INFORMATION EXCHANGES BETWEEN ENTERPRISES

AND ITS COMPETITOR MINORITY SHAREHOLDERS :

CARTELIZATION?

INTRODUCTION:
Competition Law acts as a guardian against anti-competitive practicespractises by firms in
the market, to fosterwith the aim of fostering competition and protectprotecting markets
against such anti-competitive conduct. For this purpose, the antitrustantirust regime prohibits
any agreement which causes, or is likely to cause, appreciable adverse effect on competition
[“(“AAEC”]) in the markets. To further this philosophy, the law takes a strict approach when
dealing with Cartels. Cartels have been considered as the prime evil in the eyes of
competition law, and are prohibited at all costs. Moreover, minority shareholding, a the
common business practice has anti-competitive effects in some situations. These anti-
competitive effects include, cartels, oligopolistic markets, tacit collusion, and
monopolisation.

In light of this approach of the antitrust law, the question that the author raises in the present
article is that, whether information exchange between an enterprise and its minority
shareholders, who happens to be its competitors, would amount to cartelization. Meaning
that, an enterprise ‘E’, has shared certain information relating to pricing, with otheranother
firms ‘F1’ and ‘F2’, competitors of E in the same market. Additionally, if F1 and F2 are
minority shareholders in E, or vice-versa then would this exchange of information be
considered as a Cartel activity between the firms.

UNDERSTANDING EXCHANGE OF INFORMATION AMOUNTING TO CARTELIZATION:

A cartel is an arrangement or agreement between the competitors, to restrictwith the objective
of restricting, limitlimiting, controlcontrolling or attemptattempting to control the production,
distribution, sale, price or trade of goods or services. Cartels are clandestine, verbal and often
informal agreements, aimed at increasing prices generally through price-fixingprice fixing,
allocation of production, and engaging in collusive conduct. Cartels achieve their objective
by exchanging crucial information amongst them.

The exchangeExchange of information between competitors has been a cause of concern for
competition regulators. The transfer of commercially sensitive information such as pricing
strategies, which may lead to a substantial adverse effect on the market is considered as an
anti-competitive conduct. This facilitates collusive practices as the competitors reach to a
unanimous coordination. Over this, we shall understand both, the Indian approach and the
approach by the European Union [(“EU”]).

The Indian Approach

Section 3(3) of the Competition Act, 2002 [(“the Act”]) deals with such exchange of
information between competitors. The Competition Commission of India [(“CCI”]) in the
case of In re: Alleged Cartelization in Flashlights Market in India, observed that when
competitors exchange commercially sensitive information pertaining to their production and
sales, increase in prices, etc., the same isn anti-competitive in nature, however, such
exchange shall be coupled with AAEC laid down under section 19(1) of the Act. Meaning
that, if evidence indicating AAEC is not available, then a mere exchange of information
cannot be held as violative of the provisions of the Act.

The EU Approach

Here, Article 101 of the Treaty on the Functioning of the European Union [(“TFEU”])
stipulates the law over the information exchanges between the competitors. The EU
AntitrustAntirust regulator undertakes the examination of these cases, in accordance with the
gGuidelines on the applicability of Article 101 of the TFEU to horizontal cooperation
agreements. Accordingly, multiple factors, similar to AAEC, have to be considered before
holding the exchanges of information as anti-competitive. In the case of T-Mobile
Netherlands, it was held that if competitors exchange information, they risk disrupting the
existing competition in the market.

MINORITY SHAREHOLDING AND CROSS-OWNERSHIP VIS-À-VIS ANTITRUST REGIME:

Cross-ownership relates to a direct ownership of stocks in a competitor by another
competitor. A cross-ownership can occur even through a minority shareholding. This
minority shareholding can be of two broad types; A non-controlling minority shareholding,
and a controlling minority shareholding. In the former, a company buys a smaller proportion
of the shares in the other company, and this shareholding does not allow the company to
exercise decisive control on the other company's operation, while in the latter it acquires a
controlling influence throughthough certain rights over strategic decisions of the company.
Such minority shareholdings raise a concerning eye under competition law because;
1. Economic incentives for not competing increases: Now, the enterprise will not only be
interested in its own profit but also have interest in the profits of the competitor, because the
enterprise will receive a share in the profits of the competitor. In these cases, both the
competitor and the enterprise will have the incentive to increase the prices of the products or
reduce the quality. This is because the consumer is going to purchase the product either from
the enterprise or from its competitor, and in any case, the profits will be eventually shared.

2. Ability for influencing decisions and strategic behaviour of the company arises: The
enterprise can influence the decision in a manner that it limits the possibilities of its
competitor to establish themselves in a geographical area or with the product type where the
enterprise itself holds a major position. In the Toshiba/Westinghouse case, it was observed
that through an enterprise’s minority shareholding, its competitor’s ability to raise capital or
stop the competitor from making any investment decisions can be limited. For instance, it can
stop the competitor from entering into a joint venture or stop the manufacturing of a product
or establish a new factory.

3. Information over business matters of the competitor becomes accessible: An

enterprise’s minority stake in a competitor may provide it access to information about the
competitor that would otherwise be unavailable to it. This can happen if, for instance, the
enterprise acquires the opportunity to choose a member of the competitor's board of directors
because of its minority stake. The enterprise may have access to sensitive information about
the competitor's strength, position, and strategy. This information can be used for colluding
tacitly.

ANALYSIS CUM OPINION:

The enterprise and its minority shareholder may according to the company law, be considered
as a single economic entity under certain circumstances, however, if the transfer of business-
sensitivebusiness sensitive information between them leads to hindering competition in the
market, that will be anti-competitive. An agreement or a concerted practice between
competitors would violatebe in violation of section 3 of the Act and Article 101 of the TFEU.
For an efficient functioning of a Cartel, it is necessary that; (a) the competitors have a certain
degree of transparency, which allows them to be cognizant about the business strategies of
each other; (b) the incentive to disassociate from the Cartel is less, and; and (c) the other
firms involved canhave the ability to punish the enterprise which tries to diverge from the
collusion. This can be achieved when enterprises have a minority stake in theirits competitors
or vice-versa, coupled with a smooth flow of information between them that induces tacit
coordination.

This is because, business-sensitivebusiness sensitive data which is not publicly available

regarding pricing patterns, a trend of product sales, consumer outreach strategies etc.,
becomebecomes easy to acquire, given the fact it is exchanged with its shareholders. Thus, as
the enterprise is a minority shareholder, it gains the ability to gauge if the competitor is
planning to deviate from the Cartel’s conduct. Additionally, a structural link between two
competitors might increase the credibility of the "penalty" for violating the coordination. The
reason isbeing that if the competitor deviates from the decisions of the Cartel, either its
minority shareholder or it itself will incur losses, and losses of one will be losses of another
as they have a shared liability. In the case of independent competitors, a deviation is
generally punished through a price war with the firm that has deviated from the Cartel.
However, while dealing with a minority shareholder, punishment can be inflicted by
influencing the decisions of the competitors by utilizing the minority shareholder’s rights,
and hampering credible business decisions.

Therefore, the exchange of information between minority shareholders and the main
enterprise, who are competitors of each other, can provide the necessary fuel to power a
Cartel, and reduce the competitor's desire to deviate from the collusion. This arrangement
canhas the ability to remove the existing competition from the market, create entry barriers,
and harm consumer welfare. Because of the same, it shall be condemned under both section 3
of the Act and Article 101 of the TFEU.

CONCLUSION:
Firms by acquiring a minority stake in their competitors, and the information exchanges
between them satisfysatisfies the ingredients of an efficient Cartel. This causes hindrance in
existing market dynamics. These various situations have been discussed in the article above.
Given the fact that markets are getting complex day by day, and businesses are adopting
intricate strategies to compete and survive in these markets, competition law has to evolve in
accordance with the same. Keeping that in mind it has become imperative to frame a set of
guidelines for enterprises and their minority shareholders to follow in respect of information
exchange.