The Corporate Governance Cartel

This Article offers a novel — antitrust — perspective on a growing phenomenon in capital markets: institutional investor coalitions. It reveals the anticompetitive risks that investor coalitions pose and challenges the prevailing positive view of this development in capital markets. Traditionally, corporate law has encouraged investor cooperation, regarding it as the solution to the well-known collective-action problem facing public shareholders. As this Article shows, however, the recent evolution of investor alliances into powerful, orchestrated coalitions often emerge at the border between firms and markets, affecting not only the intra-firm governance arrangements of the companies held by the coalition members but also the capital markets themselves. At the firm–market border, cooperation among institutional investors — even around seemingly benign corporate governance issues — provides an opportunity for tacit collusion that grants members an unfair advantage in the markets in which they compete. To demonstrate this contention, this Article adopts an antitrust lens to analyze the collective efforts of one particular group of institutional investors: the coalition to inhibit firms’ use of dual-class stock in initial public offerings (IPOs). This original account of the coalition against the dual-class structure exposes the significant anticompetitive effects that may arise when competing buyers of shares in the primary market coordinate their response to a governance term at the IPO juncture. Since the members of the coalition collectively account for most of the expected market demand for public offerings, their orchestrated efforts can be seen as an exercise of buyer-side power. The exploitation of such power effectively creates a cartel of buyers in the primary market, resulting in two potential economic distortions: (1) abnormal underpricing of dual-class offerings and (2) suboptimal governance arrangements. Both distortions point to overlooked perils associated with the mass-scale aggregation of power by institutional investors. The potential anticompetitive effects of such investor coalitions — whose actions may be vigorous and sustained, yet difficult to pinpoint — require an immediate policy response. This Article thus proposes regulatory reforms aimed at preventing institutional investors from engaging in collective actions that limit competition. The proposed policies represent a means to achieve the necessary delicate balance between the goal of corporate law to encourage cooperation among shareholders and the goal of antitrust law to restrict collaboration among competitors