Initial situation
General principles
Exception: division
Is there a group-wide view in other situations?
Comment


During corporate restructuring a social compensation plan is usually drawn up to provide for severance or other payments to employees affected by restructuring measures. Against this backdrop, an issue which is often raised in negotiations with the works council and the trade union is whether the financially better-off parent company must be involved in allocating the social compensation plan. If the company being restructured bears a disproportionate part of the burden, should only its financial situation be the decisive criterion or should the financial situation of its affiliated companies also be taken into consideration?

Initial situation

If during corporate restructuring a social compensation plan is drawn up under Section 112 of the Works Constitution Act, the employees affected and the employer naturally have very different interests as far as the financing of a social compensation plan is concerned. The employer is interested in keeping costs as low as possible to prevent capital outflow and to secure the existence of the company. The employees, on the other hand, hope for the highest possible severance pay and improved social benefits.

Ideally, negotiations between management and the works council – the latter usually supported by trade unions – lead to an agreement which takes the interests of both sides into consideration adequately. Where they are unable to come to an agreement, a conciliation board must be contacted. The other option, which is seldom used in practice, is mediation by the Employment Agency. This must take the social interests of the employees into account (in accordance with Section 112(5) of the act) when deciding how to fund a social compensation plan. On the other hand, the law also provides that the company should not be overburdened by disproportionately high expenditure so that remaining jobs are not jeopardised. Thus, such judgements depend, in principle, on financial aspects.

Often the company concerned has little room for manoeuvre: corporate restructuring measures which trigger a social compensation plan generally result from an attempt to overcome economic difficulties. Therefore, staff and the works council often focus on the sound financial position of the parent company or relevant group of companies and wish this to be taken into account when calculating social benefits. The question therefore arises: is the situation of the shareholder, the parent company in the group, or only the situation of the company affected decisive? In the latter case, an unreasonable financial burden would soon occur, thus causing an infringement of Section 112(5) of the act.

General principles

The courts have issued conflicting decisions on whether the financial circumstances of the company or the group of companies are decisive. The Federal Employment Court has now ruled, in passing, that in principle only the financial situation of the employer itself (ie, the company) is relevant. This would also be the case, the court stated, if the company affected were part of a group of companies.(1) The wording of the first three sentences of Section 115(1) of the act alone requires this, the court held, and it can be assumed that this was the intention of the legislature when it passed the act.

As a result, using company financial data regarding, among other things, liquidity, assets and liabilities, a check must be made to ascertain whether and to what extent a social compensation plan would burden the employer. If over-indebtedness or an unacceptable outflow of equity were to be the consequence of a social compensation plan, then the statutory limit defined in Section 112(5) of the act would be exceeded and any decision of the conciliation board would be ineffective.

Exception: division

The Federal Employment Court has ruled that when there is a division under Section 123 of the Transformation of Companies Act (as a result of Section 134 of the same act), a different rule applies.

In cases in which a split-up results in an investment company (which becomes the bearer of the previous assets) and an operating company (which may use only the assets of the investment company), the former shall be responsible for the employees at the operating company. According to the court's recent decision, its economic standing forms the basis for the calculation of a social compensation plan at the operating company.

In this kind of division, the operating company's assets are reduced at the expense of its employees. Even if the wording of Section 134 of the Transformation of Companies Act infers liability only for the fulfilment of claims against the operating company, the purpose of Section 134 is to prevent companies fleeing from liability for social compensation plans which result from a division. A company which has no assets after spin-off cannot reasonably take the legitimate interests of its employees into account with respect to a social compensation plan.

However, the corporate veil is only partially pierced: only if assets have been withdrawn from the operating company as a result of the division will liability arise. The mere fact that the new company was split off from an economically stronger company is insufficient.

Is there a group-wide view in other situations?

A further possible case of the corporate veil being pierced results from the general principles of group liability. According to the Federal Court of Justice's amendment to case law,(2) these are cases of so-called "interference jeopardising existence in the [limited liability company's] group of companies" which are dealt with pursuant to Section 826 of the Civil Code on intentional damage contrary to public policy.

If a sole shareholder interferes in a company's assets, jeopardising the existence of the company without providing compensation, as a rule its creditors will be disadvantaged. The parent company must meet these costs – the company that sustains damage is then entitled to compensation. This must be taken into account when calculating the social compensation plan as it belongs to the company's assets. Mere undercapitalisation of the subsidiary is insufficient in this case. The strict criteria developed by the court for liability pursuant to Section 826 of the Civil Code must be fulfilled.

However, the Federal Employment Court has still not specified whether the obligation of a controlling company to provide financial compensation must also take social compensation plans into account in profit and control transfer agreements pursuant to Section 302 of the Stock Corporation Act. The prevailing view among legal scholars is that this is the case.

Comment

When calculating social compensation payments, in principle it is the financial situation of each employer and thus the specific company concerned, which is decisive. However, the Federal Employment Court has decided that in cases in which assets are withdrawn from a (hived-down) company as a result of a division pursuant to Section 123 of the Transformation of Companies Act, the financial situation of the affiliated companies must also be taken into consideration, albeit only the value of the withdrawn assets and not its other assets.

For further information on this topic please contact Antje-Kathrin Uhl, Bjoern Gaul, Bernd Roock or Oliver Simon at CMS Hasche Sigle by telephone (+49 711 97 64 250), fax (+49 711 97 64 96251) or email (kathrin.uhl@cms-hs.com, bjoern.gaul@cms-hs.com, bernd.roock@cms-hs.com or oliver.simon@cms-hs.com).

Endnotes

(1) Decision 1 ABR 97/09, March 15 2011.

(2) Decision II ZR 3/04, July 16 2007.

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