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Transposition of the SE legislation in Germany (Updates: October and May 2004)

(October 2004): The German government failed to meet the 8 October deadline for transposition of the SE statute and directive into national law. However, on 29 October the Lower House (Bundestag) passed the draft legislation on introduction of the European Company (Societas Europeae or SE) after its second and third readings. The draft legislation is now to be debated by the Upper House (Bundesrat) at its 26 November session. Although the legislation on the introduction of the SE does not require Upper House approval to come into effect, there is still a possibility that the Opposition will request that the matter be considered by the mediation committee, so delaying the legislative process. In that case, the earliest possible date on which the Upper House could finally adopt the draft legislation would be 17 December 2004. Thus, the legislation is unlikely to come into force before 1 January or 1 February 2005.

(May 2004):

In April 2004 the German legislator issued draft legislation on the introduction of a European Company (SE) which consists of two main parts: first, the law on the implementation of Council Regulation No. 2157/2001 on the European Company Statute which contains provisions on the company-law aspects of the establishment, structure and operation of an SE under German law; and second, the law on the transposition of Council Directive 2001/86/EC supplementing the European Company Statute with regard to employee involvement.

Since the main aspects of the SE Regulation’s introduction have already been dealt with in a previous country report, this update on the situation in Germany will focus on the rules for employee involvement in the SE as laid out in the draft legislation.

Concerning the introduction of the SE Regulation into national law the most notable feature of the draft legislation is the fact that it enables SEs to choose between a monistic corporate governance structure with a single administrative organ – the so-called ‘administrative board’ – and a dualistic structure involving a supervisory organ and a management organ. The option of a monistic corporate governance structure is a novelty in Germany because the German law on joint stock companies provides exclusively for a dualistic structure.

Therefore, the German legislator saw the need to make use of the authorisation provided by Article 43, Paragraph 4 of the SE Regulation in order to define a detailed catalogue of rules concerning the rights and duties of an administrative board and the managing directors appointed by the administrative board.

With respect to the rules on employee involvement in the SE, the crucial feature of the draft legislation is that the German legislator applied the ‘before and after principle’ as laid out in the SE Directive: this means that employee participation rights already applying to participating companies are retained within the SE. Therefore, the draft legislation follows the SE Directive by specifying that a special majority of the members of the Special Negotiating Body (SNB) – two thirds of SNB members representing at least two thirds of the total workforce, and including the votes of members representing employees in at least two member states – is required to approve an agreement which would lead to the reduction of employee participation rights. This applies in the case of SEs established by merger, if board-level participation rights already cover at least 25% of the total workforce of the participating companies. In the case of SEs established by creating a holding company or a subsidiary, a special majority vote is required if co-determination rights already apply to at least 50% of the combined workforce of the participating companies. In the case of SEs established through transformation, a reduction of employee participation rights is not possible.

Concerning the composition of the SNB, the draft legislation follows the proportional principle set out in the SE Directive; that is, the seats on the SNB must be allocated in proportion to the number of employees employed in each member state by the participating companies. However, the draft legislation explicitly stipulates that men and women should be represented on the SNB in proportion to their numbers in the workforce. It also explicitly allows SNB membership for trade union representatives. According to the draft legislation, German SNB members are to be elected by the highest-level body of employee representation (that is, group works council, central works council or works council). Since the SNB is only a temporary body, the only provisions of the draft regulation which deal with its internal structure state that the SNB must elect a chair and a deputy chair from among its members. In accordance with the SE Directive, the SNB has the right to request experts of its choice, including representatives from Community-level trade union organisations. Any expenses relating to SNB functioning, and the negotiations in general, shall be borne by the participating companies.

The fall-back provisions governing the establishment, as well as the rights and duties of, the so-called ‘SE Works Council’ which has to be established if management and SNB fail to reach an agreement (or if they so decide) essentially echo the legal provisions on EWCs. However, the draft legislation on SE introduction contains important improvements, such as a more precise definition of information and consultation rights, the right to training for SE Works Council members and no explicit restrictions on the number of external experts to be financed by the company.

Assessment of the two sides of industry

In its statement, the DGB welcomes the draft legislation as a good opportunity to retain the German system of co-determination in the event of SE establishment and in that way to make a substantial contribution to promoting the EU’s social dimension. The detailed suggestions put forward by the DGB to improve transposition of the SE Directive concern the following: clearer definition of when the company should provide information to the employee side in the event of SE establishment; making mandatory the provision that men and women should be represented on the SNB in proportion to their numbers in the workforce; ensuring trade union participation in the negotiations between management and SE Works Council on information, consultation and co-determination if negotiations have to be resumed due to structural changes in the SE; expanding the select committee of the SE Works Council in order to ensure appropriate representation of the various European member states; and two joint meetings a year between management and SE Works Council (instead of the one stipulated by the draft legislation).

In contrast to the positive assessment of the DGB, the German employers’ organisations are rather critical in their joint statement. While they appreciate the opportunities offered by the SE with regard to cross-border cooperation and restructuring for companies operating on a European scale, they criticise the ‘de facto 1:1 transfer of the existing system of co-determination to the SE’. The employers’ federations emphasise that, due to the strong co-determination rights envisaged in the draft legislation on introduction of the SE, foreign companies will hesitate to invest in Germany. Furthermore, the employers argue that the strong co-determination rights retained in the SE under German law will practically exclude German companies from partnership in the establishment of SEs. They criticise in particular the fact that the German legislator made no distinction between the monistic and dualistic corporate governance structures in respect of employee involvement. According to the joint statement, some foreign investors may even consider this as ‘expropriation’ because the German legislator intends to extend employee involvement beyond the supervisory organ to the management organ in a monistic SE. A recurring theme is the employers’ criticism that the German legislator went beyond the provisions of the SE Directive: for example, in strengthening the definition of consultation or in specifying that trade unions have the right to up to one third of the seats in the German SNB delegation. In sum, the German employers’ federations call the draft legislation on SE introduction ‘a failure’.

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