Gerhard Manz, GesellschaftsrechtDr. Barbara Mayer, Fachanwältin für Handels- und Gesellschaftsrecht

Must Foreign Employees be taken into Account for Co-determination?

German corporations with more than 500 employees are subject to the One-third Participation Act (Drittelbeteiligungsgesetz -“DrittelbG”), and corporations with more than 2,000 employees are subject to the Co-determination Act (Mitbestimmungsgesetz - “MitbestG”). According to the Regional Court of Frankfurt (Landgericht – “LG”), not only the employees of the German companies but also those of foreign subsidiaries must be taken into account when determining the application of the MitbestG.

Background

In a status proceeding against Deutsche Börse AG with respect to the composition of its supervisory board, the LG Frankfurt noted that same was incorrect. According to the court, the supervisory board should be composed in accordance with the provisions of the MitbestG and not those of the DrittelbG. Pursuant to the MitbestG, half of the supervisory board members have to be company employees. In determining the decisive threshold values, the group should also take the employees of its foreign subsidiaries into account. The decision is not yet legally binding.

To date, legal practice has proceeded from the assumption, in accordance with the prevailing opinion in legal literature, that only domestic enterprises must be taken into consideration. Therefore, the supervisory board of Deutsche Börse AG, which has more than 2,000 employees only when foreign subsidiaries are also taken into consideration, was composed in accordance with the provisions of the DrittelbG.

Judgment of the LG Frankfurt dated 16 February 2015; Docket no. 3-16 O 1/14

According to the court, the wording of the MitbestG suggests the inclusion of foreign subsidiaries. An intention to restrict the provision to German enterprises cannot be derived from the historical legislator. Moreover, the MitbestG refers to the concept of group used in section 18 para. 1 of the German Stock Corporation Act (Aktiengesetz – “AktG”) which undoubtedly also encompasses foreign group companies. In addition, a limitation to domestic subsidiaries would also violate the EU discrimination prohibition and lead to competitive distortions.

Comment

Companies with the following German legal forms are subject to the MitbestG: Aktiengesellschaft (stock corporation), Kommanditgesellschaft auf Aktien (partnership limited by shares), Gesellschaft mit beschränkter Haftung (limited liability company), Genossenschaft (cooperative). Therefore, some companies attempt to avoid co-determination by using the legal forms of Ltd. & Co, KG, the BV & Co. KG, etc. If the opinion of the LG Frankfurt is enforced in jurisprudence, then particularly medium-sized stock corporations (mittelständische Aktiengesellschaften), partnerships limited by shares (Kommanditgesellschaften auf Aktien), and limited liability companies (Gesellschaften mit beschränkter Haftung) incorporated or organized under German law would have to prepare for status proceedings and for the appointment of new supervisory board members and/or modifications to existing supervisory boards. With regard to the threshold values provided by the MitbestG for the number of supervisory board members, even larger corporations could be forced to recompose their supervisory boards. However, the DrittelbG will not be subject to any changes because according to this law subsidiaries are included only in cases in which control agreements exist. Such agreements are usually entered into only with companies with registered office in Germany.

The decision of the LG also highlights the distinction from a European stock corporation (Societas Europaea – “SE”).  The co-determination provisions of the DrittelbG and the MitbestG do not apply to the SE; instead, the co-determination should be negotiated with the employees. If the parties do not agree, then the highest co-determination standard of the companies participating in the founding of the SE shall apply. Subsequent amendments are usually not taken into account, such that the co-determination is made permanent. Amendments are only taken into account if an abuse of the legal form is involved or if the structure of the company changes, e.g., through acquisition of a co-determined company. Organically evolved SEs could, however, circumvent the co-determination when reaching the threshold values of the DrittelbG and the MitbestG. The details hereto have not yet been conclusively clarified. In any case, the decision will not affect any existing SEs because no “structural change” of the company will takes place.

It is questionable whether the appeals court, which in all likelihood will be called upon, will uphold the decision of the LG Frankfurt in light of these consequences. The LG’s line of argumentation which primarily refers to the wording appears to be rather weak. The question why a non-allocation would violate the prohibition against discrimination under European Community law remains unaddressed. Finally, the judgment does not at all deal with the line of argumentation of the opposing view.

Nevertheless, all affiliated groups with foreign companies, as well as rapidly expanding medium-sized companies, should closely observe the proceedings and should start addressing possible consequences.

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