What is at issue?
Significance for German companies
Decisions and consequences
Recent decisions of the Frankfurt am Main Regional Court(1) and the Berlin Regional Court(2) have caused uncertainty for German groups of companies with subsidiaries in Europe. In particular, the decisions concern businesses with employees and subsidiaries within Europe, but outside Germany (for further details please see "Employees working abroad – threshold values for corporate co-determination"). It is common knowledge that in status proceedings initiated by Deutsche Börse AG regarding the composition of the supervisory board, the Frankfurt Regional Court – contrary to prevailing opinion – decided that the claimant's motion for alternative relief was to be allowed because both the Deutsche Börse employees employed abroad and employees of its foreign subsidiaries must be included in the thresholds for corporate co-determination. The court had gathered this from an interpretation of the wording of the One-Third Participation Act and the Co-determination Act. These acts were not limited to employees employed in Germany. According to the ruling, the composition of the supervisory board of Deutsche Börse was incorrect because, due to the number of employees in Germany (1,624), only one-third of the board consisted of employee representatives pursuant to the One-Third Participation Act. Instead, owing to the total number of 3,811 employees employed in Europe, the supervisory board would have to be composed equally of six representatives of the shareholders and six representatives of the employees pursuant to Section 7(1)(1)(1) of the Co-determination Act.
The Frankfurt Regional Court rejected the claimant's principal motion. The motion focused on the decision not to apply the One-Third Participation Act, because it restricted the active and passive voting right to German employees and thus violated EU law. For this reason, the claimant's wish was that no employee representatives were to be members of the supervisory board. The court did not regard the question concerning the legitimacy of the act's election regulations in the European Union as material to the decision, because such a question could be asked only in a procedure to contest the election and not in status proceedings.
Also in 2015, in status proceedings concerning TUI AG, the Berlin Higher Regional Court presented the procedure by order (Case 14 W 89/15, October 16 2015) to the European Court of Justice (ECJ), asking whether the exclusion of the active and passive voting right for employees of European members of the group outside Germany constituted a violation of Article 18 of the Treaty on the Functioning of the European Union (prohibition of discrimination) and Article 45 (freedom of movement for workers).
In its capacity as the appeals court in the Frankfurt proceedings, the Frankfurt am Main Higher Regional Court meanwhile reached an interim decision. On June 17 2016 (Case 21 W 91/15), the court decided to suspend the proceedings until the ECJ ruled on the question referred by the Berlin Higher Regional Court. The ECJ reported that the advocate general's expert opinion is to be expected in Winter 2016/2017 and the ECJ decision is expected during the course of 2017.
The question of whether German corporate co-determination is compatible with EU law is under scrutiny. Similar status proceedings are being conducted in a number of cases. These primarily involve two different issues:
- First, it must be determined whether a group of employees employed outside Germany are to be counted when determining whether the threshold for the participation of employees (more than 2,000 employees pursuant to the Co-determination Act and more than 500 employees pursuant to the One-Third Participation Act) is reached.
- Second, the question arises of whether the exclusion of the active and passive voting right for group employees employed outside Germany regarding the election of the employee representatives for the supervisory board of the German company is incompatible with EU law.
These two questions do not necessarily have to be answered in the same way. It is possible to count employees outside Germany when determining whether the threshold has been reached without simultaneously granting them an active and passive voting right in Germany. However, the active and passive voting right is at issue in the case referred to the Berlin Higher Regional Court.
The Frankfurt am Main Higher Regional Court links both questions in its order of June 17 2016 in the status proceedings against Deutsche Börse. The court was of the opinion that German co-determination rights could be considered incompatible with EU law due to the non-consideration of employees employed outside Germany only if a passive voting right for employees outside Germany was assumed. Therefore, the proceedings must be suspended until the ECJ has reached a decision on the question referred by the Berlin Higher Regional Court.
Significance for German companies
The result of these proceedings is significant for German companies. If it turns out that restricting German co-determination to Germany is incompatible with EU law, the co-determination scene in Germany will change considerably:
- If employees from outside Germany must also be counted when determining whether the threshold for one-third participation or equal co-determination has been reached, the rules regarding one-third participation or parity co-determination would apply in future to many German companies to which they have not applied in the past. The number of companies with co-determination, particularly parity (equally represented) co-determination, would increase significantly.
- If foreign employees also have an active and passive voting right, the composition of the supervisory board would change. Whereas it is now possible to elect only German employee representatives to the supervisory board, it would then lead to the 'Europeanisation' of the supervisory board, with employee representatives from Germany and other countries on the board.
It cannot be predicted how the ECJ will assess German co-determination and its compatibility with EU law.
If the ECJ follows the prevailing opinion in Germany and limits co-determination to the respective country, nothing will change. In the proceedings before the Frankfurt and Berlin regional courts, the composition of the supervisory boards is correct. However, if the ECJ concludes that the German co-determination law is inconsistent with EU law, it will remain unclear what will apply in this case.
It is conceivable that the co-determination rules regarding the supervisory boards will not be applicable, and the supervisory boards must remain without employee representatives. This would result in the general decline of co-determination in Germany. However, since co-determination leads to more employee rights and European social welfare policy is designed to improve living and working conditions by way of a 'bottom-up' adjustment (Article 151 of the Treaty on the Functioning of the European Union), such a result is not expected.
Instead, it is most likely that foreign employees must be counted in some way. This could mean that foreign employees will be counted only when determining whether the threshold has been reached. The consequence would be a significantly increased number of companies becoming subject to co-determination laws. With regard to foreign subsidiaries with a great number of employees, it is also possible that the supervisory boards of German companies subject to co-determination will become larger. If employees of foreign subsidiaries were to receive active and passive voting rights (like employees of German subsidiaries), this would lead to foreign employees joining the supervisory boards of the co-determined companies, resulting in the Europeanisation of the supervisory boards. It is unclear how this would be carried out, but it is conceivable that the principles of a European regulation could apply (eg, Section 36 of the SE Employee Involvement Act on the Composition and Election of the Supervisory Board in European Stock Corporations).
The German legislature would have to decide on the consequences of any incompatibility with EU law. How the legislature would handle any potential incompatibility is entirely open. Based on the discernible trend not to govern disputed issues under labour law, it is expected that the legislature will not react and will leave it to the courts to find a solution.
If the German co-determination law turns out to be incompatible with EU law, employees employed in any manner abroad will probably have to be taken into account with regard to co-determination.
What kind of statutory regulations, if any, will be introduced is unclear. It may take years to achieve clarity. Against this backdrop, companies should review whether it is possible to implement one of the strategies available in practice to avoid co-determination, particularly by using a European stock corporation.
For further information on this topic please contact Rainer Kienast at CMS Hasche Sigle by telephone (+49 40 376 30 305) or email ([email protected]). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.