The fund companies dispute the claim that their ownership stakes represent a threat to competition. They say they are minority shareholders, often holding less than 10% of a company, and thus critics vastly overstate their influence. Barbara Novick, a vice president at BlackRock, lobbied the FTC on the issue in 2018 and 2019.
BlackRock, Vanguard and State Street declined to comment. The FTC also declined to comment.
Researchers have also found that common ownership increases the likelihood of companies merging and reduces the premiums that sellers receive -- both possible signs of conflicts among large shareholders. That scenario is playing out in real life in a lawsuit involving Elon Musk’s 2016 merger of his Tesla electric-vehicle company with SolarCity, a financially troubled maker of solar panels.
SolarCity was founded by two Musk cousins and Musk was its chairman and largest shareholder. Industry experts panned the $2.6 billion deal, alleging that SolarCity, drowning in debt, was basically insolvent and that Tesla itself was cash-strapped and struggling to meet production goals. The two companies had little in common beyond that 25 institutional investors -- holding almost 46% of Tesla’s shares -- stood on both sides of the transaction. Because of that and the family conflicts, dissident Tesla shareholders alleged in a lawsuit, a bad deal won overwhelming shareholder approval.
Tesla sought what is called business-judgment protection, which says courts shouldn’t second-guess the votes of disinterested stockholders. The dissidents then presented the novel argument that the ownership overlap meant the shareholders weren’t disinterested parties at all. While the court dismissed that argument on the grounds that Musk’s controlling interest in Tesla is what ultimately swung the vote on the merger, the judge predicted the common-ownership issue would one day resurface. The three-year-old case is ongoing.
Earlier Inquiries
The FTC’s inquiry isn’t the first time antitrust enforcers have weighed in on the controversy. The European Union cited common ownership as one reason that two agricultural-chemical companies had to spin off assets to win approval to merge. The Justice Department’s antitrust division, which shares antitrust enforcement with the FTC, asked major airlines about communications with their biggest shareholders in 2015. The probe didn’t result in an enforcement action.
Schmalz, the Oxford finance professor, said only antitrust enforcers have the power to determine whether index funds are influencing merger decisions, but he warned that even if the FTC doesn’t find evidence of overt pressure, common ownership of companies still raises significant antitrust worries.
“Suppose you don’t find anything?” he said. “That doesn’t mean there’s no problem. That’s the danger.”
This article was provided by Bloomberg News.