Common ownership has been a hot topic in antitrust law for a while and the debate as to its competitive effect is far from settled. India’s competition watchdog recently imposed conditions on a 3% investment because of minority holdings the buyer had in a rival company. Hemangini Dadwal, a partner at AZB & Partners, and associate Shreya Singh examine the potential impact of that decision.

The Competition Commission of India (CCI) recently approved a minority acquisition by a private equity fund, ChrysCapital, in Intas Pharmaceuticals (Intas), on the condition that ChrysCapital would remove its nominee director in a competing portfolio investment and agree not to exercise veto rights over certain “strategic” corporate actions. ChrysCapital was making a 3% investment in Intas and had a minority portfolio investment in Intas’s competitor, Mankind Pharma. The CCI considered this remedy critical to approve ChrysCapital’s 3% investment in Intas, which would take ChrysCapital’s total shareholding in Intas to 6%.

The CCI’s decision not only seems to diverge from its earlier approach involving common shareholdings but indicates a higher level of scrutiny for acquisitions involving common minority shareholdings.

A shift in legal standard?

ChrysCapital, in addition to acquiring a minority shareholding in Intas, also proposed to obtain the right to appoint a director on the board of Intas and veto certain corporate actions, including amendments to charter documents, commencement of new lines of business, and changes to the capital structure of Intas. It also had similar rights accompanying its minority investments in other pharmaceutical companies, including Mankind Pharma and Eris Lifesciences (ChrysCapital held less than 10% in both, although it did not exercise additional rights in Eris Lifesciences). ChrysCapital also held stakes of less than 20% in GVK Biosciences and Curatio Healthcare. According to the CCI, ChrysCapital’s existing rights in these entities enabled it to “materially influence their strategic affairs”. As these entities appeared to have over 150 overlapping products with Intas, including consistently high market shares in some competing product categories, a closer review was considered necessary.

The CCI’s remedy appears to address a concentration of market power in the hands of ChrysCapital, based on a “unilateral effects” theory of harm emanating from ChrysCapital’s ability to “materially influence” the affairs of Mankind Pharma and Intas. Both companies are stated to exhibit high market shares in competing pharmaceutical products. While the order also asserted that the remedy would prevent potential coordination – market allocation, pricing arrangements, etc – amongst competing portfolio companies of ChrysCapital, this is not entirely apparent. Although the CCI restricted access to Curatio Healthcare’s non-public information, had the remedy also sought to address “coordinated effects”, it is likely that this restriction would extend to removing ChrysCapital’s “influence” from the other two competing portfolio companies in which ChrysCapital had invested – GVK Biosciences and Curatio Healthcare.

Importantly, this is not the first time the CCI has had a chance to examine competitive harms arising from common ownership. In IHH/Fortis, IHH Healthcare sought to acquire a majority shareholding in Fortis Healthcare, even as it had a 50% joint venture in a competing hospital. The CCI’s remedies were practical – preventing IHH from appointing common directors in competing hospitals and adopting information firewalls. When considering competitor cross-shareholdings in Toyota/Suzuki, the CCI noted that mere crossholdings amongst competitors did not raise concerns of competitor collaboration. In its antitrust inquiry in Ola/Uber, the CCI was required to examine allegations of coordination between Ola and Uber arising as a result of Softbank’s common minority shareholdings in the two ride-hailing cab companies. The CCI noted that although common ownership in competing entities may incentivise collusive behaviour, absent evidence of collusion, an inquiry was not justified. Unlike ChrysCapital/Intas, each of these decisions appear to recognise – and address – a collusive theory of harm emanating from minority common shareholdings.

Treatment of common shareholdings in other jurisdictions

Ex-ante remedies arising out of common ownership aren’t unique to the CCI. The US Federal Trade Commission in 2007 contested private equity funds The Carlyle Group and Riverstone’s proposed acquisition of a 22.6% equity stake in Kinder Morgan, as well as the right to appoint two out of 11 board seats and obtain non-public competitively sensitive information in Kinder Morgan. The FTC’s opposition stemmed from the fact that the private equity companies had a controlling interest in KMI’s competitor, Magellan Midstream. It sought to impose remedies similar to ChrysCapital/Intas in India – removing representatives on the board of management of Magellan; ceding control and not influencing the management or operation of Magellan; and establishing safeguards against sharing of competitively sensitive information between Magellan and KMI, as long as the funds held an interest or could influence KMI. Significantly, however – and unlike in ChrysCapital/Intas – Carlyle/Riverstone/KMI held a controlling interest of 50% in the general partner that controls Magellan.

On the other hand, the European Commission does not appear to have directed remedies to address antitrust harms solely on account of common passive shareholdings by institutional investors. The European watchdog did, however, consider common ownership as an “element of context” while examining competitive concerns arising in the Dow/DuPont and Bayer/Monsanto decisions. The commission recognises that the debate around common shareholdings remains unsettled, but markets with significant common shareholdings have less rivalry and innovation, and market shares and concentration measures are likely to be underestimated. More recently, the European Commission released a report on common ownership exploring the possible anti-competitive effects caused by investors holding shares in multiple competing entities in a few sectors. Although the report suggests a positive correlation between common shareholding and market power, it ultimately concluded that further research and empirical analysis of factors that impact competitive outcomes would need to be carried out to determine any anti-competitive harm.

Should common minority interests be treated the same as common controlling interest?

It is possible for controlling interests in two or more rival entities to result in unilateral and coordinated effects. Common shareholders in rival companies may be incentivised to reduce competition with one another to maximise the value of their investment. A controlling interest enables common shareholders to enforce this incentive, absent effective firewalls.

It may however be worth examining whether minority, passive and non-controlling common shareholdings in competing entities raises the same degree of competitive concerns as controlling common investments. Investors with minority shareholdings are typically passive investors. Even assuming that passive investors may be incentivised to reduce competitiveness between rivals, they’d be unable to do so absent control over day-to-day operations. Moreover, the company itself is incentivised to perform well in the market to attract future investments. Notwithstanding execution challenges, to jeopardise market performance for the benefit of a single passive shareholder would arguably be counter-productive, not least because  nominee directors have strong judiciary duties to act in the best interests of their companies. Failure to act in such a manner could result in serious professional and reputational consequences. In any event, potential confliicts
of interest arising from the same investor nominee being appointed as a director in two competing portfolio companies may be addressed by adopting directions of the kind provided in IHH/Fortis. But precluding investors from having a nominee or observer on the board of directors altogether may adversely impact their decision to invest. This would be undesirable, particularly in the prevailing economic conditions.

It is also worth noting that minority investments in the same sector may actually result in efficiencies, namely that industry expertise could improve corporate governance and increase diversification and liquidity of portfolios.

Conclusion

In light of this, absent a controlling common interest, remedies of the kind proposed in ChrysCapital/Intas may need closer consideration. To reasonably discern whether common minority shareholdings result or may result in anti-competitive harm, an empirical study (as carried out by the European Commission) would go a long way in bringing much-needed clarity to regulators and businesses alike.

Authors:

Hemangini Dadwal, Partner
Shreya Singh, Associate