Introduction

Recent decisions of the Frankfurt am Main Regional Court and Berlin Regional Court have caused uncertainty for German groups of companies with subsidiaries in Europe. In particular, the decisions concern German groups that, together with their subsidiaries in the European Union, employ more than 2,000, but fewer than 2,000 staff members in Germany. Contrary to previous practice, the Frankfurt Regional Court decided(1) surprisingly that employees of foreign subsidiaries must be counted with regard to corporate co-determination on the supervisory board of a German group parent company. By contrast, the Berlin Regional Court(2) continues to assume that employees of foreign subsidiaries need not be taken into account.

Corporate co-determination

Corporate co-determination on the supervisory board of a company depends on the number of staff members generally employed. If, for example, a German stock corporation or German limited liability company as a rule employs between 500 and 2,000 staff members, a co-determined supervisory board must be established as a supervisory body, with one-third of its members employee representatives (one-third participation). If, as a rule, the company employs more than 2,000 staff members, the employees have a co-determination right pursuant to Section 1(1) of the Co-determination Act, according to which half of the supervisory board members must be employee representatives (parity co-determination).

According to Section 5(1) of the act, employees working at subsidiaries must be counted. Consequently, employees of subordinate group companies are deemed employees of the controlling company. A supervisory board with parity co-determination must be established at the level of the controlling group parent, because the co-determination rights should be exercised where business decisions for the group are made. According to hitherto prevailing opinion, employees working at foreign group companies need not be taken into account in the context of this group allocation. This is justified by the principle of territoriality, according to which extension of the German co-determination acts to the territory of other countries is not considered.

Employees at subsidiaries

Departing from previous practice, the Frankfurt Regional Court decided in early 2015 that the employees of a subsidiary who work abroad must be involved in the election of employee representatives for the supervisory board and must be counted when determining the threshold values relevant for the application of the Co-determination Act. According to the Frankfurt Regional Court, different treatment of the companies located in Europe but outside Germany would violate the prohibition of discrimination under EU law (Article 18 of the Treaty on the Functioning of the European Union (TFEU)), at least with regard to subsidiaries located in the European Union. If corporate co-determination were not intended to apply in groups with cross-border activities, the result would be a distortion of competition. Further, there is nothing in the wording of the Co-determination Act to the effect that employees working abroad are excluded from co-determination.

In this case, counting employees working in Europe outside Germany resulted in half of the seats on the supervisory board of the German group parent company having to be staffed with employee representatives because the 2,000-employee threshold was exceeded.

Election of supervisory board members

The Berlin Regional Court reached a fundamentally different conclusion. According to the court, the present structure of German co-determination at top-tier group companies with subsidiaries in other EU countries does not violate European law. There is no breach of the prohibition of discrimination under Article 18 of the TFEU. Direct discrimination was ruled out because no reference was made to the nationality of the employees of foreign subsidiaries. Nor did the absence of representatives of foreign staff at the top-tier company constitute indirect discrimination. By restricting co-determination to German establishments, the German legislature did not violate EU law. The negative effects of German co-determination were only a knock-on effect below the interventional threshold of EU law. The Berlin Regional Court saw no infringement of the right to freedom of movement of workers (Article 45 of the TFEU), because the loss of the right to vote for employees on the supervisory board did not constitute a serious obstacle for German employees to make use of their right to freedom of movement. Finally, the lack of harmonisation under EU law regarding corporate co-determination showed that a different level of corporate co-determination in the national laws of EU countries must be accepted. In the absence of harmonisation, the German legislature was prohibited by the principle of territoriality under international law from interfering with the legislative powers of other EU countries.

Comment

The Frankfurt Regional Court decision was largely criticised in the specialist press. In view of the diverging legal opinion in the regional courts' decisions, groups of companies with cross-border corporate structures should keep a wary eye on further discussions. It remains to be seen whether the Frankfurt Regional Court decision will be confirmed by Germany's highest court. What is remarkable in respect of both proceedings is that the regional courts did not consider submitting this legal issue to the European Court of Justice (ECJ) for a preliminary ruling pursuant to Article 267 of the TFEU. In both cases, the courts did not consider preliminary proceedings before the ECJ to be necessary; and as courts competent at first instance, they were not obliged to do so. However, it cannot be ruled out that higher German courts will submit corresponding issues to the ECJ for preliminary rulings because of doubts about their compatability with European law. Until Germany's highest court has ruled on the matter, legal uncertainty will remain.

For further information on this topic please contact Daniel Ludwig or Oliver Ramcke at CMS Hasche Sigle by telephone (+49 40 376 30 305) or email (daniel.ludwig@cms-hs.com or oliver.ramcke@cms-hs.com). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.

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