Working Party No. 3 on Co-operation and Enforcement

Transcription

1 For Official Use DAF/COMP/WP3/WD(2008)20 DAF/COMP/WP3/WD(2008)20 For Official Use Organisation de Coopération et de Développement Économiques Organisation for Economic Co-operation and Development 03-Mar-2008 English text only DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS COMPETITION COMMITTEE Working Party No. 3 on Co-operation and Enforcement ANTITRUST ISSUES INVOLVING MINORITY SHAREHOLDING AND INTERLOCKING DIRECTORATES -- Italy February 2008 The attached document is submitted by Italy to Working Party No. 3 of the Competition Committee FOR DISCUSSION under item III of the agenda at its forthcoming meeting on 19 February Please contact Mr Antonio Capobianco if you have any questions regarding this document [phone number; ; address: antonio.capobianco@oecd.org]. English text only JT Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format

2 MINORITY SHAREHOLDINGS, INTERLOCKING DIRECTORATES AND THE THEORY OF HARM 1. Minority Shareholdings and Interlocking Directorates in Italy 1. Under Italian law a merger has to be notified only if the merger leads to the acquisition of control of a company and the turnover thresholds are exceeded. Therefore in merger cases the problem of minority shareholding and interlocking directorates can only be addressed in the context of remedies, so as to impede a dominant position to be created or strengthened. 2. In recent years the Italian competition Authority has indeed addressed antitrust issues originating from minority shareholding and from interlocking directorates in a number of bank mergers (the major ones being: Banca Intesa and Sanpaolo IMI; BPU and Banca Lombarda and Piemontese,minoo now called UBI; Unicredit and Capitalia). 3. Minority shareholding is a stake in the capital of another firm (the target) that do not yield any control or material influence on its business. Included in this definition are cases in which an agreement among the key shareholders of the target firm is in place to which the firm owning the (minority) stake (the buyer) participates. 1 Minority shareholding can be an antitrust problem when the buyer and the target are rivals. 4. Interlocking directorates occur when single individuals sit on more than one board (or other governance body) of a firm. Interlocking directorates can be an antitrust problem when the interlocked firms are rivals. 5. Table 1 shows the most relevant minority shareholdings and interlocking directorates involving the firms affected by the three merger cases. Although banks and insurance companies often cooperate in the production side of the insurance business through vertical cooperative JVs (bancassurance), they are nonetheless competitors in the distribution of insurance products Intesa Sanpaolo, the largest bank in Italy by number of branches, has a 2,2% stake in Assicurazioni Generali, which is the largest insurance company in Italy. Assicurazioni Generali has in turn a 5,1% stake in Intesa Sanpaolo. Assicurazioni Generali and Intesa Sanpaolo are also competitors in the life insurance market because they both sell their own insurance products in addition to Intesa Vita s 1 2 Shareholder agreements can be defined as pacts among blockholders to set a common voting policy and/or restrict their freedom to sell shares. For example, Unicredit sells through its distribution channels CreditRas Vita s life insurance products, which is a cooperative JV between Unicredit and the Allianz Group. Unicredit does not own assets in the life insurance business. Unlike Unicredit, Allianz produces also insurance products that are sold through other channels in competition with Unicredit. For this reason, Unicredit is not one of Allianz s competitors in the production of life insurance products but only on the distribution side. An exception to this rule is given by Intesa Sanpaolo, which produces insurance products on its own in addition to distributing the production with Intesa Vita (a JV with Assicurazioni Generali). 2

3 products, which is a cooperative JV between them. Assicurazioni Generali has a number of competitors among its shareholders, including Unicredit, Monte dei Paschi di Siena (MPS) and the Premafin Group. 7. UBI Banca, the fourth Italian bank by number of branches, is also a shareholder of Intesa Sanpaolo. Two of UBI s core shareholders have relevant stakes in Intesa Sanpaolo; one of them is the private investor with the largest stake in Intesa Sanpaolo (5,9%). 8. Unicredit is Mediobanca s largest shareholder and also one of Assicurazioni Generali s shareholders. It is worth to notice that Mediobanca, a leading Italian investment bank, with a stake of 15,7% in Assicurazioni Generali, de facto controls it. As a result, Mediobanca may be considered a player in the insurance business and thus as a competitor of Unicredit and the Premafin Group in the insurance market. This is highly relevant because Unicredit and the Premafin Group are among Mediobanca s core shareholders 3. Table 1: Key links among competitors observed in the latest work by the Italian competition Authority in the financial sector. Cases Minority shareholdings Interlocking directorates Assicurazioni Generali has a 5% stake in Intesa Sanpaolo Intesa/Sanpaolo BPU/Banca Lombarda (UBI Banca) Unicredit/Capitalia Intesa San Paolo has a 2.2% share in Assicurazioni Generali 1,22% stake in Intesa Sanpaolo Two relevant shareholders in common with Intesa Sanpaolo (a major competitor) 4,7% stake in Assicurazioni Generali 18% stake in Mediobanca Two of Assicurazioni Generali s top executives in the governance bodies of Intesa Sanpaolo (1 in the surveillance board, 1 in the management board) One of Intesa Sanpaolo s top executives in UBI Banca s governance bodies Three of Unicredit s top executives in Mediobanca s surveillance board 9. Table 1 also shows the number of interlocking directorates associated with these minority shareholdings. Beginning with the Intesa Sanpaolo merger, the governance bodies of the bank include two of Generali top executives (the chairman and one of the two CEOs), the former in the management board and the latter in the surveillance board). As we have seen before, Assicurazioni Generali and Intesa Sanpaolo are partners (in their cooperative JV) as well as competitors in the production and distribution of insurance products. 10. Intesa SanPaolo is also interlocked with UBI Banca as one of its top executives (the chairman of the surveillance board) is a member of UBI Banca s surveillance board. 11. Finally, five members of Unicredit s board sit in Mediobanca s surveillance board, some of them with very senior positions. Mediobanca is one of Uincredit direct competitors in the investment baking 3 These shareholders are also part of the shareholder agreement on Mediobanca, which controls approximately 50% of the firm. 3

4 markets as well as the firm that de facto controls Assicurazioni Generali, probably Unicredit s strongest competitor in the insurance markets. 12. Figure 1 shows more generally the number of directors who sit on more than one board among the Italian listed companies in According to this data, there are 327 directors who sit on two boards or more, though not all of them can be considered as interlocking directorates because these firms do not operate in the same markets and thus they cannot be considered as truly competitors. Figure 1: Number of directors who sit on one board or more in the Italian listed companies in 2006 No. of directors No. of boards Source: Santella et al. (2007), MPRA Paper No No. of directors who sit on 1 board o more 13. In the next section, we will discuss some issues arising from minority shareholdings and interlocking directorates that can be potentially harmful to competition. 2. Theories of Harm 14. In the context of merger control minority shareholding and interlocking directorates may increase the likelihood of a collective dominant position being created or strengthened. 2.1 Minority shareholdings Elimination of the incentives to compete aggressively 15. The idea here is that owning a minority stake in a competitor may affect the incentives of the two companies to compete vigorously against each other. In particular, if a maverick firm has a stake in a consolidated competitor it would have lower incentives to compete aggressively since it would share some of the profits of the consolidated competitor. Thus, equilibrium prices in oligopolistic markets where firms have minority shareholdings would be higher than in absence of such shareholdings. 4

5 16. Reynolds and Snapp (1986) 4 have studied minority shareholdings in a Cournot model and conclude that they lead to higher equilibrium prices. Flath (1991) 5 extends these results to Bertrand models and finds that if oligopolists have silent partial interests in one another, equilibrium prices tend to be higher than in absence of such shareholdings. This result holds irrespectively of whether firms compete a la Bertrand or a la Cournot. 17. Thus, the idea that having minority shareholdings in competitor firms leads to higher prices levels appears grounded in the economics literature. The magnitude of this effect depends in practice on the size of the minority interest; the market share of the target ; the degree of substitutability between the products of the target and of the buyer (and therefore the amount of demand that would be captured by the target in the event of a price increase by the buyer); and the extent of minority shareholdings in the market under study (i.e. the buyer and/or the target may have multiple cross-shareholdings). 18. The quantification of the price effects of such shareholding depends on the precise demand and cost conditions of the involved firms. Simulation work shows that such effects tend not to be large unless stakes are sizeable Coordinated effects 19. A distinct question is to what extent holding a minority share (possibly reciprocally) in a competitor can facilitate tacit coordination. This could in principle happen through two mechanisms. The first is that minority shareholdings may affect firms payoffs and weaken the incentives to deviate from collusion potentially favouring a more collusive outcome. Secondly, minority shareholdings can provide information that can assist explicit or implicit agreement on a coordinated strategy, and the monitoring of such agreements. We consider each in turn. 20. On pricing incentives, minority shares (particularly cross-ownership stakes) make collusion more likely as they can alter the firms incentives to collude. They represent a sort of facilitating practice. For example, having a stake in rivals may reduce the firms incentives to deviate from a collusive agreement as the gains from deviating are lower than in absence of minority shareholdings 7. The same goes for the incentive to punish. However economic analysis suggests that there are countervailing effects on firms Reynolds, R. J. and Snapp, B. R. (1986), The Competitive Effects of Partial Equity Interests and Joint Ventures, in International Journal of Industrial Organization, Vol. 4, pp , Elsevier Science Publishers (North Holland). Flath, D. (1991), "When is it rational for firms to acquire silent interests in rivals?", International Journal of Industrial Organization, Volume 9, Issue 4, December 1991, pp For small stakes such effects are generally not large because they are second order effects. This is because if, on the one hand, the firm owning a stake in a competitor may be more willing to increase its prices because it will recover some of the profits loss due to the price increase through its stake, on the other, only a fraction of lost profit will be recovered. This fraction tends to increase with the level of market concentration as the lower the number of competitors the larger the share of the lost demand that goes to the target firm. Larger effects can be obtained if the firm has stakes in a number of competitors. Thus, for these effects to be quantitatively significant the market has to be fairly concentrated and/or minority shareholdings need to involve a number of competitors in the concerned market. In this sense, a merger among competitors could increase the likelihood of such mechanisms because it increases the degree of market concentration. This is because when (symmetric) firms own stakes in their competitors, market shares may differ from their shares of (total). So for example, if firm A has a stake in firm B, A s share of total profit is given by A s profit plus a fraction of B s profits. 5

6 incentives to cheat, and to punish rivals who cheat. The net effect depends on the detailed facts in particular on demand and cost conditions as well as on the extent and nature of the minority participation. 21. Minority shareholdings may also facilitate collusion through information exchanges among competitors. Having a minority share might allow the buyer to participate in the board of the target and therefore be informed on the target s plans, costs etc. which it would not otherwise have. In other words, when a firm (the buyer) buys a stake in another (the target), the buyer may also acquire the right to appoint one or more directors on the board of the target (which is why it is important to make sure that minority holdings be turned into passive financial investments). 2.2 Interlocking directorates 22. Interlocking directorates can give access to sensitive and not publicly available information on firms strategies, demand, costs, entry in other market segments and/or other geographic areas. This could facilitate various forms of coordination and thus be harmful of competition through: Enhancing coordination among firms (as successful coordination requires agreement on the common strategy to be followed by the different market participants); Increased sustainability of implicit agreements between competitors (which depends also on the speed and accuracy with which cheating can be detected). 23. Having established that interlocking directorates may cause harm to competition, it is also important to stress that this may not always be the case as their effects depend on the precise context where they take place. In particular, the potential harm caused by interlocking directorates is strictly related to the role and type of governance bodies where interlocks take place as well the on the functioning of such bodies Role, functioning and types of governance bodies 24. Regarding the governance bodies, a necessary condition for information exchanges to materialize is that the individuals holding positions in more than one competitors sit in the governance bodies that play an active role in the day to day management of the firm as well as in setting the corporate strategies. In addition to these requirements, the functioning of such bodies needs to be open and transparent so that decisions are the actual (and not only the formal) outcomes of meetings of these bodies. 25. In standard systems, the board of directors is the most prominent governance body as it is meant to monitor management on behalf of shareholders as well as to approve major business decisions and corporate strategy such as disposal of assets, investment or acquisitions, etc. This implies that having a seat on a proper functioning board of a competitor firm can indeed lead to an exchange of sensitive information, which can in turn be factored in the definition of its own corporate strategy (without necessarily ending up in a coordination of strategies). 26. Conversely, if boards end up rubber stamping the decisions of management instead of challenging them and/or asking for details or more information (as often is the case), it is quite unlikely that sensitive and detailed information is even discussed at board meetings even though key executives (e.g. the CEO) often sit on the board. In this situation interlocking directorates are less likely to be a concern. 27. So called dual systems are characterised by the presence of two distinct governance bodies (as opposed to he standard systems where only one governance body is in place, the board of directors), each 6

7 with its own role. One body, the management board (MB), is composed of key managers of the firm and is in charge of the day to day management as well as to decide corporate strategies. The management board generally meets on a weekly basis. 28. The other body, the surveillance board (SB), is appointed by shareholders to monitor the behaviour of managers 8. The surveillance board meets much more infrequently than the management board and approximately 3 to 4 times a year. Firm managers cannot be member of the SB. As a result, interlocking directorates are more likely to raise competition issues if they happen at the MB level Effects of information exchanges 29. Before concluding this section on the potentially harmful effects of interlocking directorates, it is worth noticing that not all information exchanges have anticompetitive effects. In some instances information flows among competitors may not improve as a result of interlocks. For example, a representative of A entering the board of B, which in turn has a JV with C, may not necessarily improve the information A and C have about one another: for example, is there a credible channel through which B s ownership in the JV would allow A to have a better idea of C s actions? or be able to detect cheating by C more accurately, e.g. by making it easier for the relevant managers to communicate between them? would the information be trustworthy? 30. There may also be instances in which information flows among competitors may have procompetitive effects. For example, joining the board of a competitor may have the effect of revealing a business opportunity that other firms had not spotted and this could generate some healthy competition for that business opportunity. This could be the case if this business opportunity leads to first mover advantages. 3. Conditions imposed to clear the mergers 31. Table 2 summarizes the conditions imposed by the Italian competition Authority to tackle the most relevant instances of minority shareholdings and interlocking directorates emerged in the merger cases we referred to earlier in the paper. These conditions have ranged from total and/or partial divestments of stakes in competitors (as in the Unicredit/Capitalia merger), to setting up procedures to control information flows and voting on selected matters for individuals with positions in competitor firms (Intesa Sanpaolo and Unicredit/Capitalia), to undertakings not to include individuals with positions in competitors firms in their management bodies (UBI Banca). Table 2: Conditions imposed for approval of mergers. Cases Conditions Issue tackled Intesa/Sanpaolo Procedures to control information flows and voting on selected matters Interlocking directorates Markets affected by the Authority conditions Life insurance 8 It is important to recall that the powers of the surveillance board show a degree of variation across firms. In some instances the corporate strategy of the firm on some selected matters (as defined by the management board) need to be approved by the surveillance board as well. 7

8 Procedures to control information flows and voting on selected matters Divestment of stakes in Assicurazioni Generali (premerger 4.7% post-merger 0) and Mediobanca (pre-merger 18%, postmerger 9%) Interlocking directorates Minority shareholdings Life insurance Investment banking Unicredit/Capitalia BPU/Banca Lombarda (UBI Banca) Undertakings not to have management roles in rivals Interlocking directorates All markets in which the involved firms operate 4. Conclusions 32. The Italian financial system is characterized by a very articulated web of minority shareholdings and interlocking directorates. As suggested in this note, minority shareholdings can sometimes be anticompetitive. In the context of merger control a truncated analysis may be used: is the market competitive? Do members of the board participate in strategic decision making? If the answer to the first question is no and to the second yes, the probability that the sale of minority shareholdings could be a good remedy for authorizing an otherwise anticompetitive merger increases. 33. Of course a much more rigorous proof of harm would be needed in the antitrust (as opposed to merger) evaluation of agreements possibly facilitated by minority shareholdings or interlocking directorates. In any case, the fact that minority shareholding acquisitions do not need to be notified ex-ante creates a gap in the system. 8