Select Committee on Treasury Written Evidence


Supplementary memorandum submitted by T&G

THE RISKS TO WORKERS OF PRIVATE EQUITY

THE ABSENCE OF ADEQUATE LEGAL PROTECTION

EXECUTIVE SUMMARY

  The prospect of a highly leveraged take-over of a company, by private equity or otherwise, carries significant risks for the workforce. There is at present no adequate legal protection available to the workforce.

  Trade union representatives of the workforce should be informed, have the time to prepare their position, given the opportunity to make their views known, and engage in fruitful consultation and negotiation. As is the case under TUPE, the existing terms and conditions of the workforce should be guaranteed after any take-over by private equity. However, the specific risks to the workforce posed by the special financing arrangements of private equity take-overs (and other highly levered takeovers) create the need for special protection. A mechanism must do two things.

(i)   require information and consultation before any decision is taken

  First, ensure that the trade union representatives of the workforce are fully informed and consulted before any decision is made by the company's management/owners. Legislation should spell out in specific detail what is required by way of the process of information and consultation. This process must be completed before any decision is made regarding the proposed take-over, and this is a matter of negotiation with a view to reaching an agreement. The Trans-national Information and Consultation of Employees Regulations 1999 and the Information and Consultation of Employees Regulations 2004 should be amended to enable trade unions to seek court injunctions ordering the company's management/owners not to take any action until the process is completed, and establishing a presumption that such an order should be issued.

 (ii)   guarantee maintaining terms and conditions of employment

  Secondly, the normal time horizon of private equity firms is a period of c. five years before selling on. Protection should take the form of a legislative provision that in the event of a substantial increase in the leverage of a company associated with the takeover of a company, there should be a guarantee that the existing contractual terms and conditions of employment of the workforce will be maintained, with increases in line with the RPI, for at least five years. Present legislation on insolvency should be amended to cover companies taken over by private equity so that special guarantee institutions financed by contributions from private equity firms are established to provide the necessary financial guarantees. The private equity financed fund should, in the event of job losses, guarantee redundancy terms above the statutory minimum to the greater of one year's earnings or contractual redundancy pay.

THE RISKS TO WORKERS OF PRIVATE EQUITY

  1.  The ability of private equity to take over companies is a function of their capacity to mobilise large amounts of debt financing, loading the company taken over with a heavy debt burden. One consequence of sustaining repayment of this debt burden is that the resources available to the company to maintain existing terms and conditions of employment, and often employment itself, are much reduced. This can, and often does lead to both changes in the form of lower contractual terms of employment, and loss of jobs through compulsory redundancies.

  2.  The prospect of a highly levered take-over of a company, by private equity or otherwise, therefore, carries significant risks for the workforce. There is at present no adequate legal protection available to the workforce in case of a take-over by private equity.

THE ABSENCE OF LEGAL PROTECTION

  3.  Normally, workers are protected where there is a take-over through transfer of an undertaking from one employer to another. In such a case, TUPE:[121]

    (i)  requires information and consultation of the employees' representatives,

    (ii)  guarantees that the terms and conditions of employment will be automatically continued by the new (transferee) employer, and

    (iii)  provides that normally any dismissals due solely to the transfer will be unfair.

  4.  However, none of this protection is available in cases of take-overs by private equity. This is because the legal form of the take-over is a transfer of shares from the company's existing shareholders to the private equity firm. There is no change in the identity of the employer. As the employer remains the company (though with new, private equity shareholders) TUPE does not apply.

  5.  This is the case of all take-overs through transfer of shares, not only those involving private equity. However, for the reasons mentioned (the unusually large debt burden of the company taken over and its consequences for jobs and terms and conditions of employment), the activities of private equity pose significantly and qualitatively greater risks to the workforce.

THE PROTECTION NEEDED

  6.  First, workers need and want to be informed of the potential risks posed to their jobs and their terms and conditions of employment by a private equity take-over or any other highly levered takeover.

  7.  The trade union representatives of the workforce should be informed, have the time to prepare their position regarding a prospective highly levered take-over by private equity, given the opportunity to make their views known to the company before the takeover, and engage in fruitful consultation with the company about any prospective take-over and its consequences for the workforce.[122]

  8.  Secondly, as is the case under TUPE, the existing terms and conditions of the workforce should be guaranteed after any highly levered take-over. However, because of the specific risks to the workforce posed by the special financing arrangements of private equity take-overs and resulting debt burden of the company, there is a need for special protection.

THE MECHANISM OF PROTECTION

  9.  Any mechanism which seeks to provide protection for the workforce must ensure that it is in place before any highly levered take-over. If the mechanism operates after the take-over, it is too late. The company taken over will be loaded with debt and there is little the company can do to alleviate the risk to jobs and terms and conditions when it is financially stretched servicing its enormous new debt burden.

  10.  A mechanism providing adequate protection before any highly levered take-over must do two things.

    (i)  require information and consultation before any decision is taken;

    (ii)  guarantee maintaining terms and conditions of employment.

 (i)   Information and consultation before any decision is taken

  11.  First, ensure that the trade union representatives of the workforce are fully informed and consulted about the highly levered bid before any decision about the take-over is made by the company's management/owners.

  12.  The requirement of information and consultation is a requirement of EC law: the Directives on Collective Dismissals,[123] Transfers of Undertakings,[124] European Works Councils[125] and the Framework Directive on information and consultation.[126]

  13.  The problem lies in the minimal approach adopted by UK governments to their implementation in UK law.

  14.  For example, the fact that take-overs by share purchase are effectively excluded from the scope of the Transfers of Undertakings Directive is not significant on the continent, where most transfers of undertakings involve a change of employer. Only in the UK is the dominant form of transfer through share purchase. Their exclusion is effectively a UK opt-out from the directive. This should be, and can be changed by domestic legislation, which could easily be amended to cover private equity take-overs of companies by share purchase.

  15.  But this would not be enough. There are well-known and specific risks involved in highly levered take-overs of companies by private equity or otherwise.

  16.  There is a known particular lack of transparency where private equity partnerships are involved, given the absence of the normal disclosure requirements imposed on companies, the secrecy surrounding financing arrangements, and the speed with which these transactions are often carried out. There are also known risks, not least to shareholders, as well as employees, that the company's management may be compromised by the prospect of the rewards to them of recommending a private equity bid.

  17.  In these circumstances, it is important that the process of information and consultation of trade union representatives of the workforce prior to any decision by the company's management/ owners in relation to a private equity bid to take over the company be both (i) specific and detailed, and (ii) capable of effective enforcement. To these ends:

    (i)  The UK legislation implementing the information and consultation requirements of the EC directives needs to prescribe specific and detailed processes.

    (ii)  The mechanisms of enforcing these requirements need to ensure that management/owners cannot decide upon, let alone proceed with a highly levered takeover (private equity or otherwise), until the information and consultation process has been satisfactorily completed.

 (ii)   Guaranteed maintenance of terms and conditions of employment

  18.  The risks to companies entailed in private equity take-overs are not confined to workers. Those exposed to these risks have taken steps to protect themselves. Thus institutions providing the finance necessary to support the take-over, primarily banks, usually insist on a premium rate above the normal interest rate. Trustees of the company's pension fund are able to demand guarantees, often in the form of up-front cash payments, to secure the financial commitments of the pension fund to its beneficiaries.[127]

  19.  Workers also need to secure protection for their terms and conditions of employment. In the event of a highly levered take-over by a private equity firm or otherwise, the company's employees require guarantees that their terms and conditions of employment will not be sacrificed to meet the costs imposed by the heavily leveraged debt burden and exorbitant management fees.

  20.  At the moment, these interests of the workers affected are not protected in the event of highly levered take-overs. UK legislation needs to provide this protection.

THE LEGISLATIVE SOLUTION

  21.  The particular risks posed to a company's employees by a private equity take-over (the process: lack of transparency, speed and secrecy, management opportunism; the outcome: threats to terms and conditions of employment) require a legislative response by Parliament.

 (i)   Information and consultation before any decision is taken

  22.  It might seem that one initial, simple and straightforward step towards providing some protection would be to amend TUPE so that its requirements apply when there is a take-over of a company by a private equity firm.

  23.  In fact, as regards information and consultation, even without such an amendment, three pieces of current legislation already require information and consultation of representatives of the workforce in almost all cases of a private equity bid to take over a company.

  24.  First, acceptance of a private equity bid normally entails at least the contemplation that redundancies might ensure. This is the trigger for the information and consultation requirements imposed by the Collective Redundancies Directive 1975. In domestic UK law, the Trade Union and Labour Relations (Consolidation) Act 1992.[128]

  25.  Secondly, where a multinational enterprise is involved, the European Works Councils Directive 1994 (extended to the UK in 1997) requires the company's management to inform and consult the EWC where the private equity bid is likely to have consequences for the terms and conditions of employment of the employees of the enterprise. In domestic UK law, the Transnational Information and Consultation of Employees Regulations 1999.[129]

  26.  Thirdly, where the enterprise concerned employs at least 100 employees (from March 2008, 50 employees will suffice), management/owners' decisions affecting terms and conditions of employment must be the subject of information and consultation with employee representatives under the framework Directive. In domestic UK law, the Information and Consultation of Employees Regulations 2004.[130]

  27.  The problem is

    (i)  lack of detailed specification of the requirements of the information and consultation process,

    (ii)  the timing of such a process: often compliance is too late, notably after the decision is made, and

    (iii)  the lack of effective enforcement mechanisms where the company's management/owners fail to comply with the requirements of the process.

 (i)   Specific and detailed requirements of the process

  28.  Legislation should spell out in specific detail what is required by way of the process of information and consultation of trade union representatives of the workforce before any decision is made by the company's management/owners regarding a highly levered bid, by private equity or otherwise, to take over the company. This would include, for example, the following 10-stage process:

    1.  transmission of information/data regarding the bid, in particular, projections of future employment and terms and conditions of employment,

    2.  examination of the data by the trade union representatives,

    3.  conduct of an expert study on the implications (financial, etc) of the bid for jobs and terms and conditions of employment,

    4.  preparation and specific training of the trade union representatives for consultation on the private equity bid,

    5.  formulation by the trade union representatives of their position, expressed in a formal opinion,

    6.  meeting the company's management/owners to present the trade union representatives' position,

    7.  the company management/owners' reasoned response to the position adopted by the trade union representatives,

8.  a subsequent opportunity for the exchange of views between company management/owners and trade union representatives,

    9.  gradual establishment of a dialogue between company management/owners and trade union representatives working "in a spirit of cooperation and with due regard for their reciprocal rights and obligations, taking into account the interests both of the undertaking or establishment and of the employees",[131]

    10.  "with a view to reaching an agreement on decisions" as to whether or not to proceed with the bid and, if so, on what conditions.

  29.  Lending banks, faced with the risk to their loans in cases of insolvency, have moved to a strategy of active risk management which aims to protect the banks' interests not at the later stage of insolvency, but at an earlier stage. They intervene by requiring regular information disclosure, and, where necessary, putting in active teams to monitor management/owners' decisions in the event of the company encountering financial difficulties.[132] Trade unions should be able to invoke similar procedures to information, monitoring and control rights to protect the interests of their members.[133]

 (ii)   Timing: before any decision is made

  30.  The European Court of Justice in the Junk case[134] laid down two vital principles regarding the legal obligation of employers to inform and consult employees' representatives:

    (i)  the process of information and consultation must be completed before the decision is made;

    (ii)  the process of information and consultation with a view to reaching an agreement is effectively an obligation to negotiate.

  32.  The implications of the Junk decision were recognised in proposals to revise UK Regulations regarding the requirement on employers to notify public authorities of impending redundancies.[135]

  33.  At the minimum, therefore, these two points should be specified in provisions on information and consultation by management/owners faced with a highly levered take-over bid by private equity or otherwise. The process of information and consultation of trade union representatives of the workers must be completed before any decision is made regarding the proposed take-over, and this is a matter of negotiation with a view to reaching an agreement.

 (iii)   Enforcement: injunctions

  34.  Takeovers by private equity are almost invariably accompanied by collective dismissals of workers. At the very least, they are usually accompanied by the prospect of changes in contractual terms and conditions of employment of employees in the company. The ECJ in Case C-188/03, Junk,[136] declared unequivocally that any decision to collectively dismiss workers can only be taken after the completion of the process of information and consultation.

  35.  Take-overs will often involve multinational enterprises. In other EU Member States, European works councils (EWCs) have successfully gone to court, taking legal action to block decisions by multinationals where the enterprise has failed to comply with the requirements of the EWCs directive. Injunctions have been obtained preventing the management/owners taking any decision or action until the procedure of information and consultation has been completed.[137]

  36.  This contrasts with the minimalist approach adopted by the UK transposing directives on information and consultation, which has rendered them ineffective in practice. The maximum penalty for failure by a multinational enterprise to comply with the obligation to inform and consult under the UK legislation implementing the EWCs Directive is a fine of £75,000. The Information and Consultation of Employees Regulations 2004 lay down the same meagre sanction and explicitly exclude the possibility of an order stopping the employer carrying out his decision in violation of his legal obligation.[138]

  37.  A legislative solution to the effective enforcement of the obligation of a company's management/owners to inform and consult before any decision involving a highly levered take-over by private equity or otherwise would be to amend both sets of Regulations to enable trade unions to seek court injunctions ordering the employer not to take any action until the process is completed, and establishing a presumption that such an order should be issued.

(II)  GUARANTEED MAINTENANCE OF TERMS AND CONDITIONS OF EMPLOYMENT

 (i)   A guarantee of contractual terms and conditions of employment

  38.  TUPE guarantees that terms and conditions of employment will be automatically continued by the new (transferee) employer, and provides that normally any dismissals due solely to the transfer will be unfair. The extra risks involved in takeovers by private equity firms make it necessary to provide at least equivalent protection.

  39.  The normal time horizon of private equity firms is that they will manage the company for a period of c. five years before selling it on. Guaranteed maintenance of terms and conditions should be provided for at least five years, wages to increase in line with the RPI. This aims to ensure that the extraordinary profits extracted by private equity should not come at the expense of the terms and conditions of the workforce.

  40.  The protection would take the form of a legislative provision that in the event of a takeover of a company by a private equity firm, there should be a guarantee that the existing contractual terms and conditions of employment of the workforce will be maintained for at least five years.

  41.  Workers also need to secure protection and compensation for any loss of employment as a result of the extra risk entailed by a highly leveraged takeover by private equity or otherwise. In the event of such a takeover the company's employees require guarantees that redundancy terms will not be sacrificed to meet the costs imposed by highly leveraged debt burden, exorbitant management fees and the risk entailed. As compensation the redundancy terms should be raised above the statutory minimum to the greater of one year's earnings or contractual redundancy pay.

 (ii)   A guarantee fund

  42.  Pension fund trustees may seek guarantees as a result of the extra risk entailed by private equity. Banks seek a "premium" interest rate on loans to private equity to cover the extra risk. The burden imposed by the precarious financial structure of private equity take-overs is perceived to increase the risk to pension funds and bank loans.

  43.  Employees run the risk of downward pressures on wages and working conditions to meet the costs imposed by the skewed financial structure of private equity, in particular the heavy leveraged debt burden and exorbitant management fees. Pension fund trustees have sought to protect pension liabilities by demanding full funding requirements as a condition of take-overs.[139]

  44.  Directive 80/987/EEC aimed to protect workers who lose their jobs due to insolvency.[140] The UK legislation implementing this directive could be reinforced to reflect the increased risk to workers resulting from the activities of private equity in restructuring, not least, of eventual insolvency of a once profitable undertaking.

  45.  The present legislation on insolvency could be amended to cover companies taken over by private equity, where there is a risk of insolvency and intervention is required to protect the interests of employees. Either the present guarantee institutions, or better, special guarantee institutions financed by contributions from private equity firms, could be established to provide the necessary financial guarantees.

  46.  Article 4(2) of the 2002 Directive provides that Member States may set ceilings on the payments made by guarantee institutions, but that these ceilings "must not fall below a level which is socially compatible with the social objective of this Directive". The levels currently specified in the UK's Employment Rights Act 1996 (sections 182-184) are low. It could be argued that in cases of insolvency of companies controlled by private equity, the social objective of protecting employee claims may be higher to reflect the greater risk. The guarantee funds set up must be provided with the necessary financial basis to secure the payments specified.

CONCLUSION

  47.  In sum, there are substantial risks to workers in the take-over activities of private equity firms and other highly levered takeovers. There is a complete absence of legal protection, and protection is needed.

  48.  The mechanism of protection proposed is to amend existing legislation:

    (i)  to require information and consultation before any decision is taken by company management/owners regarding highly levered take-over bids by private equity or other firms. Legislation should prescribe detailed specification of the obligatory process of information and consultation, in particular, that the process must be completed before any decision is made, and failure by management/owners to comply with this obligatory process allows for enforcement by way of court injunctions prohibiting any decision being taken;

    (ii)  to guarantee maintenance of contractual terms and conditions of employment for at least five years, wages to increase in line with the RPI;

    (iii)  as compensation for risk redundancy terms should be raised above the statutory minimum to the greater of one year's earnings or contractual redundancy pay;

    (iv)  to establish a guarantee fund financed by contributions from private equity firms to pay the new higher minimum redundancy pay in the event of the firm going into administration.

























121   The Transfer of Undertakings (Protection of Employment) Regulations 2006, SI 2006 No. 246. Back

122   Compare the position of pension fund trustees. As described in the Financial Times, 18 June 2007, p. 17: "ICI pension trustees are insisting on a central role in any takeover talks between the UK chemicals group and Akzo Nobel, the Dutch conglomerate..." A spokesman for ICI's pension trustees said: "We would have expected to have an early and direct conversation with anyone wanting to replace ICI as owner of the company". Back

123   Council Directive 75/129 of 17 February 1975 on the approximation of the laws of the Member States relating to collective dismissals, OJ L 48/29, as amended by Directive 92/56 of 24 June 1992, OJ L 245/92. Now consolidated in Council Directive 98/59/EC of 20 July 1998 on the approximation of the laws of the Member States relating to collective redundancies, OJ L 225/16. Back

124   Council Directive 77/187 of 14 February 1977 on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of businesses, OJ L 61/26, as amended by Directive 98/50/EC of 29 June 1998, OJ L 201/88. Consolidated in Directive 2001/23 of 12 March 2001, OJ L/82/16. Back

125   Council Directive 94/45/EC of 22 September 1994 on the establishment of a European Works Council or a procedure in Community-scale undertakings and Community-scale groups of undertakings for the purposes of informing and consulting employees. OJ L 254/64 of 30.9.94. Council Directive 97/74/EC of 15 December 1997 extending to the United Kingdom Directive 94/45/EC. OJ L 10/22 of 16.1.98. Back

126   Council Directive No. 2002/14 establishing a framework for informing and consulting employees in the European Community. OJ 2002, L80/29. Back

127   As described in the Financial Times, 18 June 2007, p. 17: "[The spokesman for the ICI pension trustees] highlighted the power of the trustees to determine the size of the deficit, which could range from £500 million to £2.2 billion, depending on their view of a bidder's financial strength and their confidence in the bidder's willingness to fund long-term promises to pensioners. .. The scheme's liabilities are more that £9.2 billion, against a market capitalisation of £6.5 billion, according to the company. He said: `If faced with someone who hasn't talked with us, we would have to form a different, harsher view [of the owner]. That would be another factor in determining the size of the deficit'". Back

128   Part IV, Chapter II, ss. 188-198 (Procedure for handling redundancies). Back

129   S.I. 1999, No. 3323. Back

130   S.I. 2004/3426. Back

131   This is the formula mandated by the EC Directives. Back

132   See Vanessa Finch, "Security, Insolvency and Risk: Who Pays the Price?", (1999) 62 Modern Law Review 633-670; and "The Recasting of Insolvency Law", (2005) 68 Modern Law Review 713-736. Back

133   Again, as in the case of the ICI pension fund trustees in the Financial Times, 18 June 2007, p. 17: "We are agnostic about who owns ICI, but not about the strength of the promise. If we perceive the promise [of whoever sponsors the pension scheme] is legally and financially weaker, that would increase the size of the deficit. It would be better to have an up-front conversation". Back

134   Irmtraub Junk c. Wolfgang Kuhnel als Insolvenzverwalter uber das Vermogen der Firma AWO, Case C-188/03, 27 January 2005, paras. 40-45, interpreting Council Directive 75/129 of 17 February 1975 on the approximation of the laws of the Member States relating to collective dismissals, OJ L 48/29, as amended by Directive 92/56 of 24 June 1992, OJ L 245/92. Now consolidated in Council Directive 98/59/EC of 20 July 1998 on the approximation of the laws of the Member States relating to collective redundancies, OJ L 225/16. Back

135   Department of Trade and Industry, Collective Redundancies. Employers' Duty to Notify the Secretary of State. Revised Legal Framework, Consultation Document, March 2006. Back

136   Irmtraub Junk c. Wolfgang Kuhnel als Insolvenzverwalter uber das Vermogen der Firma AWO, Case C-188/03, 27 January 2005. Back

137   There are three recent decisions of national courts in Belgium (British Airways, Cour de Travail de Bruxelles, 6 December 2006) and France (Gaz de France, Tribunal de Grande Instance et Cour d'Appel de Paris, 15 November 2006; Alcatel/Lucent, Tribunal de Grande Instance de Paris, 27 April 2007. Back

138   Regulation 22 specifies that "no order of the [Central Arbitration Committee] under this Regulation shall have the effect of suspending or altering the effect of any act or agreement made by the employer or of preventing or delaying any act or agreement which the employer proposes to do or make". Back

139   For a recent example, see "KKR in deal over Boots pensions", Financial Times, 20 June 2007, p.20: "The KKR-led consortium buying Alliance Boots yesterday reached a last-minute agreement with trustees of the Boots Pension scheme, averting a legal challenge to the scheme of arrangement through which the consortium is to buy the company. The trustees had threatened to use their role as the company's single largest creditor to challenge the corporate re-organisation ... . The trustee has priority status over all other creditors for the first £200 million of the shortfall-estimated at about £1 billion-and will rank alongside senior bank lenders in respect of a further £400 million in the event of default". Back

140   Directive 80/987/EEC on the approximation of the laws of the Member States relating to the protection of employees in the event of the insolvency of their employer, amended in 2002 by Council Directive 2002/74/EC, OJ L 270/10, 23.9.2002. . Back


 
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