural one, a corporation’s acquisition of property could constitute a “combination” ’ under antitrust law).

⁴⁴ Hansmann and Pargendler (n 29) 993.

⁴⁵ It is also instructive that the predecessor of the US Federal Trade Commission, an independent administrative agency with an antitrust enforcement mandate, was the US Bureau of Corporations (1903–1915). The Federal Trade Commission Act came into force the same year as the Clayton Act (1914), including statutory provisions on the control of mergers and acquisitions and a flat prohibition of interlocking directorates between competing corporations. The US Bureau of Corporations, having a mission of transparency reporting and conducting industry studies (also addressing issues of ownership and control), was a curious experiment in ‘state-corporate cooperation’. In effect, it operated as an institutionalised ‘forum’ for informal bargaining between the US government and business corporations and was ‘the pragmatic means by which Roosevelt pursued a conservative, yet effective, reigning in of big business power’. See W Murphey, ‘Theodore Roosevelt and the Bureau of Corporation: Executive-Corporate Cooperation and the Advancement of the Regulatory State’ (2013) 14 Am Nineteen Century Hist 73.

⁴⁶ cf Hansmann, Kraakman and Squire (n 33) 1398.

⁴⁷ Tzanaki (n 1).

⁴⁸ J Azar, M Schmalz and I Tecu, ‘Anticompetitive Effects of Common Ownership’ (2018) 73 J Fin 1513; OECD, ‘Common Ownership by Institutional Investors and Its Impact on Competition’ (2017) DAF/COMP(2017)10.

⁴⁹ E Elhauge, ‘Horizontal Shareholding’ (2016) 129 Harv L Rev 1267; F Scott Morton and H Hovenkamp, ‘Horizontal Shareholding and Antitrust Policy’ (2018) 127(7) Yale LJ 2026. Note also the different emphasis by economists (on the market structure and competitive impact of common ownership) vis-à-vis lawyers (on the definition of the antitrust problem and the framing of its implications in terms of the (horizontal) nature of the competitive relationship).

⁵⁰ L Bebchuk and S Hirst, ‘The Specter of the Giant Three’ (2019) 99 BU L Rev 721.

⁵¹ OECD, The Role of Institutional Investors in Promoting Good Corporate Governance (OECD Publishing 2011); E Rock, ‘The Logic and (Uncertain) Significance of Institutional Shareholder Activism’ (1991) 79 Geo LJ 445.

⁵² E Posner, F Scott Morton and G Weyl, ‘A Monopoly Donald Trump Can Pop’ The New York Times (New York, 7 December 2016) (‘the real challenge to competitive markets today does not come from mergers […]. The great, but mostly unknown, antitrust story of our time is the astonishing rise of the institutional investor – a large [financial intermediary] company […] that buys stock in substantial quantities for the benefit of clients and customers – and the challenge that it poses to market competition.’).

⁵³ E Elhauge, ‘How Horizontal Shareholding Harms Our Economy – And Why Antitrust Law Can Fix It’ (2020) 10 Harv Bus L Rev 207, 285.

⁵⁴ In the sense of the above noted (n 9) disconnect between the private welfare of common shareholders and social welfare. Interestingly, the disconnect may simultaneously be evidenced within the context of both corporate law and competition law for different reasons. Specifically, common shareholders’ interests and actions may be found in opposition to the fiduciary principle in corporate law (to the extent they are in opposition to the interests of the firm as a whole and any non-diversified group of shareholders) but also be the source of consumer and competitive harm (to the extent they induce suboptimal outcomes in product markets that would not have existed in the absence of common ownership).

⁵⁵ Elhauge (n 53) 269, 271 (noting that ‘the reason that the Sherman Act was called an antitrust law was that it aimed to prohibit trusts that in fact were horizontal shareholders’ but also that in contrast to ‘pre-Sherman Act trusts’ that were per se illegal as they involved ‘horizontal agreements with no plausible procompetitive justification’, horizontal shareholdings by institutional investors should be scrutinised under a rule of reason standard as they ‘provide investment capital and diversification benefits’).

⁵⁶ That is both anti- and pro-competitive effects. See Á López and X Vives, ‘Overlapping Ownership, R&D Spillovers, and Antitrust Policy’ (2019) 127 J Pol Econ 2394; J Azar and X Vives, ‘General Equilibrium Oligopoly and Ownership Structure’ (2021) 89 Econometrica 999; M Backus, C Conlon and M Sinkinson, ‘The Common Ownership Hypothesis: Theory and Evidence’ (2019) Brookings Economic Studies Report www.brookings.edu/wp-content/uploads/2019/02/ES_20190205_Common-Ownership.pdf; O Shy and R Stenbacka, ‘Common Ownership, Institutional Investors, and Welfare’ (2020) 29 J Econ & Manage Strat 706; O Shy and R Stenbacka, ‘An OLG Model of Common Ownership: Effects on Consumption and Investments’ (2019) 62 J Macroecon 103155; A Gibbon and J Schain, ‘Rising Markups, Common Ownership, and Technological Capacities’ (2022) Int J Ind Organ https://doi.org/10.1016/j.ijindorg.2022.102900.

⁵⁷ OECD, ‘Antitrust Issues Involving Minority Shareholdings and Interlocking Directorates’ (2009) DAF/COMP(2008)30.

⁵⁸ Elhauge (n 49) 1267.

⁵⁹ Azar, Schmalz and Tecu (n 48); J Azar, S Raina and M Schmalz, ‘Ultimate Ownership and Bank Competition’ (2016) Working Paper https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2710252; M Newham, J Seldeslachts and A Banal-Estanol, ‘Common Ownership and Market Entry: Evidence from Pharmaceutical Industry’ (2018) DIW Berlin Discussion Paper 1738.

⁶⁰ Azar (n 2) 263; R Gilson and J Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Colum L Rev 863; B Braun, ‘American Asset Manager Capitalism’ 25–26 https://osf.io/preprints/socarxiv/v6gue/ (‘the Great Re-Concentration and the growth of asset managers have transformed the U.S. into a concentrated-ownership liberal market economy with strong minority shareholders and a large amount of indexed, and thus patient, capital. […] Two features, however, distinguish the new asset manager capitalism from the Gilded Age money trust [as well as from corporatist “Germany, Inc.” prior to the 1990s]. First, unlike their robber baron predecessors, today’s dominant owners are fully diversified. Second, asset managers are economically disinterested intermediaries – they lack skin in the corporate game. […] their business model is to compete for capital and management fees from investors. [They] only own the legal title, not the economic interest in the corporations whose stock they hold. […] asset manager capitalism is without historical precedent.’).

⁶¹ Azar (n 2); Backus, Conlon and Sinkinson, ‘The Common Ownership Hypothesis’ (n 56); J Coffee, ‘The Future of Disclosure: ESG, Common Ownership, and Systematic Risk’ (2020) ECGI Law Working Paper 541/2020.

⁶² Azar and Vives (n 56).

⁶³ M Schmalz, ‘Common-Ownership Concentration and Corporate Conduct’ (2018) 10 Annu Rev Financ Econ 413; M Condon, ‘Externalities and the Common Owner’ (2020) 95 Wash L Rev 1.

⁶⁴ See for example the recent but opposing policy initiatives for EU merger control reform regarding minority shareholding (2014) vis-à-vis the Capital Markets Union initiative (2015) and the Revised Shareholder Rights Directive (2017). Arguably, more ‘active’ and ‘empowered’ common institutional owners may inadvertently exacerbate any competition concerns over minority shareholding that currently fall outside the EUMR to the extent it is deemed ‘non-controlling’. Analogously, specialised regulators in the US move to opposing directions: despite the FTC Hearings on the competition implications of common ownership (2018), the SEC is proposing reforms to limit disclosure obligations for institutional investment managers regarding reporting of their equity holdings (2020).

⁶⁵ As the popular parable goes: ‘In the land of the blind, the one-eyed man is king’ (Desiderius Erasmus is credited with first coining the phrase and coding it in his Adagia (1500)). Let us then proceed on the issue of common ownership cautiously with the limited knowledge we possess at hand, rather than hide behind the limited capacity and mandate of specialised regulators to look at a fragmented view of the problem and thus miss the ‘big picture’.

⁶⁶ The first term is usually employed in the EU context to suggest the absence of ‘legal control’ that is used as a jurisdictional criterion under EU merger rules; the latter term is most common in US law & economics literature suggesting that the shareholding is ‘silent’ (non-voting) or a ‘purely financial interest’ (without any corresponding ‘control rights’), thus not directly affecting the partially acquired rival’s behaviour. See D O’Brien and S Salop, ‘Competitive Effects of Partial Ownership: Financial Interest and Corporate Control’ (2000) 67 Antitrust LJ 559. This terminology also fits the open-ended ‘economic effects’ jurisdictional test and ‘passive investment’ exception under US merger control rules. See n 19 and 26 and surrounding text.

⁶⁷ Ultimately, both ‘cross-ownership’ and ‘common ownership’ are distinct forms (direct vs indirect) of partial ownership of firms competing in the same relevant market. See Tzanaki (n 5).

⁶⁸ That is holding ‘less than 50% of voting rights attached to the equity of the target firm’. See Annex I ‘Economic Literature on Non-Controlling Minority Shareholdings (“Structural links”)’ to Commission Staff Working Document, ‘Towards More Effective EU Merger Control’ SWD(2013) 239 final, para 19.

⁶⁹ Tzanaki (n 1). In other words, the competition law concept of control (‘inter-firm’) analytically relies on corporate law conceptions of control (‘intra-firm’). For a theoretical voting model that formally links the two, see J Azar, ‘Portfolio Diversification, Market Power, and the Theory of the Firm’ (2016) Working Paper http://papers.ssrn.com/abstract=2811221.

⁷⁰ For instance, theories of harm on ‘unilateral’ anticompetitive effects rely on formally modelling ‘control weights’ corresponding to ‘financial interests’ arising out of the acquired shareholding. See O’Brien and Salop (n 66); Azar, Schmalz and Tecu (n 48); Backus, Conlon and Sinkinson (n 1).

⁷¹ D O’Brien and K Waehrer, ‘The Competitive Effects of Common Ownership: We Know Less than We Think’ (2017) 81 Antitrust LJ 729, 766–767; Tzanaki (n 5) 8 (‘common ownership is not associated to either formal legal control or even clear economic control of the firm on a stand-alone basis but rather with situations of indirect, de facto, collective control in firm governance and product markets due to the interaction and cumulative effect of small parallel holdings in competitors by diversified investors’).

⁷² Tzanaki (n 1) 177, 184, 189, 222, 233, 242-243.

⁷³ Tzanaki (n 5) 3. The double separation of ‘ownership from ownership’ and of ‘ownership from control’ have split property entitlements in the firm between ‘ultimate’ and ‘beneficial’ owners, or between ‘legal’ and ‘economic’ owners.

⁷⁴ See n 19 above and surrounding text.

⁷⁵ Such minority shareholdings, albeit cumulatively as a group may lead to a situation of factual joint control (de facto voting bloc power), fall outside the scope of the EUMR as it defines ‘joint control’ on a legal basis (majority control by ‘stable coalitions’ that is ex ante verifiable and creates a ‘permanent’ change in control) and given a ‘strong commonality of interests’ (that goes beyond any ‘symmetric’ financial interests and control rights attached to the equity holdings). Tzanaki (n 15) 84. See also O’Brien and Salop (n 66) 570; M Corradi, ‘Bridging the Gap in the Shifting Sands of Non-Controlling Financial Holdings?’ (2016) 39 W Comp 239, 248–249.

⁷⁶ See n 24 and 26 above and surrounding text.

⁷⁷ This distinction (total vs partial control) largely corresponds to the one first suggested by O’Brien and Salop (n 66) 577–584 in their seminal analysis of ‘partial ownership’ (who also propose several analytical sub-categories of ‘partial control’) and the quantification of its competitive implications in terms of degree of potential harm.

⁷⁸ As noted above, some countries (Germany, UK) use such a broader jurisdictional criterion (competitively significant or material influence) based on corporate law rules and an analysis of the actual governance dynamics (eg shareholding position equivalent to that of a blockholder of above 25%) to determine the scope of their merger control regime. See n 24 and 26 above.

⁷⁹ See relatedly Commission, ‘Staff Working Document accompanying the White Paper, “Towards More Effective EU Merger Control”’ SWD (2014) 221 final, paras 90–93.

⁸⁰ In my doctoral dissertation I propose the term ‘influential’ in the economic sense to signify ‘intermediate’ cases of minority shareholding that may give rise to positive or negative ‘strategic influence’ and thus affect the competition dynamics, although formally ‘non-controlling’ in the legal sense. See Tzanaki (n 15). Unlike actively influential shareholding, strategically influential minority shareholdings are not systematically captured by existing competition and merger control rules. See Tzanaki (n 1), section II.B.

⁸¹ Tzanaki (n 1) 232.

⁸² O’Brien and Salop (n 66) 578–579.

⁸³ Tzanaki (n 1) 224.

⁸⁴ Footnote Ibid. at 9, 72.

⁸⁵ Tzanaki (n 15) 87, 96. This distinction focuses on the time horizon of the (present or future) manifestation of competition effects, rather than the time horizon of holding the minority investment stake (ie whether an equity holding is temporary or long-lasting). In fact, depending on the circumstances, a long-term shareholding may have both static and dynamic effects on competition, but possibly also only dynamic ones.

⁸⁶ Backus, Conlon and Sinkinson (n 1) (suggesting that the common owners’ ‘profit weights’ may be mathematically decomposed into two elements: ‘overlapping ownership’ and ‘relative investor concentration’).

⁸⁷ O’Brien and Salop (n 66) 583 (discussing the ‘proportional control’ scenario flowing from ‘partial ownership’).

⁸⁸ For instance, the theoretical ‘proportional control’ assumption regarding ‘voting’ shareholding may not be justified and could be revised accordingly in the specific case. See D O’Brien and S Salop, ‘The Competitive Effects of Passive Minority Equity Interests: Reply’ (2001) 69 Antitrust LJ 611, 622–625 (suggesting applying a ‘discount rate’ in estimating the competitive effects of shareholding and calculating the MHHI when the acquirer has no ability to exercise control over the target management in practice, thus no influence over the use and distribution of the target’s profits); Azar (n 2) 286–293 (analysing common ownership with managerial entrenchment (‘agency costs’) within a context of oligopoly theory with (and without) shareholder voting, in which case the theoretical anticompetitive incentives of common owners towards monopoly (under a proportional control assumption) are attenuated).

⁸⁹ M Hunold and F Schlütter, ‘Vertical Financial Interest and Corporate Influence’ (2019) DICE Discussion Paper 309, Düsseldorf University Press. Importantly, it is noted that also a unilateral shareholding may be able to produce reciprocal influence, ie ‘bi-directional internalisation’ for the acquirer and the target in case the partial shareholding is accompanied both by cash flow (profit) and control rights. Partial control over the target, even if ‘unilateral’, matters in estimating both the acquirer’s own internalisation function but also that of the partially acquired rival as it affects the incentives of both. That is, the acquirer’s ‘control rights in one direction’ (corporate influence) are said to potentially have the same effect as if the target had ‘profit rights in the other direction’ (financial interest), which is functionally equivalent to a ‘reciprocal’ shareholding (pure financial interest) by the acquirer and the target in each other.

⁹⁰ The corporate influence exercised by means of the acquirer’s minority shareholding in the target need not be positive (‘incentive’ to internalise acquirer’s profits) but may also be negative (‘constraint’ on the target’s competitive choices or actions). Partial control or influence over the target may lead to a situation of ‘mutual internalisation’ or to a ‘competitive disadvantage’ imposed on the target (and an ‘artificial advantage’ secured by the acquirer). See M Hunold and K Stahl, ‘Passive Vertical Integration and Strategic Delegation’ (2016) 47 Rand J Econ 891; I Lianos and others, ‘Financialisation of the Food Value Chain, Common Ownership and Competition Law’ (2019) 16 ECJ 149; Tzanaki (n 15).

⁹¹ A ‘bi-directionally influential’ minority shareholding may thus also arise because of purely financial interests among competitors that are parallel and induce an alignment of interests of rival firms and their managers to their shareholders’ interests under a unilateral theory of harm. This situation may emerge only due to a ‘passive’ form of economic control that implicitly relies on the assumption that shareholders are interested in the internalisation of competitive externalities of the rival firms’ conduct and managers are interested in the maximisation of shareholder profits. See Tzanaki (n 1) (elaborating on plausible passive influence mechanisms); R Inderst and S Thomas, ‘Common Ownership and Mergers between Portfolio Companies’ (2019) 42 W Comp 551 (outlining the unilateral theory of harm based on common ownership); J Azar and A Tzanaki, ‘Common Ownership and Merger Control Enforcement’ in Ioannis Kokkoris and Claudia Lemus (eds), Research Handbook on the Law and Economics of Competition Enforcement (Edward Elgar Publishing, 2022) (similarly).

⁹² López and Vives (n 56); Azar and Vives (n 56).

⁹³ Although potentially in combination with other voting shareholders in order to reach the requisite majority under corporate law (majority voting bloc), if not possible by means of the de jure or de facto vote share corresponding to any individual minority shareholding. The possibility of a majority voting position or coalition is critical to make the shareholders’ threat to vote against management ‘credible’. See A Shleifer and R Vishny, ‘A Survey of Corporate Governance’ (1997) 52 J Fin 737, 764–765. Thus, while (a group of) concentrated shareholder(s) may be relied upon to solve the ‘free rider problem’ among shareholders in corporate governance and as a result, the vertical agency problem; if the coalition is solid albeit changing, they may potentially create a horizontal agency problem between the shareholders who are in control versus others.

⁹⁴ In equilibrium the vote need not be exercised to impact outcomes and behaviour. Its potential use may discipline management and change behaviour as long as the threat of its use is ‘credible’ and the possession of voting rights is ‘known’ (conditions easily met since voting rights typically attend shareholding by statute, unless otherwise provided, and majority voting control is possible absent a dominant blockholder) in order to be anticipated, internalised and be able to ex ante deter undesirable behaviour. For the realistic nature of such potential, see Coffee (n 61) discussing two fundamental changes occurring in US securities markets: ‘(1) institutionalization (with the result that institutional investors now dominate both trading and stock ownership); (2) extraordinary ownership concentration (with the consequence that the three largest U.S. institutional investors now hold 20% and vote 25% of the shares in S&P 500 companies)’.

⁹⁵ G Stigler and C Friedland, ‘The Literature of Economics: The Case of Berle and Means’ (1983) 26 JLE 237, 248 (‘The majority of the voting stock is the ultimate control over a corporation even if that stock is diffused among many owners. The stock may be acquired by a small group by stock purchases if the shares become an attractive speculation, so in an ultimate sense ownership and control cannot be separated. […] In the absence of a struggle for control, one cannot know whether a given management or set of stockholders controls the selection of the board, or indeed whether they are a single coalition. We suggest a test of de facto control’).

⁹⁶ Given the threat of takeover against inefficient firm managers, ultimate control remains with shareholders even in large corporations. See n 30 above, especially Manne (1981) regarding the dynamics of the market for corporate control and the significance of the free transferability of votes; K Kastiel and Y Nili, ‘Competing for Votes’ (2020) 10 Harv Bus L Rev 287 (suggesting that the free ‘float’ of votes, the distribution of control/ voting power among shareholders and the fluctuation in voting patterns matter for the intensity of competition for votes [the ‘liquidity’ of this voting market] to reach majority control).

⁹⁷ From a financial point of view, all common stock shareholders of large corporations – regardless of the distribution of power within a given corporation – are considered ‘residual risk bearers’ that ‘contract for the rights to the net cash flows’ and thus have a residual claim in the firm’s profits. See E Fama and M Jensen, ‘Agency Problems and Residual Claims’ (1983) 26 JLE 327, 428. From a corporate law perspective, however, one also needs to consider any relevant statutes and bylaws to see whether there are multiple classes of equity and whether some of them may not be qualified as having a residual claim.

⁹⁸ L Ryan, ‘Shareholders and the Atom of Property: Fission or Fusion?’ (2000) 39(1) Bus & Soc 49 (‘if the atom did split, it may now be fused’ given the recent re-concentration of corporate ownership and control, in light of the growth and governance role of institutional investors).

⁹⁹ Although shareholders are ‘passive’ property owners in the sense that they have delegated day-to-day management and operational decisions of the corporation to ‘specialised agents’, they retain (latent) ‘ultimate control’ as principals and can shift the strategic direction of the organisation by possessing the residual control rights (voting) or by operation of the market for corporate control (takeover). This specialisation of functions, including the shareholder-investor ‘passivity’, is an inherent feature of the modern corporate form and does not upset per se the allocation of property rights in the firm. Thus, although shareholders may occasionally de facto lose (part of) their corporate power vis-à-vis management, they always hold the legal right to control (as a group). See J Coates, ‘The Future of Corporate Governance Part I: The Problem of Twelve’ (2018) Harvard Public Law Working Paper No 19-07. Managerial entrenchment and fiduciary duties towards shareholders-principals are factual matters. See M Isaksson and S Çelik, ‘Who Cares? Corporate Governance in Today’s Equity Markets’ (2013) 8 OECD Corporate Governance Working Papers No 8 50 (discussing the fiduciary duty of institutional investors to their ultimate beneficiaries, whose interpretation they suggest is an ‘empirical matter’).

¹⁰⁰ Easterbrook and Fischel (n 30) 403–406 (‘shareholders are the residual claimants to the firm’s income. […] The right to vote [that is, the right to exercise discretion] follows the residual claim.’).

¹⁰¹ A Alchian, ‘Corporate Management and Property Rights’ in Henry G Manne (ed), Economic Policy and the Regulation of Corporate Securities (American Enterprise Institute 1969) 339, 342, 350.

¹⁰² O’Brien and Salop (n 88) 625 (suggesting that even a conservative economic ‘analysis would not justify an exemption from Section 7 or a dramatic increase in antitrust permissiveness towards passive minority financial interests’); Elhauge (n 49) 1305–1312 (cogently explaining that even institutional investors with passive financial investment strategies do not usually qualify for either the substantive [liability] or the filing [notification] passive investment exemption under US merger control given that: i) ‘antitrust passivity’ requires lack of any (even legitimate) influence (voice, voting) by large institutional investors as ‘active owners’ that may affect corporate management and, in any event, is negated in case of actual anticompetitive effects, and ii) the filing exemption narrowly applies to investors with ‘no intention to participate in or influence management’ who acquire less than 10% of the target’s voting securities (15% for the special case of institutional investors); while US antitrust authorities consider ‘merely voting’ as not a priori inconsistent with ‘passive investment intent’, it is suggested that in light of the latest common ownership scholarship, this interpretation of the statute is ‘unwisely overbroad because horizontal investors who individually have less than 10–15% of corporate stock can nonetheless significantly alter the competitive incentives of corporate management by simply voting their shares, especially because collectively their share of corporate stock may be far higher than 10–15%’).

¹⁰³ That is, when and how a dynamically influential shareholding may turn into a statically influential one.

¹⁰⁴ Elhauge (n 49) 1311–1312 (discussing the statutory requirements and the related guidance by US antitrust agencies).

¹⁰⁵ See n 31 above.

¹⁰⁶ H DeAngelo, ‘Competition and Unanimity’ (1981) 71 Am Econ Rev 18; Azar (n 2) 272.

¹⁰⁷ On the ‘Fisher Separation Theorem’ which shows that under perfect competition all shareholders agree on a ‘single firm objective’ (own firm profit maximisation) that may hold ‘despite the heterogeneity of shareholders’ preferences’ under certain conditions, and on the heterogeneity (and complexity) of institutional investors and the shareholdings in their portfolios, see A Romano, ‘Horizontal Shareholding and Network Theory’ (2021) 38 Yale J on Reg 363, 366 (‘The problem with diffuse institutional ownership is not so much that it reduces the incentives of horizontal competitors to engage in aggressive competition, but that it results in institutional investors having a different objective function from that of other shareholders.’; and quoting ‘Hansmann [who] argued that one of the advantages of investor-owned firms is that “investors generally share a single well-defined objective: to maximize the net present value of the firm’s earnings per dollar invested.”’); E Rock and D Rubinfeld, ‘Antitrust for Institutional Investors’ (2017) NYU Law and Economics Research Paper 17-23 10–16 (noting that the common ownership thesis explicitly challenges ‘the basic assumption in finance research that a firm’s objective is to maximize its own value and that firm and investor optimization are separable’ and also, it ‘assumes implicitly that individual firms maximize the weighted average of the profits enjoyed by the shareholders of the firms, accounting for the shareholders’ ownership of horizontal competitors.’).

¹⁰⁸ Under EU competition law, ‘positive’ control (actual) is key to determine whether firms form part of a ‘single economic entity’ (for purposes of vicariously attributing parental liability for subsidiary companies’ antitrust violations under Article 101 TFEU) and ‘negative’ control (potential) is the criterion used to decide whether there is a ‘merger or acquisition’ (for purposes of assessing jurisdiction in case of a possible permanent change of control between previously independent companies, and increased market concentration, under the EUMR).

¹⁰⁹ B Novick, ‘How Index Funds Democratize Investing’ Wall Street Journal (New York, 10 January 2017) A.11; J Duca, ‘The Democratization of America’s Capital Markets’ (2001) Federal Reserve Bank of Dallas – Economic and Financial Review 10 (noting the ‘dramatic’ decline in transaction costs of mutual funds and ETFs, that induced rising household investing in ‘a diversified stock portfolio by buying mutual fund shares rather than by directly buying stocks’).

¹¹⁰ R Wigglesworth, ‘Passive Attack: The Story of a Wall Street Revolution’ (Financial Times, 20 December 2018). Critics had called ‘the greatest invention in the history of finance’, the ‘index-tracking mutual fund’ for mass investors, as ‘un-American’, ‘devouring capitalism’ and ‘worse than Marxism’ as it aimed at mimicking the market and achieving ‘average returns’ for investors.

¹¹¹ See L Boller and F Scott Morton, ‘Testing the Theory of Common Stock Ownership’ (2019) NBER Working Paper 27515, 6 (distinguishing between ‘common ownership’ by diversified, overlapping shareholders and ‘focused ownership’ by undiversified shareholders that have more incentives to compete in product markets as they internalise only profits from their own firm); and n 35 above (where Hovenkamp and Rodrigues describe the model of the ‘indifferent investor’ propelled by modern finance advances). To be sure, common ownership induced by passive index investment can be an extreme example of financial diversification that exacerbates its effects such as the ‘indifference’ of diversified investors.

¹¹² That is both diversified institutional investors and the part of retail or individual investors that are indirectly diversified through them.

¹¹³ Coffee (n 61) 2–5, 36 (‘Not since Berle and Means announced the separation of ownership and control have shareholders as a group perceived themselves to possess the power to behave as “true owners.” But, unlike the “true owners” of the 19th Century [the railroad, oil and bank barons], the focus of institutional investors as owners will logically shift to maximizing portfolio value, not the value of individual stocks. […] The era in which retail investors “owned” companies or moved the trading markets is long gone […] with high common ownership across a broad portfolio, it becomes rational and predictable that these institutional investors will make both investment and voting decisions on a portfolio-wide basis […]. This, in turn, permits the netting of gains and losses across the portfolio, and the implications of this transition are sweeping.’).

¹¹⁴ Isaksson and Çelik (n 99) 38, 42 (‘the fundamental economic rationale for providing shareholders with the means to monitor and engage’ and ‘[a]ll of these rights are given to shareholders under the assumption that they, as residual claimants, have a unique incentive to care and inform themselves about the long-term success of the enterprise. It is assumed that there is a direct link between the performance of the corporation and the shareholder’s income. […] this direct link is broken by an increasingly complex universe of intermediaries whose business is to manage other people’s money. […] Has the fundamental incentive for active and informed ownership – on which so much of the corporate governance doctrine rests – simply disappeared for large or dominant groups of shareholders?’). It is also stressed that the different categories of shareholders, the ‘lengthened and ever complex chain of intermediaries between savers and companies’ and the great heterogeneity of institutional investors complicate general corporate governance policy, in particular given the possibility that ‘regulatory initiatives to increase shareholder engagement may have unintended consequences’.

¹¹⁵ Azar (n 69) 17–20 (discussing the inapplicability of the Fischer separation theorem and the profit maximisation assumption of ‘atomistic’ firms if there is ‘imperfect competition’ in product markets and firms are not ‘separately owned’).

¹¹⁶ Berle and Means (n 28) 352 (quoting Walther Rathenau); Fisch (n 31) 886 (discussing the shareholder-centric model of corporate law on the basis of property rights theory and the implications given contemporary trends in institutional stock ownership).

¹¹⁷ R Clark, ‘The Four Stages of Capitalism: Reflections on Investment Management Treatises’ (1981) 94 Harv L Rev 561. The main figures and stage roles of investors along the evolutionary path of capitalism are said to be: (1) the entrepreneur, (2) the owner, (3) the capital supplier, and (4) the beneficiary.

¹¹⁸ Berle and Means (n 28) 352 (quoting Walther Rathenau); Fisch (n 31) 887.

¹¹⁹ D Langevoort, ‘The SEC, Retail Investors, and the Institutionalization of the Securities Markets’ (2009) 95 Va L Rev 1025, 1025–1026, 1081 (noting that the US securities regulator ‘thinks of itself as the [retail] investors’ advocate […] The last thirty years or so have brought a rapid shift toward institutionalization in the financial markets in the United States […] to repeat what now should be almost self-evident, the SEC is the retail investor’s champion only in a bounded way.’).

¹²⁰ S Martin and F Partnoy, ‘Encumbered Shares’ (2005) 3 Ill L Rev 775, 778, 813 (speaking of ‘financial innovation’ and analogous derivates cases and their implications for the allocation of corporate voting [residual control] rights, ‘it is far too simplistic to assume that shareholders uniformly hold the residual claims to a corporation’s assets or cash flows.’ […] ‘assumptions central to the paradigmatic position on corporate voting [homogeneity of shareholder preferences, residual claimant position of shareholders] are no longer valid.’).

¹²¹ Diversification acts as de facto insurance against such ‘unsystematic’ risk. See Coffee (n 61) 10, 35 (noting the divergence of interests between diversified institutional and undiversified individual investors as regards risk, the first being more exposed and sensitive to ‘systematic’ risk, which cannot be diversified away, while the latter are more interested in ‘unsystematic’ or firm-specific risk); Fisch (n 31) 882.

¹²² See n 34 above.

¹²³ It may be that institutional investors bear the investment authority and associated risk, in which case they are the ones, perhaps counterintuitively, to be considered ‘ultimate owners’. If retail investors retain investment risk and authority, they may still delegate any voting authority with regard to their shares to fund management agents. Thus, the identity of investors who have ‘ultimate’ or ‘beneficial’ status will depend on the details of the particular investments involved. See Tzanaki (n 5) 3–5 (pointing out the differences between index funds and ETFs regarding this distinction); Ryan (n 98) 68–69 (distinguishing between ‘defined benefit’ and ‘defined contribution’ retirement plans and analysing their respective property rights implications as to who, between institutional and retail investors, retains ‘ultimate’ versus ‘beneficial’ ownership status); cf Braun (n 60) 18 (analysing the position of ‘disinterested’ shareholders that hold ‘the legal title (shares and the attached voting rights) but not the economic interest’ vis-à-vis the ‘ultimate “asset owners” (retail or institutional investors)’).

¹²⁴ WG Ringe, ‘Hedge Funds and Risk-Decoupling – The Empty Voting Problem in the European Union’ (2013) 36 Seattle U L Rev 1027, 1030 (‘while a normal shareholder would always bear a certain economic risk that corresponds to the size of their stake in the company, hedge [and analogously index] funds, by contrast, try to disconnect the relationship between equity and risk’). Risk-decoupling may be: i) ‘negative’ – ‘a shareholder with reduced risk exposure retains its voting power and its influence in the company, but it does not bear the risk of negative returns’; or ii) ‘positive’ – ‘activist investors acquire an economic stake in a company without gaining voting power’, in which case no disclosure is required during a takeover. Risk-decoupling may create distorted incentives for the exercise of voting rights assigned to shareholdings and also ‘private benefits of control’ for the risk-decoupled shareholder (conflicts of interest with other shareholders). In essence, ‘a risk-decoupled shareholder creates new agency costs’. See Footnote ibid. at 1059, 1062.

¹²⁵ Fisch (n 31) 882–883, 878 (‘Diversification, however, decouples economic interest from ownership in the same way as complex financial products. […] the decoupling effected by intermediation offers the potential to alter corporate decision making. The extent to which this decoupling affects corporate operations depends on the extent to which intermediaries can exercise governance power. […] decoupling may create incentives for some market participants to exercise control rights in a manner that is inconsistent with the interests of other shareholders and the corporate enterprise and that, most problematically, these actions can be undertaken in secret.’); Ringe (n 124) 1066–1067 (noting that in case of ‘risk-decoupling’ by index funds as opposed to activist hedge funds, diversified institutional investors may come to ‘hold the shares of two direct competitors’ unintentionally or randomly whereas hedge funds’ strategy is ‘intentional’).

¹²⁶ Tzanaki (n 5) 4–5 (referring to this phenomenon as ‘nominal ownership’, ‘bare ownership’, ‘ownership by proxy’, ‘ownership via intermediation’); cf Ryan (n 98) 49, 68–69 (speaking of ‘ownership representation’).

¹²⁷ Or indeed, control becomes de facto ‘morphable’. By reverse analogy to the terminology used by Hu and Black, who first analysed these ‘decoupling’ phenomena. See H Hu and B Black, ‘The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership’ (2006) 79 South Calif Law Rev 811.

¹²⁸ Footnote Ibid. at 908 (‘existing legal and economic theories of the public corporation presume a [proportional] link between voting rights and economic ownership that can no longer be relied on.’); Ringe (n 124) 1073 (‘Economically, […] a risk-decoupled share is more akin to debt than equity, but legally speaking, a risk decoupler remains a shareholder [of an empty shell] and retains the voting right. […] If this risk is eliminated, the justification for the assignment of voting rights disappears. […] A risk-free shareholder cannot fulfill the function of the vote – to express the best possible decision for the strategic direction of the company [and thus promote firm value, directly, and societal value, indirectly]’).

¹²⁹ Tzanaki (n 5) 3, 5.

¹³⁰ Tzanaki (n 1) 184, 222, 243.

¹³¹ cf Hu and Black (n 127) 812.

¹³² Of course, it is also possible that large, diversified investors’ self-interest operates in ‘beneficial’ for society ways in that they may create positive externalities (innovation) or internalise negative ones (climate change). In fact, they have been called to act as ‘stewards for the commons’, see G Serafeim, ‘Investors as Stewards of the Commons?’ (2018) 30 J App Corp Fin 8. Importantly, however, the extent to which the self-interested activity of diversified investors produces net harm or benefit from a societal point of view always depends on whether this ‘will benefit their portfolio on a net basis’. See Coffee (n 61). This is a factual matter.

¹³³ cf Coates (n 99) 2; Tzanaki (n 1) 217.

¹³⁴ Fully diversified investors become ‘passive’ (no control) and ‘indifferent’ (no ownership) given the devaluation or decoupling of the vote and the diluting of firm-specific risk that attends index funds and passive financial investment strategies, as noted above. This is not an aberration, but they should rationally be so, as per modern finance theory. Yet, in such novel universe, established notions and common language terms, such as (partial) ownership and control, start to lose meaning.

¹³⁵ See Hovenkamp (n 32) noting this evolutionary transformation in shareholder character.

¹³⁶ See n 85 above and surrounding text.

¹³⁷ See n 74–81 and 84 above and surrounding text.

¹³⁸ See n 86–88 above and surrounding text.

¹³⁹ See n 89–92 above and surrounding text.

¹⁴⁰ Romano (n 107); L Enriques and A Romano, ‘Institutional Investor Voting Behavior: A Network Theory Perspective’ (2019) 1 Ill L Rev 223; Lianos and others (n 90).

¹⁴¹ cf Ringe (n 124) 1073.

¹⁴² R Reynolds and B Snapp, ‘The Competitive Effects of Partial Equity Interests and Joint Ventures’ (1986) 4 Intl J Industrial Org 141, 141–142. The profit internalisation may be reciprocal, but the mechanism and competitive effects are unilateral to begin with. See Azar and Tzanaki (n 91) 258–259; Tzanaki (n 1) section III.A and 235-236.

¹⁴³ Indeed, there is limited authority in EU case law suggesting that even a nonvoting, totally passive minority shareholding, originating from a loan, may lead to mutual internalisation of competitive externalities, with the same effect as if acquirer and target held cross-shareholdings in each other. See Cases IV/33.440 Warner-Lambert/Gillette and IV/33.486 BIC/Gillette [1993] OJ L 116/21. See also n 93 and 95 above and surrounding text, and Tzanaki (n 1).

¹⁴⁴ Unlike traditional index funds, ETFs may be freely traded (and may also be actively managed), which may impact and further complicate the competition analysis while tracking complex agency relationships and property rights allocations. See W Birdthistle, ‘The Fortunes and Foibles of Exchange-Traded Funds: A Positive Market Response to the Problems of Mutual Funds’ (2008) 33 Del J Corp L 69, 110 (suggesting that ETFs ‘create a market – rather than a regulatory or litigated – solution to much of the mutual fund difficulties’; however, they have their own possible conflicts of interest, eg arising from stock lending plans).

¹⁴⁵ A Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (Harvard UP 1970).

¹⁴⁶ E Elhauge, ‘The Causal Mechanisms of Horizontal Shareholding’ (2021) 82 Ohio St LJ 1, 66; I Appel, T Gormley and D Keim, ‘Passive Investors, Not Passive Owners’ (2016) 121 J Financ Econ 111, 133 (suggesting that passive institutional investors have an ‘influential voice in decisions pertaining to firms’ governance structures’); J Fisch, A Hamdani and S Solomon, ‘The New Titans of Wall Street: A Theoretical Framework for Passive Investors’ (2020) 168 U Pa L Rev 17, 37, 71.

¹⁴⁷ Fisch, Hamdani and Solomon (n 146) 27, 54; J Fichtner, E Heemskerk and J Garcia-Bernardo, ‘Hidden Power of the Big Three? Passive Index Funds, Re-Concentration of Corporate Ownership, and New Financial Risk’ (2017) 19 Business and Politics 298, 309, 321, 323; cf WG Ringe, ‘Stewardship and Shareholder Engagement in Germany’ (2021) 22 EBOR 87.

¹⁴⁸ Azar (n 2).

¹⁴⁹ cf Hovenkamp cited in n 22 above and surrounding text, distinguishing the ‘structural model’ of early corporate law and the ‘strategic model’ adopted by antitrust law; cf also D Crane, ‘The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal’ in Naomi R Lamoreaux and William J Novak (eds), Corporations and American Democracy (Harvard UP 2017) 110 (noting that in the twentieth century the US federal government, having failed to introduce a federal chartering or licensing regime, ‘found itself in the position of regulating conduct by “corporate persons” rather than creating, structuring and regulating corporations themselves’). Under the former model, antitrust would obtain a more discretionary character and a quasi-regulatory function.

¹⁵⁰ See Elhauge cited in n 55 above and surrounding text.

¹⁵¹ See Section 15.5 above.

¹⁵² See Section 15.6 above.

¹⁵³ This is a sentiment common to laborers of all sorts, eloquently crystallised in Robert Frost’s poem ‘Servant to Servants’.

¹⁵⁴ A science fiction film (2002) directed by Steven Spielberg. By analogy to a pre-merger control regime, a futuristic, all-prescient government aims to completely prevent crime before it happens (‘pre-crime’ enforcement) by use of ‘pre-cognition’. Yet, besides its theoretical perfection and immaculate prediction record, the system does present flaws and inaccuracies that were kept secret until exposed in a ‘minority report’: a dissenting prediction of the future that ‘might’ tell a different story and questions some of the predicted ‘reality’. Tom Cruise, ‘falsely’ targeted as a future crime perpetrator, ultimately reveals the system’s main flaw: ‘people can change their future once they become aware of it’.