The UK’s Financial Conduct Authority (FCA) issued its first formal ruling under its competition enforcement powers on 22 May 2019 against three asset management companies. Hargreave Hale Limited (Hargreave Hale), Newton Investment Management Limited (Newton), and River and Mercantile Asset Management LLP (RAMAM) were found to have contravened the competition laws through the sharing of “strategic information” during the book building process in relation to an IPO by On the Beach Group plc (On the Beach) and a placing by Market Tech Holdings Limited (Market Tech), shortly before the books closed and the share prices were set. Newton was granted immunity for reporting the infringement to the FCA, and thus avoided a pecuniary penalty. Antitrust fines of £306,300 and £108,600 were imposed on Hargreave Hale and RAMAM, respectively.
What constitutes “strategic information”?
Asset managers participating in an IPO or a placing are direct competitors of each other. Each asset manager needs to consider rival asset managers’ likely demand for the shares, and decides what bid he needs to submit in order to ensure he will be allocated the desired amount of shares in the face of such competition. Although each individual asset manager has an incentive to bid less in the hope of obtaining shares at a lower price, he also needs to weigh this incentive against the risk of missing out or being allocated fewer shares than he desires if rival asset managers bid for sufficient volume at higher prices.
In a competitive book building process during an IPO or a placing, rival asset managers independently and confidentially determine the volume and value of their respective bids based on their own assessment of the investment opportunity. Any information that enables one asset manager to know the intention of another during the IPO or placing, when they should have been competing for shares, is considered “strategic information”. Examples of “strategic information” include: an asset manager’s own assessment of the value of the issuing firm, the number of shares and the price at which he intends to bid, and whether or not he plans to submit a bid. The sharing of such information during the book building process in an IPO or a placing can eliminate, or at the minimum substantially reduce the uncertainty among the asset managers regarding each other’s intention.
What “strategic information” was shared among Newton, Hargreave Hale and RAMAM?
The FCA ruled that Newton, Hargreave Hale and RAMAM disclosed and/or accepted “strategic information” by sharing information on their valuation of the issuing firms, their bidding intention, including the volume and/or share price of the bid they intended to submit, in connection with the On the Beach IPO and the Market Tech placing.
On the Beach IPO. In the morning on the day of the book closing, a fund manager at Newton (Mr. Paul Stephany) blind-copy emailed asset fund managers at 12 rival firms, including Hargreave Hale and RAMAM. Mr. Stephany disclosed his own valuation of the issuing company in the email (“£260 million pre [new] money”), and encouraged the other asset fund managers to move their respective valuation at the same level. Mr. Stephany also disclosed in the email that he had placed an order of a specific amount at the £260 million limit the same morning.
The direct recipients of Mr. Stephany’s email at Hargreave Hale forwarded the email internally to the asset managers who were responsible for the firm’s ultimate decision with respect to the On the Beach IPO. Moreover, Hargreave Hale tried to get in touch with Newton after receiving the email, and the two companies had at least one telephone conference prior to the book closing. In its reply to Newton’s email, RAMAM offered its own valuation of the On the Beach IPO, to which Newton responded with its own view of RAMAM’s valuation.
Market Tech placing. In the morning on the day of the book closing, Mr. Stephany of Newton telephoned Hargreave Hale and RAMAM separately to discuss the valuation of Market Tech. During these calls, Mr. Stephany disclosed to his counterparts at Hargreave Hale and RAMAM the amount of shares he intended to buy, and at what price. Mr. Stephany also attempted to persuade his counterparts to submit their own orders at the same low price as Newton’s. Hargreave Hale had already submitted its bid in the Market Tech placing prior to its conversation with Newton, and did not change its submission subsequent to the phone call. RAMAM submitted its bid at the same price as Newton’s shortly after its call with Mr. Stephany.
The fact that the disclosures took place on the day the respective book was due to close rendered the information exchanged among the asset management firms even more “strategic”. Generally, the shorter the time period between the disclosure of information on a bid and the time the book closes, the less likely the disclosing firm will change its bid or depart from its stated intention. Hence, as the deadline for bid submission approaches, uncertainty as to the discloser’s intention regarding the IPO or placing is likely substantially reduced. Thus, the recipient can also place greater reliance on the disclosed information.
Why is the exchange of “strategic information” anti-competitive?
In a properly functioning competitive market, every bid submitted by an asset manager should be independent of the “strategic information” of rival asset managers. Sharing of “strategic information” can distort and restrict competition because it reduces the parties’ decision making independence by lowering their incentives to compete. As rival asset managers compete less vigorously during book building, each asset manager may end up submitting a lower bid than he might have otherwise. As a result, the issuing company may achieve a lower strike price than it would have in the absence of “strategic information” sharing among competing asset managers, which in turn leads to an increase in the cost of capital for the issuing firm. The higher capital cost raises the cost of the related investments that the issuing firm plans to undertake. In some cases, some investments may become non-viable because of higher capital costs.
Further, the anti-competitive conduct among asset managers, which leads to lower bid prices and hence higher capital costs, could reduce the attractiveness of IPOs and placings as a means of raising capital for firms, thus distorting the efficient allocation of capital. It can also undermine the credibility of the book building process as a means of raising capital for companies.
How should (and shouldn’t) an asset manager respond to the disclosure of “strategic information” by a competitor?
Hargreave Hale and RAMAM were two of 12 asset management firms who received the same email from Newton which contained “strategic information” on the On the Beach IPO on the day of the book closing. Only Hargreave Hale and RAMAM (as well as Newton) were implicated. The reactions of three of the remaining ten recipients of the Newton email (who were not implicated in this matter) illustrate how “well advised” firms should react when they receive “strategic information” from a competitor:
- Old Mutual Global Investors (UK) Ltd. (Old Mutual) attempted to block the discloser’s email address in order to avoid any future contact; the problematic email from Newton was forwarded internally to Old Mutual’s Head of Compliance.
- BlackRock Investment Management (UK) Ltd. (BlackRock) emailed the discloser at Newton (Mr. Stephany) to explain that his emails were not in line with BlackRock’s protocol.
- Henderson Volantis (Henderson) withdrew from participating in the On the Beach IPO.
The FCA’s decision also highlights what an asset manager should not do when he finds himself on the receiving end of “strategic information” from a competitor – thanking the discloser for the information, continuing the discussion with the discloser (and therefore endorsing or encouraging the disclosure), agreeing to consider the information, or providing information to the discloser in return. Competition law enforcers may consider such responses to the disclosure of “strategic information” by a competitor as evidence of the recipient’s participation in an anti-competitive “concerted practice” in violation of the competition law.
Notably, by not proactively rejecting the “strategic information”, the recipient may also be deemed to have “accepted” the information from the discloser, and thus be considered a party to a “concerted practice” and be found in violation of the competition law. According to the FCA decision, evidence of the recipient not distancing itself from the “strategic information”, not rejecting the information, or not reporting its receipt to regulators or internal compliance officers can all be indicative of the recipient’s acceptance of the information.
Why is this FCA decision relevant to asset managers in Hong Kong?
Since the Hong Kong Competition Ordinance came into full effect in December 2015, the Hong Kong Competition Commission (HKCC) has launched over a hundred investigations of allegedly anti-competitive conduct committed by businesses and individuals in a wide range of industries. Among the conduct that the HKCC focuses on is the sharing of commercially sensitive information between competitors, which the HKCC considers highly problematic under the Competition Ordinance. Hence, asset managers should be vigilant in their interactions with their competitors. Specifically, the exchanges of “strategic information” among competing asset managers during book building, which the FCA found to be in breach of the competition laws in the UK, may also run afoul of the Competition Ordinance if committed in Hong Kong.