Memorandum from Unite the Union
Unite the Union welcomes the Treasury Select
Committee's resumed inquiry and the opportunity to submit evidence.
Unite represents 2 million members employed throughout all sectors
of the economy, including the food and drink industry, manufacturing,
banking and finance, transport, commercial and contract services
as well as the public and voluntary sectors. Unite was formed
by the merger of Amicus the Union and the Transport and General
Workers Union to form the UK's largest trade union.
Unite has previously expressed strong concerns
about the need for legislation and regulation regarding many aspects
of private equity. Unite remains very concerned about levels of
leverage, advantageous tax regimes and the lack of transparency.
Unite welcomes Sir David Walker's recognition that the private
equity industry is too secretive in its dealings and opaque in
its communication with other stakeholders. Unite acknowledges
the clear recommendation from Sir David that this must change.
Unite believes that workers' rights are at the heart of the remedies
required and this is the main focus of this submission.
1.1 Unite believes the private equity business
model increases the risk for employees in terms of job security,
terms and conditions, wage rates and pension provision.
1.2 The private equity model exploits workers
and there is no industrial or legal provision for the protection
of workers employment rights under this business model.
1.3 Unite believes the Walker report has
failed to acknowledge issues around workers rights, high levels
of leverage and unfair taxation. The report also fails to offer
any pragmatic industrial solutions to issues raised in previous
1.4 Unite believes that the remit asking
for Sir David Walker to supply a set of voluntary guidelines is
disingenuous, in that the report precludes any consideration of
mandatory guidelines for the sector.
1.5 Unite would recommend a strengthening
of the existing information and consultation regulations to accommodate
the private equity business model. In doing so Unite believes
this could go some way to mitigating some of the worst excesses
of bad employment practices currently in operation in the sector.
1.6 Unite believes a voluntary Code of Conduct,
monitored by the BVCA is unacceptable. Experience has shown that
selfregulation does not work.
1.7 Unite believes that private equity companies
should be subject to the same legal requirement for disclosure
and transparency as public listed companies.
1.8 Unite is concerned to see that the Walker
report undermines the proposal for a facility to provide comprehensive
industry wide data on the private equity sector. Workers deserve
the right to know what is happening to the company they work for
and how the decision making process will affect them.
1.9 Unite believes there needs to be a review
of the existing TUPE provision which currently does not include
protecting the rights of those workers transferred through share
purchase, including the right to request an injunction for non-compliance.
1.10 Unite would argue most strongly for
a legal requirement for any pension provision or benefits to be
protected and ringfenced when a private equity group is
looking at buying a company out.
1.11 Unite believes there is a significant
argument in favour of supporting the introduction of a government
levy on private equity profits to establish and finance a special
fund to provide enhanced redundancy payments if a company bought
out by a private equity group goes into liquidation or administration.
1.12 Unite would like to see the Danish
model of taxation reviewed by government to see whether it would
work in the UK economy.
1.13 Unite believes that the present advantageous
tax regime for private equity companies and partners is wrong.
This is a clear case of discrimination. Private equity partners
should be subject to the same 40% personal taxation rate as other
2. PRIVATE EQUITY
2.1 Private equity increases risk for workers.
Unite's belief on the need for worker rights is predicated on
the clear, uncontested fact that the private equity business model
based, as it is, on a high degree of leverage, increases the risk
for employees in terms of firstly, keeping their jobs and secondly,
being detrimental to their wages, benefits especially pensions
and other terms and conditions. Unite believes workers are being
systematically exploited by the private equity business model
and, at present, have absolutely no form of legal redress. Private
equity does not share the benefits of its financial success with
the workforce in terms of improved pay and conditions. A negative
change in the risk of a business makes stakeholders worse off;
an increased risk of default of a business makes workers worse
3. THE WALKER
3.1 Having recognised that increased leverage
increases risk for employees and private equity's implicit contractual
obligations over and above its explicit contractual obligations
the Walker report fails to prescribe solutions. The Walker report
is narrow in scope ignoring worker's rights, leverage and tax.
It considers only a very limited part of transparency, effectively
ignoring the most important transparency for workers namely the
right to be informed and consulted on the finance and business
plan prior to acquisition/substantial share purchase resulting
in a change of control. The value attribution proposal is weaker
than in the consultation. The voluntary proposals for implementing
even the inadequate recommendations are ineffective. The report
also includes spurious assertions such as private equity is a
force for good.
3.2 The Code of Conduct ignores the key
issue for workersworkers rights and we elaborate on these
in the section below. The notion that compliance with a Code should
be voluntary, monitored by BVCA is unacceptable. The proposal
for voluntary self regulation by the industry is inappropriate.
It cannot work. The report fails to explain how self regulation
in the Cayman Islands would work. With a track record for making
claims about the private equity industry in relation to creating
jobs which have been proven to be "worthless",
regulation of the standard of reporting by the industry is a must.
Unite suggests that the government investigates further the merits
of regulation equivalent to that of the Securities and Exchange
Commission who scrutinise prior to publication. The Walker report
undermines the proposal for a respected capability for providing
comprehensive industry wide data on the private equity industry
by making the spurious assertion that private equity is a force
for good, yet then acknowledges that there is inadequate information
available about the industry.
3.3 The Walker proposals fall far short
of the necessary disclosure and transparency requirements. The
level and type of disclosure for workers in private equity owned
businesses should be strengthened by regulation. Workers should
not be kept in the dark. Workers need to know what the future
might hold for them and that their jobs, wages and conditions
and pensions are safe.
3.4 The report focuses on financial reporting
and a narrow view of transparency, stressing communication about
company values and "covering attentiveness to interests of
employees and communications". This reflects the unsubstantiated
claim on which the report is predicated, namely that private equity
is a force for good in the economy. There is no evidence that
this claim is true. What is true is that available data shows
that workers do not benefit under private equity ownership. Existing
research shows that private equity reduces wages
and completely ignores the evidence that workers do not benefit
from private equity ownership.
3.5 Transparency alone will not meet employees'
needs. Taking on debt is a risk to workers in terms of jobs, wages
and conditions so workers should have the automatic right for
protection and compensation for this risk.
4. WORKERS RIGHTS
4.1 Just as the banks and pension funds
can secure their interests in leveraged buyouts so too should
workers. In private equity transactions, banks are able to charge
risk adjusted rates of interest; pension trustees exercise the
right to demand greater up-front funding to compensate for added
risk. Regulation should ensure that workers are similarly consulted,
protected and compensated. There should not be two standards of
protection and compensation in the economy.
4.2 Workers need rights prior to buyout.
Workers and their representatives deserve the right to be both
informed and consulted on the finance and business plan of any
takeover/significant stake prior to acquisition/significant share
ownership so that workers' pay and conditions are safeguarded
and they are compensated regarding the additional risk. Pre-acquisition
(any acquisition)/significant share purchase TUPE rights should
apply. The Transfer of Undertakings (Protection of Employment
Regulations) should be amended to cover transfer through share
purchase, including the right to an injunction for non compliance.
Unite believes the case for an amendment of TUPE has been greatly
strengthened by the decision in Millam.
The Court of Appeal has highlighted how share sales may lead to
changes of control of a business, with consequences for employees,
justifying extending to them the same protection available on
transfer of an undertaking.
4.3 The repeated claims of private equity
taking over companies, of their intention to exercise close control
reinforces the case for regarding share sales to private equity
as falling within the scope of TUPE as defined in Millam. Private
equity openly declares its mission to exercise control and vaunts
this as a positive advantage. With this should come responsibility
towards employees, legally enshrined in TUPE.
4.4 The rule that transfers through share
sales do not fall within TUPE was established by the Employment
Appeal Tribunal in Brookes v Borough Care Services. A recent Court
of Appeal decision in Richard Millam v The Print Factory (London)
1991 Ltd, while upholding the rule in Brookes, states that a change
in legal control as a matter of law by way of share sales of itself
may not suffice to constitute a transfer within TUPE. The implication
is that a change in control as a matter of fact, apart from the
share sale, may be a transfer within TUPE.
4.5 The absence of a change in legal control
(no new employer in law) is not conclusive where there is a change
in control in fact of the business. Lord Justice Buxton concluded:
"The legal structure is of course important, but it cannot
be conclusive in deciding the issue of whether, within that legal
structure, control of the business has been transferred as a matter
of fact". The Court of Appeal's emphasis in Millam is on
the question of fact: not legal control, but control in fact.
A finding that there is no transfer, based on the sole fact of
a share sale, is inconsistent with this approach. Thus TUPE should
4.6 TUPE rights need to embody the presumption
that a substantial increase in debt as a consequence of a takeover
or change in control is a detrimental change to workers terms
and conditions. This gives workers the right to demand and receive
compensation for the risk to which they are being exposed.
4.7 Through their trade unions, workers
should have the right to seek fair compensation and protection
should substantially greater levels of leverage be part of a private
equity (or any other) takeover Being consulted over any business
financial plan is crucial because of the risk to workers. A buyout
may mean management would want to change the financial structure
of the firm from a ratio of 80:20 equity and debt to 10:90 equity
and debt. It might be said that this is unacceptable but reluctantly
accept more debt, providing guarantees are given.
4.8 Rights should thus include the right
to be at the negotiating table choosing the preferred buyer, to
secure the future for workplaces and plants, seek guarantees regarding
suppliers and jobs, five year guarantees for wages and terms and
conditions especially pensions. Finally, the government should
enforce a levy on private equity to establish and finance a special
fund for enhanced redundancy payments in case of administration.
4.9 It is clear that the global economic
outlook has now worsened significantly. Unite remains concerned
that this will magnify the negative impact on jobs and pay as
a result of private equity buyouts. Private equity funds may well
keep and manage a portfolio company for longer and this will intensify
attempts to increase profits and cut costs rather than relying
on realising cash from IPO's or secondary buyouts. Our concern
is that this will result in more pressure on jobs, more capping
or closure of pension funds, reduction in wages, investment, R&D
and training, increased pressure on collective bargaining (including
using USA anti trade union approaches); pressure on health and
safety, as well as growing consumer safety problems.
4.10 A recent report
showed the ratio of companies' interest payments to operating
surplus is at its highest for 15 years. This is at the peak of
an economic cycle which is potentially about to enter a downturn.
Debt should be at a minimum as the industry has been through the
good times. Our earlier submission pointed out private equity
buyouts had taken place in the context of an unprecedented stable
economic environment. The credit crunch and the risks of less
favourable economic circumstances means that if profitability
declines many companies will find themselves with unattainable
levels of debt and this could increase the risk of wage freezes,
wage cuts and benefit reductions, with further risk of job loss
and increases in administration.
4.11 Many employees work for firms already
under private equity ownership or control. Through their trade
unions they should have the right to be consulted regarding new
high leverage to fund dividend recapitalisations on the financial
and business plan. Because the risk of private equity/highly leveraged
ownership has only relatively recently been acknowledged, there
are many employees currently working in businesses where no compensation
or guarantees have been secured.
4.12 Workers should have the right to know
how much the private equity partners are paid. If private equity
ownership means value and wealth are being created, workers should
have the right to know how it is being shared out and if that
is fair. Details of management bonus schemes and the basis thereof
(ie its basis in value creation or simply cost cutting such as
job and plant cuts) should also be available. Workers should also
have the right to know who are the ultimate owners (equivalent
to shareholders in a public company) of the firm that they work
5. THE IMPLICATIONS
5.1 Pension Funds in a company bought out
by private equity has protections and compensations for the additional
risk of leveraged buyouts which Unite believes should similarly
apply to workers. However, despite these, there are many pension
funds in firms bought out by private equity which have not had
compensatory payments because awareness about the additional risk
is a relatively recent development.
5.2 Up until a few years ago, private equity
avoided buying companies with a material final salary pension
scheme. The risks involved in operating such a scheme ie, small
changes in interest rates, stock market returns, mortality, could
add meaningfully to the size of a pension deficit. While publicly
held firms who could take a long term view and ride out any short
term volatility could deal with this, it was anathema to private
equity firms who bought companies with the intention of selling
them on again in the short term. Firstly, any negative change
in the net deficit position of a company's pension fund would
directly impact what the private equity firm would obtain upon
resale. Secondly, an increase in the pension fund deficit could
also require the company to make greater contributions to the
scheme, adversely affecting the cash flow so important to private
equity firms and, in the worst case, requiring the private equity
partners to inject additional funds into the company which adversely
affects the IRR (internal rate of return) so important to private
firms. For these reasons, up until a few years ago, having a sizeable
final salary scheme was effectively a "poison pill"
for companies against private equity firms.
5.3 However, as the size of the private
equity funds grew and easy financing became readily available,
it became more and more difficult for private equity firms to
avoid companies who had final salary pension schemes. Thus, in
the last several years, private equity firms have started taking
over companies with material final salary schemes. Due to the
duties placed on pension fund trustees in the 2006 Pension Act,
private equity companies have to negotiate with pension trustees
prior to any takeover. The trustees now have the power to demand
quicker repayment of any scheme deficit should the company's risk
profile change. The risk profile inevitably changes because the
private equity firm intends to load the company up with substantially
greater debt than before.
5.4 However, the trustees only have a duty
to protect benefits already accrued (ie for pensionable service
rendered up to the date of takeover) and generally have no power
to protect future pension benefit levels. As a consequence, Unite
is concerned that companies taken over by private equity firms
have closed their schemes to new entrants almost as a matter of
course and many are going further, closing the schemes to existing
employees. In their place, Unite is concerned that the private
equity firms are instituting inferior money purchase schemes which
transfers all the investment and mortality risk to employees and
into which the private equity owned firms contribute substantially
less money for their employees' retirement in the first place.
Thus, in recent years, private equity firms have become a major
agent in destroying the final salary pension arrangements which
have provided a decent retirement for so many workers in Britain.
Unite believes that the government should commission independent
research on the impact of private equity on occupational pension
5.5 Because the pension trustees have no
power to protect future benefit entitlements, it is essential
that workers and their representatives have a power, similar to
pension trustees, to sit down with private equity firms prior
to takeover, and secure commitments from the private equity firms
as to what will happen to their pensions (and all other terms
and conditions) post acquisition. It is this right and the recognition
that the extra debt by itself is a detriment to workers terms
and conditions that Unite believes is necessary for workers to
have in order to level the playing field with private equity firms.
This can only be achieved by changing the law.
5.6 Unite would like to make two comments
specifically about pension fund investments in private equity
funds. Firstly, given the cartel like nature of the private equity
industry, with no competition amongst GPs for the fees charged
to pension funds Unite urges that fees charged by the GPs are
investigated by the Competition Commission. Even though some of
the private equity funds have increased in size, we understand
that fees have remained the same even though costs have not increased
in line with the size of the Fund.
5.7 Secondly, the statement that returns
are higher than equity markets is not proven. Indeed evidence
shows that claims about private equity funds performance has been
overstated as a result of biased samples and misleading valuations.
In a rising market private equity returns ought to be higher than
equity returns because there is less equity. Even that is not
proven due to the extraction of value by the GPs fees. Moreover
in a rising market private equity would be expected to do better
than equity. What is yet to be tested is if private equity returns
performance over a full economic cycle is higher than equity markets
over an economic cycle. This is what we are about to see. Moreover
as stated above Unite is concerned that high leverage in less
favorable financial circumstances will lead to additional pressure
for returns which will be met by value extraction from workers
in terms of jobs, pay, less investment rather than value creation.
6.1 Even within the Walker report's narrow
consideration of transparency, the benchmark used for comparison
with the private equity industry is wrong. Transparency is at
the core of the pact between business and society, and significant
progress has been made on the accountability of public companies.
The appropriate transparency benchmark should be the same transparency
requirement on public companies not with the current standard
of zero requirements for transparency from the private equity
firm itself. There should not be two standards of transparency.
Private equity should have the same obligations to disclose as
if it were a public company.
6.2 The private equity firms (the partnerships)
should also have to disclose the same information as if they were
a public company. This would mean that they should have to disclose
the remuneration of general partners (just as directors pay is
disclosed in a public company). They would also have to disclose
significant shareholders and the size of their investments. There
should be a register of limited partners shareholders available
(just as shareholders in a public company are). Finally, the private
equity firm should produce group accounts of their holdings just
as a public company would. This obligation should apply to all
private companies including sovereign wealth funds.
7.1 Private equity deals are structured
so that they reduce or eliminate the payment of tax. For reasons
of public acceptability and accountability as well as revenue
protection private equity should be fully taxed.
7.2 In relation to the tax treatment of
debt and equity, tax relief on interest on debt should be abolished.
In Denmark, the tax relief on interest payments has been eliminated
with offsets elsewhere. Unite believes this model is worthy of
consideration. The tax relief on interest on debt means that the
portfolio firms acquired by private equity pay much reduced corporation
tax. There is no reason why debt should be given more favourable
treatment over equity; this is particularly so when debt is used
for buyout purposes, and to fund dividend recapitalisation. Tax
relief on interest on debt is an anomaly in Capital Markets theory
(CMT). A purist approach to CMT would say there should be no difference
between the treatment of debt and equity.
7.3 Arguably debt should be given less favourable
tax treatment than equity given that leverage increases the financial
risk of the firm and risk of default, shifting risk on to other
stakeholders particularly workers, in terms of redundancy, erosion
of pay and conditions including pensions. Leveraged buy-outs put
new, additional financial costs and demands on the portfolio company
and sources of finance have to be found to meet them. Unite is
concerned that debt for acquisition and dividend recapitalisations
also means less money for investment in fixed assets and training.
Moreover highly leveraged buy-outs put pressure on public companies
with a more traditional financial structure. In order to avoid
being taken over, these firms close or sell off productive operations
rather than invest and issue dividends or buy back shares. The
knock on effect of debt may well squeeze investment and long term
planning across the economy. This is hardly something that should
be encouraged by tax relief.
7.4 Equity investors contributing part of
their capital as shareholder debt can exacerbate the issue of
tax reduction and should be addressed.
7.5 Unite agrees with Nick Ferguson that
it is wrong that private equity executives pay less tax than their
cleaner. Given that employees on a modest income bear marginal
tax rates, including social security taxes, private equity partners
should be taxed at the full 40% income tax rate.
7.6 The recent change to capital gains tax
is a move in the right direction. It is important that taper relief
on carried interest be withdrawn, as the government is proposing.
Dealing with tax loopholes, which either deprive the public purse
or means higher taxes on those citizens who cannot avoid tax,
is necessary but far from sufficient in relation to capital gains
or in relation to the whole set of tax issues which are pertinent
to private equity. It is the actual rate of tax that matters not
the increasewhich is why Unite believes that the 18% capital
gains tax rate for private equity partners is insufficient and
to address the discrimination against other tax payers, private
equity partners should pay the full 40% income tax rate.
8. PRIVATE EQUITY
8.1 Private equity leveraged buyouts puts
huge pressure on other companies who wish to avoid being taken
over, this pressure can result in aversion tactics that can include
increasing debt, spending money on share buy backs or issuing
dividends and focussing on short term cash flow all to the detriment
of jobs, pay, productive capacity and investment in training and
staff development. Thus, private equity may well be reducing not
only investment of companies they own but of the entire UK economy.
8.2 The Walker report also asserts that
public companies may be under borrowing rather than agree that
the level of leverage in private equity is high. Unite believes
this has not been proven, especially over the course of an entire
business cycle. High levels of leverage shifts risk onto other
stakeholders, particularly the workforce.
27 Unite (T&G section) evidence to the Treasury
Select Committee Inquiry, para 4.7. Back
David Hall, Methodological issues in estimating the impact of
private equity buyouts in employment, May 2007. Back
Op cit. Back
Court of Appeal decision, Richard Millam v The Print factory (London)
1991 Ltd. Back
Op cit. Back
20 20 vision, boom, bang or bust-Twenty years of global, technological
and financial innovation, Kroll, October 2007. Back
David Hall, Unhappy returns to investors in private equity, PSIRU,
Business School, University of Greenwich. Back