The Canadian government is currently facing an unhealthy situation that is having a major impact on the state of competition in rail transport: TCI Management (TCI), a British hedge fund that holds significant stakes in the capital of CN and CP, has acted to impede competition between the two railroads.
TCI then increased its stake in CN’s shareholding in order to reorient its business strategy.
The saga in which CN is embroiled is a relatively new and unresolved challenge to Canadian competition policy. The issue becomes particularly acute because of the overlap in ownership and behavior of TCI, an activist fund, in Canada’s only two national railways. Numerous empirical studies demonstrate that common ownership of shares by passive institutional investors in concentrated markets leads to higher prices, reduced supply, and lower product and service quality.
In May 2021, in the midst of the Kansas City Southern Railroad acquisition process, TCI, CP’s largest shareholder, stepped in to urge CN, in private and in public statements, to “cease and desist.” and to refrain from intervening in any regulatory proceedings related to CP’s offer. Then, on September 13, 2021, TCI announced that it had increased its stake in CN to 5% of the outstanding shares in order to exercise the right to call a special meeting of shareholders under the Canada Business Corporations Acts, and that he launched a proxy contest with CN to elect new directors and appoint a new CEO appointed by TCI.
The Canada Competition Act is based on the premise that competitive markets are much more efficient in providing more products and services and more innovation, at the best price, which benefits not only Canadians, but also the whole of Canada. economy.
Although transactions that could significantly lessen competition are prohibited, the application of the law in situations involving minority interests is less obvious.
The fact remains that the merger provisions in the law can and should be used to deal with anti-competitive behavior, as is the case here.
In a major article published in 2018, researchers showed that the higher the proportion of shares held by institutional funds in the airline industry, the less competition and the higher the fares. Subsequent empirical studies in other industries came to the same conclusions. If joint ownership of competing companies by passive investors has such negative consequences, what can you expect from an activist fund that has a significant stake in CN and CP and whose primary mission is to generate high returns for its investors? You don’t have to look far to find an answer. Applying U.S. antitrust law, the Federal Trade Commission describes six types of conduct – virtually all of which apply to TCI’s campaign against CN, including the nomination of board candidates – that take it out of the field. passive investment to enter an active mode, resulting in de facto regulatory intervention.
If TCI is successful in getting its candidates elected to CN’s board of directors, it will be in a position to exercise considerable influence over the management of the railway.
Given the overlap of its investments, TCI has no interest in supporting a strategy of market share growth since the gains of one company would be largely to the detriment of the other.
Despite TCI’s claims about CN’s competitiveness, the fund is determined to increase margins because it says “CN has a pricing problem.” The two management teams will therefore be required to pursue strategies focused on increasing prices and reducing investments in order to increase short-term profitability. Evidence shows that the objectives of a company depend on its owners and that, even in the absence of coordination mechanisms, management – on its own initiative – aligns its conduct with what it considers to be the best interests of the company. most influential shareholder. The most likely outcome is that TCI’s influence over the two companies will serve to advance the interests not of CN at the expense of CP, but those of both companies at the expense of shippers and the public, rail safety, system reliability and resiliency.
The stakes of this imbroglio are important because they concern a pillar of the Canadian economic infrastructure. There is no valid reason why this saga involving CN and CP should not be the subject of an antitrust review by Canadian authorities.