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Christine Wahlig
Attorney at law
Editorial Management
Alice Tanke
Marketing Manager
On 18 October 2022, the European Court of Justice (ECJ) made an important decision in SE law, which has a significant impact on the possibilities to structure the co-determined supervisory board in participation agreements of European companies (SE) (ECJ, judgment of 18.10.2022 – C 667/20).
In the event of a change of legal form, the obligation to fill seats with trade union representatives and the requirement of a separate election/appointment procedure for trade union representatives should also be maintained and extended to all Member States.
The case concerned the effectiveness of the participation agreement of SAP SE, which was subject to co-determination on a parity basis under the Co-determination Act (MitbestG) prior to the change of legal form into a SE. Two of the total of eight employee representatives in the supervisory board were to be elected in a separate procedure following a trade union proposal prior to the change. SAP SE’s participation agreement provides for the possibility of establishing a reduced supervisory board to which trade union representatives can be elected when filling the employee seats, but here is no separate election or appointment procedure for this. The trade unions IG Metall and ver.di have taken action against this regulation because they take the view that in the event of a change of legal form, the participation agreement must also provide for a separate procedure regarding the election of trade union representatives to the supervisory board.
After the trade unions had initially been unsuccessful in the first and second instance, the Federal Labour Court (BAG) had referred the question to the ECJ to obtain a preliminary ruling on whether a separate election procedure for trade union representatives in the supervisory board, which had previously been prescribed by law, was to be guaranteed in a participation agreement even after a change of legal form (BAG, decision of 18.08.2020 – 1 ABR 43/18).
On 18 October 2022, the ECJ decided on this referral question as follows: If, in the case of a change of legal form, employee representative seats in the supervisory board were to be filled by trade union representatives in a separate procedure prior to the change of legal form, the participation agreement must compulsorily provide for (a) trade union seats in the supervisory board, (b) a separate procedure for the election of trade union representatives and (c) a right of proposal for all trade unions represented in the SE and its subsidiaries both nationally and internationally.
This view is justified by the fact that – contrary to the previously prevailing opinion in literature – the guarantee provided for in Art. 4 (4) Directive 2001/86/EG (SE-Directive) and section 21 (6) SEBG (Act on the Participation of Employees in a European Company) that “all components of employee participation” will be maintained in the case of a change of legal form is not limited to the granting of employee seats in the SE’s supervisory board, but also includes, as in the present case, further elements such as the trade union’s participation in the corporate co-determination through elections in a separate procedure. At the same time, the ECJ strictly upholds that any rights of proposal must not be limited only to the country of residence’s trade unions. Rather, according to the court, rights of proposal in the sense of the internationalisation of employee participation in the SE must be granted to all trade unions represented in the SE or its subsidiaries both nationally and internationally.
The decision may have significant consequences for participation agreements of European stock companies which were established by way of a change of legal form. In the past, it was often assumed that the guarantee of the maintenance of corporate co-determination in the case of a change of legal form in Art. 4 (4) SE-Directive and section 21 (6) SEBG only extends to the granting of employee seats and the share of seats. Consequently, many participation agreements do not provide for any or only limited participation of trade unions in the filling of employee seats in the supervisory board. When separate seats for trade union representatives are provided, these are often not allocated in a separate procedure and, moreover, the rights of proposal are often limited to individual Member States. In future, these provisions will have to be considered as ineffective. If one were consistent, it would even have to be assumed in these cases that even recourse to the statutory fall-back solution in sections 34 seq. SEBG of the participation agreement is inadmissible, since the statutory fall-back solution in accordance with the SE Directive does not provide for trade union seats to be filled in a separate procedure throughout Europe.
It is not yet clear which impact the ineffectiveness of individual provisions on corporate co-determination in a participation agreement will have on the participation agreement as a whole. However, a supplementary interpretation of the participation agreement will not be possible in most cases. An overall ineffectiveness of the participation agreement (also in the interest of ensuring at least the regulations on information and consultation of employees) may also only be presumed in exceptional cases. If necessary, until the participation agreement is amended, a supplementary recourse to the statutory fall-back solution in sections 34 seq. SEBG for corporate co-determination, as advocated in the literature, would seem appropriate. However, this would also not result in the maintenance of the trade union participation demanded by the ECJ.
How a possible new regulation on corporate co-determination– also taking into account further requirements in the expected Federal Labour Court’s decision in the case at issue – is to look like, cannot yet definitely be predicted either. For example, it remains to be seen whether the total number of seats for employee representatives in the supervisory board or the share of seats for trade union representatives will be upheld in the course of the SE conversion; there are still some strong arguments against this. Moreover, it is still uncertain how the allocation of trade union seats to be implemented throughout Europe relates to the distribution of seats among the Member States. According to the ECJ’s ruling, there is some reason to believe that the trade union seats must be filled separately in a procedure to be implemented for all Member States and that a distribution of the remaining seats among the Member States may only be planned separately.
Affected companies should review their participation agreements and, if applicable, immediately get in dialogue with the employee representatives responsible (this is usually the SE works council) about an amendment of the participation agreement. Finally, it remains to be seen whether the decision will lead to a situation in which, for example, in the above-mentioned constellation of a conversion of a company previously subject to co-determination under the MitbestG, the conversion into an SE will in future increasingly take place through another form of conversion than the change of legal form. After all, in case of other forms of conversion, such as cross-border mergers, it remains the case that the special negotiating body can also agree to deviating regulations with the corresponding resolution majority.
