DECEMBER 23, 2021
Smoke rises from a derailed Canadian Pacific Railway train near Guernsey, Sask, on February 6, 2020. TCI is the largest shareholder in Canadian Pacific Railway Limited.
Matt Smith / The Canadian Press
Pierre Lorty is a Senior Business Consultant at Denton Canada LLP.
The Government of Canada is facing a very unhealthy situation in which a foreign hedge fund holding significant equity positions in both CN and CP engaged in anti-competitive behavior affecting Canadian Railways and then In an effort to revamp the board, it has increased its stake in CN. And redirect your business strategy.
The stakes are high.
The saga in which the Canadian National Railway Company is embroiled involves a relatively new and unresolved competition policy challenge. The issue has been brought to the fore by the overlapping share ownership and conduct of TCI Fund Management Limited, an active investor in Canada’s only two national railways. A growing body of empirical work indicates that, even when possessed by passive institutional investors, common stock ownership in concentrated markets more often leads to higher prices, lower market output, and lower product and service quality than would otherwise be the case.
Pierre Lorty is a Senior Business Consultant at Denton Canada LLP.
The Government of Canada is facing a very unhealthy situation in which a foreign hedge fund holding significant equity positions in both CN and CP engaged in anti-competitive behavior affecting Canadian Railways and then In an effort to revamp the board, it has increased its stake in CN. And redirect your business strategy.
The stakes are high.
The saga in which the Canadian National Railway Company is embroiled involves a relatively new and unresolved competition policy challenge. The issue has been brought to the fore by the overlapping share ownership and conduct of TCI Fund Management Limited, an active investor in Canada’s only two national railways. A growing body of empirical work indicates that, even when possessed by passive institutional investors, common stock ownership in concentrated markets more often leads to higher prices, lower market output, and lower product and service quality than would otherwise be the case.
Will happen.
TCI is the largest shareholder in Canadian Pacific Railway Limited, and in the midst of the bidding process to acquire the Kansas City Southern Railway, TCI attempted to block CN’s bid and from interfering in regulatory proceedings related to CP’s proposal from the company. urged to escape. , In September, TCI announced that it had increased its stake in its outstanding shares in CN to 5 percent in order to gain the right to convene a special meeting of shareholders under the Canada Business Corporation Act. It also said that it was starting a proxy battle with CN over the election of a slate of directors and the appointment of a new chief executive officer to be nominated by TCI.
The basic premise of Canada’s Competition Act is that competitive markets offer lower prices, better product quality, and the greatest opportunities for business innovation, which benefit not only individuals, but the economy as a whole. While transactions that may substantially reduce competition are prohibited, law enforcement is less straightforward in minority-owned situations. However, the merger provisions of the Act should be explicitly used to deal with such anti-competitive behaviour.
In a seminal 2018 paper, researchers found that the higher the concentration of common ownership by institutional funds in the airline industry, the lower the competition, and the higher the fares. Subsequent empirical studies in the United States and other industries in Western Europe reached the same conclusion. The point is, if common ownership of competing firms by passive investors has anti-competitive consequences, what should be expected of an activist hedge fund, which, given the high management fees, tends to compensate its investors on a risk-adjusted basis. should generate sufficiently high returns. do they charge? We don’t have to look very far for answers. In applying the US antitrust law, the Federal Trade Commission describes six types of conduct—all of which apply to TCI’s campaign against CN, including nominating candidates for election to the board—that it deactivates. Moves out of the realm of investment a more proactive mode which would guarantee regulatory intervention.
If TCI gets its nominees elected to the board of CN, it will be in a position to have a significant impact on the management of the company. Since TCI’s interests in CP and CN overlap, there is no reason for them to be pro-growth, as the increase in the growth rate of one company will be largely at the expense of the other.
Despite TCI’s remarks in a statement that CN should be “the fastest growing railroad in the industry”, TCI remains focused on increasing margins. In TCI’s view, “CN has a pricing problem.” In these circumstances, both the management teams of railways may be motivated to pursue anti-competitive and self-service strategies, whereby we can achieve high level of profitability to increase profitability in the short term without jeopardizing each other’s market position. Can expect prices and low investment. One possible consequence is that TCI’s influence on both companies may be positioned to advance the interests, not of one railway over the other, but at the expense of both shippers, rail safety, resilience, and the public.
Officers should not be swayed by the argument that directors are bound by their fiduciary duty to all stakeholders. There is, of course, no reason to expect TCI-nominated directors to engage in serious work. However, many studies show that the behavior and objectives of a company are dependent on its owners and that even in the absence of a coordinated mechanism with common shareholders, management may, on its own initiative, pre-empt its conduct. Formally aligns with what it considers to be the most influential shareholder’s interest.
There is no valid reason why the turmoil should not be subject to an antitrust investigation by Canadian authorities because of short-term financial objectives affecting a significant piece of Canada’s infrastructure.
TCI is the largest shareholder in Canadian Pacific Railway Limited, and in the midst of the bidding process to acquire the Kansas City Southern Railway, TCI attempted to block CN’s bid and from interfering in regulatory proceedings related to CP’s proposal from the company. urged to escape. , In September, TCI announced that it had increased its stake in its outstanding shares in CN to 5 percent in order to gain the right to convene a special meeting of shareholders under the Canada Business Corporation Act. It also said that it was starting a proxy battle with CN over the election of a slate of directors and the appointment of a new chief executive officer to be nominated by TCI.
The basic premise of Canada’s Competition Act is that competitive markets offer lower prices, better product quality, and the greatest opportunities for business innovation, which benefit not only individuals, but the economy as a whole. While transactions that may substantially reduce competition are prohibited, law enforcement is less straightforward in minority-owned situations. However, the merger provisions of the Act should be explicitly used to deal with such anti-competitive behaviour.
In a seminal 2018 paper, researchers found that the higher the concentration of common ownership by institutional funds in the airline industry, the lower the competition, and the higher the fares. Subsequent empirical studies in the United States and other industries in Western Europe reached the same conclusion. The point is, if common ownership of competing firms by passive investors has anti-competitive consequences, what should be expected of an activist hedge fund, which, given the high management fees, tends to compensate its investors on a risk-adjusted basis. should generate sufficiently high returns. do they charge? We don’t have to look very far for answers. In applying the US antitrust law, the Federal Trade Commission describes six types of conduct—all of which apply to TCI’s campaign against CN, including nominating candidates for election to the board—that it deactivates. Moves out of the realm of investment a more proactive mode which would guarantee regulatory intervention.
If TCI gets its nominees elected to the board of CN, it will be in a position to have a significant impact on the management of the company. Since TCI’s interests in CP and CN overlap, there is no reason for them to be pro-growth, as the increase in the growth rate of one company will be largely at the expense of the other.
Despite TCI’s remarks in a statement that CN should be “the fastest growing railroad in the industry”, TCI remains focused on increasing margins. In TCI’s view, “CN has a pricing problem.” In these circumstances, both the management teams of railways may be motivated to pursue anti-competitive and self-service strategies, whereby we can achieve high level of profitability to increase profitability in the short term without jeopardizing each other’s market position. Can expect prices and low investment. One possible consequence is that TCI’s influence on both companies may be positioned to advance the interests, not of one railway over the other, but at the expense of both shippers, rail safety, resilience, and the public.
Officers should not be swayed by the argument that directors are bound by their fiduciary duty to all stakeholders. There is, of course, no reason to expect TCI-nominated directors to engage in serious work. However, many studies show that the behavior and objectives of a company are dependent on its owners and that even in the absence of a coordinated mechanism with common shareholders, management may, on its own initiative, pre-empt its conduct. Formally aligns with what it considers to be the most influential shareholder’s interest.
There is no valid reason why the turmoil should not be subject to an antitrust investigation by Canadian authorities because of short-term financial objectives affecting a significant piece of Canada’s infrastructure.
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