Are Investment Funds’ Cross-Shareholdings Anti-Competitive?

On April 4, 2016 the DOJ’s Antitrust Division sued activist investment firm ValueAct Capital and its affiliated funds based on their failure to report investments in two horizontal competitors:  Halliburton and Baker Hughes.  In short, ValueAct acquired more than $2.5 billion worth of voting shares in both Halliburton and Baker Hughes after the companies – two of three of the largest providers of oilfield products and services – announced their plan to merge in 2014.1  Notwithstanding its advertised strategy of active involvement in its portfolio companies, ValueAct did not report either stock acquisition to the DOJ under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”).  HSR requires reports of acquisitions meeting certain monetary thresholds to allow the DOJ and its sister antitrust agency, the Federal Trade Commission, to determine before the transaction is consummated if the proposed deal “may substantially lessen competition.”  According to the DOJ, ValueAct purchased the shares with the intent to influence Baker Hughes and Halliburton decisions and therefore could not rely on certain exemptions to HSR’s notification requirements.  DOJ alleged that ValueAct made no bones about its intentions: “it likes ‘disciplined oligopolies’, [ ] looks to invest in businesses in ‘[o]oligopolistic markets, high barriers-to-entry’ and intended to influence the business decisions of both companies, including in the event that the merger failed or was re-negotiated.”

Although couched as an HSR reporting violation, the DOJ’s lawsuit underscores antitrust concerns that arise when a common set of investors – or one in the case of the Halliburton/Baker Hughes acquisition – own significant shares of horizontal competitors in a concentrated product market.  Antitrust scholar, Harvard Law Professor Einer Elhauge, recently made waves with a noteworthy article examining the competitive effects of cross-ownership.  In fact, Professor Elhauge presciently described the Halliburton/Baker Hughes/ValueAct scenario without referencing it:  one in which financial players have holdings across competitors in a concentrated market, and use them to influence management or enhance oligopolistic control.  According to Professor Elhauge: “When two firms have the same shareholders, their actions on behalf of those shareholders will be precisely the same as if the two firms had merged or entered into a perfectly-enforced cartel.”  He advocates for enforcement against the shareholders under federal antitrust laws such as § 7 of the Clayton Act, which bans any stock acquisition “where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”  See 15 U.S.C. § 18. Clayton Act § 8 prohibits interlocking directorates; in other words, its spirit but not its letter is also consistent with the Professor Elhauge’s thesis.

Concerns about cross-ownership among horizontal competitors are not new; the antitrust laws have prohibited other forms to the same end for more than 100 years.  Professor Elhauge merely examines these concerns in the current financial environment – old wine in new bottles.  But the question remains:  how far will the antitrust agencies go to constrain modern financial firms from lessening competition through cross-ownership?

[1] The same week that the DOJ sued ValueAct, it also challenged the Baker Hughes and Halliburton merger.  The lawsuit alleges anticompetitive effects in 23 different product markets.  None of the ValueAct entities were named as a defendant in the complaint.

THE MOGIN LAW FIRM, P.C. specializes in representing businesses, entrepreneurs, consumers and investors in antitrust, unfair competition and complex business litigation. We have participated in some of the largest antitrust cases in the United States and are frequently requested by other law firms and often consult with law firms engaged in antitrust cases.  Author Jodie Williams was an attorney in the Bureau of Competition of the Federal Trade Commission for several years prior to joining The Mogin Law Firm, P.C.

DISCLAIMERS: The Mogin Law Firm, P.C. is licensed in California; some of its attorneys may be admitted in other states.  The Mogin Law Firm, P.C.’s publications are designed to provide our clients and contacts with information to help manage their businesses and to provide access to MLF resources.  The content of our publications are for informational purposes only and do not constitute legal or other professional advice or opinions.  In publishing this information, MLF attorneys are not rendering legal or other professional advice or opinions on specific facts or matters, and our publications and website are not substitutes for obtaining legal advice from an attorney.  The Mogin Law Firm, P.C. assumes no liability in connection with the use of this or other MLF publications. The Mogin Law Firm, P.C.’s publications may be considered advertising in some jurisdictions.  The determination of the need for legal services and the choice of a lawyer are extremely important decisions and should not be based solely upon advertisements or self-proclaimed expertise.
1. The same week that the DOJ sued ValueAct, it also challenged the Baker Hughes and Halliburton merger.  The lawsuit alleges anticompetitive effects in 23 different product markets.  None of the ValueAct entities were named as a defendant in the complaint.

Sign up to view this Whitepaper