Hedge funds accused of 'ripping heart out of German economy'

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The Independent Online

The shareholder revolt at Deutsche Börse "rips into the heart of the German economy", Rolf Breuer, the outgoing chairman of the Frankfurt stock exchange operator said yesterday. He also said Germany should look at new laws to curb hedge fund activity.

The shareholder revolt at Deutsche Börse "rips into the heart of the German economy", Rolf Breuer, the outgoing chairman of the Frankfurt stock exchange operator said yesterday. He also said Germany should look at new laws to curb hedge fund activity.

Mr Breuer was ousted as chairman of Deutsche Börse on Monday along with the chief executive, Werner Seifert, after a shareholder revolt led by hedge funds including The Children's Investment Fund (TCI) over the German company's controversial plans for a £1.3bn bid for the London Stock Exchange (LSE). The hedge funds also objected to Deutsche Börse's corporate governance standards.

In an interview with the German magazine Capital, Mr Breuer said: "It is dangerous when hedge funds take over and impose their view on stability oriented shareholders. I fear it can happen to anyone now. It heralds a new world for company boards in Germany and rips into the heart of the German economy."

He said Germany should "seriously consider" stricter laws against hedge funds. He also criticised Christopher Hohn, TCI's managing partner, who has been engaged in increasingly bitter exchanges with Mr Seifert in recent weeks. Mr Breuer said the dispute had been conducted in a way that he thought "most unpleasant".

TCI and other hedge funds, including Atticus Capital, have accused the Deutsche Börse management of not maximising shareholder value.

Like many hedge fund managers, Mr Hohn, 38, is publicity shy but the Deutsche Börse affair will mean he is unlikely to slip back into obscurity.

Mr Hohn set up TCI at the end of 2003, with the fund starting to invest at the beginning of last year. He has offices in Mayfair, although the business is registered in the Cayman Islands. He established the business with Doug Shaw, a former head of derivatives at Gartmore, and Patrick Degorce, an ex-Merrill Lynch fund manager.

Their fund management business owns a 51 per cent stake in The Children's Investment Fund Management (UK) LLP, a limited liability partnership which, according to the parent company's accounts, had a £2.37m entitlement to its profits.

The main accounts for the parent company show it generated turnover of £4m last year and made pre-tax profits of £2.86m. It donates part of its fees to a charity, the Children's Investment Fund Foundation, run by Mr Hohn's wife, Jamie Cooper-Hohn.

She travels to Africa and India to seek out good causes mainly connected with children who have lost parents through HIV/Aids.

The latest Companies House records show that the foundation had a charitable fund at its disposal of £1.87m, having received £60,892 in 2004 and £1.9m in 2003. Mrs Cooper-Hohn's work was recently acknowledged by Bill Clinton at a press conference in New York.

Mr Hohn's $2bn hedge fund built up an 8 per cent stake in Deutsche Börse, which announced in mid-December that it was planning to buy the LSE. TCI's opposition to the deal won broad support from a number of large investors, including Atticus Capital which owns about 5 per cent of Deutsche Börse. They accused Mr Seifert of "empire-building", eventually forcing him to drop the LSE bid in March.

Mr Breuer and Mr Seifert were forced out at an emergency supervisory board meeting after the rebel shareholders threatened a vote to fire Mr Breuer and other board members at the company's annual meeting on 25 May. Mr Seifert quit with immediate effect, while Mr Breuer, who has been charged with the task of finding his successor, is due to leave by the end of the year.

Mr Breuer's remarks yesterday echoed recent comments made by Franz Müentefering, the chairman of the ruling Social Democratic Party (SDP), who compared hedge funds and private equity investors to plagues of locusts "that descend on companies, chew them up and move on".

Joachim Poss, the SDP's deputy parliamentary head, said about the hedge funds' victory over Mr Seifert: "That these investors evidently can wield such power confirms our fears."

The reaction in the German media was rather less extreme. Handelsblatt judged that while the Deutsche Börse executives did not deserve such an "unpleasant exit", their departure offered an opportunity for the exchange to turn over a new leaf.

Frankfurter Allgemeine Zeitung said other German companies would face similar pressures from shareholders and this would lead to a "new but not necessarily better understanding of corporate governance".

The state of Hesse, home to Deutsche Börse, said it would closely watch the procedure for the appointment of new executives.

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