Provided the European Court of Justice (ECJ) follows the Advocate General, German employee representation on the board level does not violate EU law and may be restricted to employees in Germany.

A good decision, says Michael Magotsch, labor law specialist at Bryan Cave. In the case of a different ruling by the ECJ, corporations in Germany would be obliged to review existing or to create new supervisory boards and appoint employee representatives according to the size of their international workforce.

The complaint by a single shareholder against the valid establishment of the supervisory board of the global travel operator TUI AG might have caused massive turmoil. German employee representation on the board level is restricted to employees employed in Germany only. A Berlin court sought the view of the European Court of Justice as to whether this is compatible with EU law. Last week, the Advocate General`s opinion (which, although not binding on the court, will be followed as a rule) has now confirmed that there is no discrimination on grounds of nationality. German employee representation on the board level may set national restrictions. In the event the court would hold the German law in violation of EU law, such a decision would have far-reaching consequences for other proceedings pending in front of various German courts.

German co-determination on board level is critical and sensitive for corporate governance at the top of large German companies. Unlike other jurisdictions, Germany has a two-tier system of co-determination: at floor level, employees elect work councils as their representatives who have far-reaching information, consultation, and even veto rights on operational levels; while at board level, employee representation depends on the headcount of staff. Once a threshold of 500 employees is reached, it is mandatory to establish a supervisory board. More than 500 employees triggers a one-third participation, whereas more than 2,000 employees results in parity co-determination.

The supervisory boards of all larger entities in Germany therefore consist of equal members of shareholders and employee representatives. It is in effect, however, an “almost parity” co-determination, because the shareholders have the final say with the chairman of the board being elected by the shareholders having two votes in the event of a deadlock. In company groups (Konzernverbund), employees of companies controlled by an entity on top of the group are allocated to and counted as employees of the controlling entity. While this results in group-wide participation, the question was raised in various proceedings whether such allocation rightly ends at the borders of Germany. Against the predominant opinion, based on pure territorial principle, a few German first-instance courts lately took the view that German employee-representation on board level must also be complied with outside of Germany; all employees employed at European subsidiaries must be considered when determining the respective headcount. The most publicized case was a proceeding before the Frankfurt courts regarding the Deutsche Börse AG which currently is stayed at appeal level, pending the decision of the European Court of Justice in the TUI case.

Should the European Court of Justice rule against the predominant German view, companies like the Deutsche Börse AG would have to establish parity co-determined supervisory boards. This would lead to further consequences regarding corporate governance in Germany, such as, for example, new compliance rules with respect to the so-called “30% women rule,” which requires publicly traded companies with parity co-determined supervisory boards to level up to a female quota of at least 30% of all board members. Likewise, many other globally operating entities would have to be forced to establish parity co-determination of their supervisory boards. Regardless of the practical nightmare of implementing and executing supervisory board election proceedings outside of Germany and, in particular, to have such rules enforced in the event of any controversies, such an interpretation by the ECJ would go far beyond any reasonable base of employee representation at board level. It can therefore only be hoped that the court will follow the opinion given by the Advocate General.

In summary: It would be great news if the Court follows the Advocate General’s motions and declares German co-determination laws compliant with EU law; this would end time-wasting and costly proceedings and would provide transparency and clarity for board members in their various corporate governance roles.