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In focus: “Subsidiary SEs” – A creeping threat to employee involvement

The SE Regulation provides for four different modes of SE establishment: merger, holding, subsidiary and conversion SE. As of 01.04.2013 the ECDB data reveals that 1,370 SEs (78%) have been set up by way of subsidiary, 146 (8%) by conversion, 90 (5%) by merger and only 13 (1%) by creating a new holding company. For 147 (8%) SEs the form of founding is unknown. The prevalence of subsidiary SEs represents a creeping threat to worker involvement rights. It must be borne in mind that mechanisms for securing employee rights to information, consultation and participation are guaranteed only at the moment of founding of SEs.

The SE Regulation provides for four different modes of SE establishment: merger, holding, subsidiary and conversion SE (SE Regulation, Art. 2). Depending on the type selected, different requirements exist for the participating companies. All four modes of formation share the necessity of a cross-border element, namely that at least two of the companies involved must be subject to the legislation of different member states. Moreover, an SE itself can set up further SEs as subsidiaries. The form of founding can also be important for employee involvement, especially with regard to the calculation of the threshold triggering the applicability of the standard rules on participation.

As of 01.04.2013 the ECDB data reveals that 1,370 SEs (78%) have been set up by way of subsidiary, 146 (8%) by conversion, 90 (5%) by merger and only 13 (1%) by creating a new holding company. For 147 (8%) SEs the form of founding is unknown. The dominance of subsidiary SEs can be attributed largely to the creation of shell/shelf companies, especially in the Czech Republic and Germany. Two ways can be distinguished: whereas, for example, in Germany the founding of new shelf SEs is often carried out by companies registered in two different member states (creation of a joint subsidiary), in the Czech Republic it is the SE itself that ‘gives birth’ to further SEs (SE subsidiary). The ‘advantage’ of the latter method is that once an SE has been created it can serve as a kind of ‘incubator’ and can create further subsidiary SEs where no cross-border requirement is needed any longer.

Analysis of the identified ‘normal’ SEs reveals a different picture. Here, conversion is the most frequent form of founding (103 SEs, 43%), followed by subsidiary SEs (85 SEs, 35%), merger SEs (49 SEs, 19 %) and holding SEs (6 SEs, 3 %). There is only 1 SE (1%) whose form of establishment is unknown. The large share of ‘normal’ subsidiary SEs, again, were originally created as inactive companies and afterwards sold and activated normally by acquiring employees.

The prevalence of subsidiary SEs represents a creeping threat to worker involvement rights. It must be borne in mind that mechanisms for securing employee rights to information, consultation and participation are guaranteed only at the moment of founding of SEs. The important question thus is: What happens once a formerly employee-free SE starts having employees? The SE Directive lacks clarity in this respect. Some member states, such as Austria, have introduced a more detailed definition in their national transposition laws, triggering renegotiations in case of major changes in the SE. But the large majority of countries have simply copied the inadequate rules of the SE. As a consequence, the definition of changes considered to constitute a structural change remains disputed. In the absence of a clear rule in the SE legislation, a German court stated that when an employee-free SE afterwards gets employees it has to start negotiations (OLG Düsseldorf, 30.3.2009, I-3 Wx 248/08). So even if the setting up of an SE without employees is a common practice, this does not free the SE from the requirement to catch up negotiations once it starts having employees. Indeed, there have already been several cases of employees being deprived of their involvement rights through the activation of a formerly inactive SE.

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