On December 11, 2014, the German Federal Cabinet adopted draft legislation with the aim of increasing women’s participation in leadership positions in the public and private sector. The proposed bill will introduce, amongst other things, quotas for women on company boards. We expect the new provisions to come into effect in 2015. Pursuant to the current version of the draft bill, companies subject to the flexible-quota targets described below will then have to set their quotas by no later than June 30, 2015. The fixed-quota requirement described below will have to be observed as from January 2016.
Outline of the New Legal Regime
The new bill establishes specific requirements as to how leadership positions in private companies as well as the federal administration are to be assigned in order to achieve a better gender balance. Amendments most relevant to the private sector are reflected in the Stock Corporation Act (Aktiengesetz - AktG), the SE Implementation Act (SE-Ausführungsgesetz - SEAG) and the Law on Limited Liability Companies (Gesetz betreffend die Gesellschaften mit beschränkter Haftung - GmbHG), particularly in the provisions governing the management and the supervision of the relevant companies, as well as in the labor law regulations regarding co- determination.
The proposed legislation introduces an individually defined gender-quota for the top three management levels of German companies that are either subject to co-determination – regardless of whether pursuant to the One-Third-Participation Act (Drittelbeteiligungsgesetz - DrittelbG) or the Co-Determination Act (Mitbestimmungsgesetz - MitbestG) – or listed on the stock exchange on a regulated market. In these companies, the supervisory board will be obliged to set quota targets for women representation in the management board in regular intervals (e.g. sec. 111 new para. 5 AktG, sec. 52 new para. 2 GmbHG). If, at the time the targets are set, the actual proportion of women at the level of the management board is less than 30%, these targets may not fall below the current proportion.
In order to ensure prompt compliance, the supervisory board will also determine deadlines for the achievement of the quota targets which may not exceed five years. Listed companies will have to disclose the targets that have been set and whether they were achieved or not (and the reason for non-compliance, if any) after the expiration of the deadline in their corporate governance declaration. Other affected companies will either have to include this information in their management report or, if not applicable, need to publish a specific report on this topic.
The management board, in turn, will proceed likewise and determine target quotas for the two management levels below the management board (e.g. sec. 76 new para. 4 AktG, new sec. 36 GmbHG).
As for the supervisory board, the new bill will apply a double-track approach.
The supervisory board of German companies that are either subject to co-determination or listed on the stock exchange will, in regular intervals, determine quota targets under the above-described requirements for itself (e.g. sec. 111 new para. 5 AktG, sec. 52 new para. 2 GmbHG).
With regard to German companies, however, that are both subject to equal co- determination pursuant to the Co-Determination Act and listed on a regulated market of a stock exchange, the more stringent concept of a fixed quota will apply. A new provision will establish a 30% minimum quota for each gender with regard to the composition of the supervisory board (e.g. sec. 96 new para. 2 AktG). The threshold generally applies to the board as a whole, namely is set as a percentage of all the shareholders’ and the employees’ representatives. Should either of these groups disagree, however, each of them will need to achieve the 30% quota separately.
If the election or appointment of a person to the supervisory board violates this 30% minimum requirement, the respective act will be deemed void (so-called “policy of the empty chair”). This means that, in case the members of the supervisory board are being elected or assigned individually one after another, the first act which violates the quota requirement (and, if applicable, every successive act) is invalid. If the board is being elected en bloc, the entire election or assignment is void with regard to the gender which is overrepresented.
The concerned companies will have to disclose in their corporate governance declaration whether the fixed quota was achieved or not and provide reasons in the event of non-compliance.
Scope of Application
It is important to note that the scope of application of the new bill will be governed by a sophisticated legal regime. Different from what might have been assumed, the proposed legislation neither directly relates to specific legal forms of organization nor (immediately) to the size or turnover of a company. The crucial point will instead be whether a company is subject to co-determination – either pursuant to the One-Third-Participation Act or the Co-Determination Act – and/or listed on the stock exchange. Consequently, even small public stock corporations or partnerships limited by shares (Kommanditgesellschaft auf Aktien) will be concerned by the new legal regime just as private limited liability companies with more than 500 employees. Hence, the proposed legislation affects – in addition to most of the German blue chips – a large number of small and medium companies (Mittelstand). The government estimates that about 3.500 companies are concerned.