No seat guarantee for trade union in case of conversion into SE

The co-determination agreement of a European Stock Corporation (SE) founded by conversion does not have to maintain a seat guarantee for trade union representatives in the Supervisory Board, which previously existed in the company pursuant to Section 7 (2) of the German Co-Determination Act (MitbestG), according to the State Labor Court of Baden-Württemberg (decision of October 9, 2018 - Ref.: 19 TaBV 1/18).

Facts

The software company SAP was subject to the German Co-Determination Act of 1976 and had a 16-strong Supervisory Board with eight employee representatives, two of whom were union representatives (Section 7 (2) no. 2 of the German Co-Determination Act). The company was converted into a European Stock Corporation (SE) in 2014. As required by law, SAP entered into an agreement with the responsible special negotiating body regarding the participation of employees in the SE. According to this agreement, the Supervisory Board consists of 18 members. Depending on the proportion of seats allocated to Germany, up to two seats are reserved for trade unions. The agreement provides that the Supervisory Board may be reduced to twelve members.

The Executive Board of SAP had submitted a proposal to the Annual General Meeting to amend the Articles of Association aiming to reduce the Supervisory Board from 18 to 12 members with the result that the unions would no longer be entitled to reserved seats on the Supervisory Board.

Two unions filed an application to prohibit the Executive Board from doing so. Alternatively, they asked the court to determine that the corresponding provisions in the agreement on the participation of employees in the SE are invalid and that the trade unions have the sole right of nomination of two members even in the smaller Supervisory Board. The Mannheim Labor Court rejected the applications (07.12.2017 - Az.:14 BV 13/16). Both unions appealed against this decision.

Reasons for the decision

The State Labor Court (LAG) rejected the trade unions' complaint.

The application against the Executive Board to prohibit it from submitting a proposal to the Annual General Meeting to amend the Articles of Association (reduction of the Supervisory Board from 18 to 12 members with the exclusion of a guarantee of seats for the trade unions) was already inadmissible.

According to the LAG, the application for a declaratory judgment that the corresponding provisions in the participation agreement are invalid was admissible but unfounded. The agreement does not violate Section 21 para. 6 of the German Act on the Participation of Employees in an SE („SEBG“) in conjunction with Art. 4 para. 4 of Directive 2001/86/EC.

The LAG admitted the appeal to the Federal Labor Court (Bundesarbeitsgericht).

Advice to Practice

The reasons for the decision have not yet been given. However, the Mannheim Labor Court had also rejected the applications and given detailed reasons for its decision. Section 21 para. 6 SEBG only protects the proportional share of employee representatives on the Supervisory Board, but not the absolute number of employee representatives or even the reserved seats for trade union representatives. This decision is convincing. The basic system of the SE Council Directive and the SEBG already argues against a seat guarantee of the trade unions, as does the wording of Section 21 para. 6 SEBG. Co-determination in the SE is characterised by the autonomy of the parties to agree, which allows comprehensive freedom for the structuring of employee participation in the form of a participation agreement in the SE. This principle of a negotiated solution would be circumvented if the representation of trade unions and executive employees on the Supervisory Board were classified as mandatory. Fixed seats for trade union representatives and executive employees on the Supervisory Board are solely subject to German co-determination law and are not part of the rules governing the SE.

However, the question as to whether the nationally provided seat guarantees are protected in the event of conversion into an SE has not yet been decided by the highest court. With the admission of the appeal to the Federal Labor Court (BAG), the LAG has now paved the way for this.