Hedge funds and Private Equity - PES

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have rules here and we should propose a Moratorium on loosening of such rules. The Commission
should to undertake a comparative study of their effectiveness and propose EU-wide
minimum standards.
One could also imagine restricting owners’ freedom to set managers remuneration packages
(stock-options) autonomously. At the very least an EU-wide code of good conduct should be
drawn up to ensure that managerial interests are best aligned with the long-term interests of the
company.
Capital maintenance provisions prescribing a limitation on the transfer of debts to companies
that are the object of investments, through the restriction of credit financing, is a way of channelling
investment in the right direction. In this regard one has to examine the tax deductibility of
interest payments that ‘subsidise’ the use of debt over equity. The Commission should undertake
a study to assess whether these issues should be tackled on an EU basis or a national
basis.
We can consider the introduction at European level of some regulatory quantitative or principlebased
constraint to the alternative investments exposure of pension funds. Such constraints in
absolute terms could be meaningful especially in the case of the PE funds given the low level of
liquidity (scarcely considered as a major risk by the industry practitioners) of such financial instruments.
Consulting fees paid out of the cash flow of the firm should be limited to a certain percentage
(varying with the amount of the deal). Fees exceeding this upper limit should not be acknowledged
as ‘costs’ for tax purposes.
Social rights
The Transfers of Undertakings Directive 77/187 of 1977 (ARD) should be revised so that
transfers of undertakings achieved through transfers of shares were covered. These purely financial
dealings with a direct impact on workers could fall under the ARD and be subject to the
requirements of prior disclosure of all relevant information to employee representatives, prior
consultation with employee representatives, and protection of the individual employees affected:
in other words, no transfer of risk to employees. It would mean defending and extending the
existing national systems of co-determination and worker participation. In particular, issues of
take-overs and leveraging should be incorporated in the substantive fields where workers’ representatives
already have information or consultation rights.
Tax policy
A uniform progressive capital gains tax rate should be applied in all member states. The
progressive rate should be very high for short-term arbitrage deals to discourage the short-term
buying and selling of firms on the market for corporate control. Taxes should be paid in the
country where the object of the transaction is located.
Rules should be introduced to limit deductions for expenditure on interest in the target company,
its holding companies and its subsidiary companies once the target company has been taken
over by one or more equity funds.
The limitation could take the form of no deductions being allowed for interest expenditure by the
local holding companies that have been established to carry out the takeover, and removal of
the deduction for interest expenditure by the target company in respect of interest on the debt
incurred in order to pay an extraordinary dividend after the company has been taken over by
equity funds.