Unlawfulness of European Company (SE) employee participation agreements in the case of insufficient trade union participation

Ruling and background

In its ruling of 18 October 2022 (C-677/20), the ECJ ruled on the question of compliance with the restrictions of Art. 4 para. 4 of Directive 2001/86/EC (SE Directive). This paragraph was transposed with identical wording in sec. 21 para. 6 of the SE Employee Participation Act (SE-Beteiligungsgesetz "SEBG") – in essence, the participation agreement of an SE created through a change in legal form must provide for a separate ballot for trade union representatives on the SE supervisory board if this is prescribed by national law (ie the German Co-Determination Act, Mitbestimmungsgesetz "MitbestG" in the initial proceedings). In this context, the "equal treatment" of the employees of the SE, the SE's subsidiaries and operations as well as the trade unions represented in them must be ensured.

The reason for the Federal Labour Court's reference was a legal dispute between, among others, the trade unions IG Metall and ver.di with SAP SE regarding their participation agreement within the meaning of sec. 21 of the SE Employee Participation Act (cf. order for reference of 18 August 2020 – 1 ABR 43/18). The participation agreement was concluded in the course of the change in legal form of SAP AG into SAP SE in 2014 and provided that a reduced supervisory board – which, however, would also be composed on a parity basis – could be formed, whereby the trade unions could propose candidates for a certain number of the supervisory board seats allocated to the German employees, but no separate ballot was provided for as regards the election of the other employee representatives.

However, this is provided for in the relevant national co-determination law (sec. 7 para. 2 in conjunction with para. 5 of the German Co-Determination Act), which raises the question of whether, pursuant to Art. 4 para. 4 of the SE Directive/sec. 21 para. 6 SE Employee Participation Act, a corresponding provision in a participation agreement ensures "with regard to all components of employee participation at least the same extent" as existed prior to the change in legal form. According to the Federal Labour Court, the provisions of the participation agreement were not sufficient. From a purely national perspective, according to the Federal Labour Court, the "seat guarantee" of the trade unions expressed in the Co-Determination Act and the separate ballot were a "formative element" (recital 28) and thus a component of co-determination that was also protected in the context of the change in legal form.

The ECJ also came to the conclusion that the separate ballots would have to be protected in the context of the change in legal form and based its result on the literal and systemic interpretation and meaning and purpose set out in Art. 4 para 4 of the SE Directive, as well as the history of, the Directive. The fact that the ruling is not convincing in terms of content and that the entire canon of interpretation actually speaks against a corresponding understanding of the norms at issue are not discussed in depth here (see instead Uffmann, ZFA 2021, 257).

Impact of the decision

It remains to be seen the effects the (at least) expected finding of invalidity of the provisions on the reduced supervisory board will have. In the initial proceedings, the participation agreement could, moreover, remain effective – also with regard to the provisions on corporate co-determination.

For whom – apart from SAP SE – and how does the ruling have impact?

• Initially, the ruling has no relevance for all those SEs which were not subject to any of the German co-determination laws prior to the change in legal form – this applies even if a change in legal form was chosen. This is because, in this case, at the time of the change there were no elements of employee involvement in the area of corporate co-determination that would have had to be taken into account in the participation agreement as a "defining element".
• The ruling is only indirectly relevant for companies that were subject to the German One-Third Participation Act (Drittelbeteiligungsgesetz "DrittelbG") before the change in legal form, as the latter does not provide for mandatory nominations of trade union representatives – and certainly not for separate ballots. Whether the ruling requires action for these companies depends firstly on whether one assumes after the ECJ ruling that, for example, the size of the supervisory board (according to sec. 4 para. 2 sentence 1 of the One-Third Participation Act) also constitutes a "defining element" of employee participation. Provisions in participation agreements according to which the supervisory board consists of only three members (including one employee representative) may also violate sec. 21 para. 6 of the SE Employee Participation Act. Although there is much to be said against such a reading, it is conceivable that the labour courts could now reach the same conclusion on the basis of the ECJ ruling. Therefore, judicial clarification is awaited.
• For companies that were subject to the Co-Determination Act prior to the establishment of the SE, a distinction must be made between those in which corporate co-determination is governed by a participation agreement and those which apply the standard solution. Further, a distinction must be made between companies that chose the path of a change in legal form (Art. 2 para. 4 SE Regulation) and those that came into existence through a merger (Art. 2 para. 1 SE Regulation) or another type of formation.

• Section 21 para. 6 SE Employee Participation Act does not apply to other types of formation than the change in legal form – taking into account its special features. The parties to the participation agreement retain the autonomy to find deviating regulations.
• Companies in which corporate co-determination is governed by the fall-back solution (secs. 34 et seq. SE Employee Participation Act) are also not affected by the ECJ's SAP ruling. Curiously, according to sec. 36 para. 3 in conjunction with sec. 6 para. 3 of the SE Employee Participation Act, the trade unions' right of proposal is limited to the employee representatives on the supervisory board in Germany. However, according to the SAP ruling, in the case of the conclusion of a participation agreement, the "right" to propose a certain proportion of candidates does not only extend to the German trade unions, but to all trade unions represented in the SE, its subsidiaries and operations throughout the EU/EEA.
• In contrast, for companies that (a) were founded by way of a change in legal form, (b) were subject to the Co-Determination Act prior to the change in legal form and (c) have concluded a participation agreement, there are numerous as yet unanswered follow-up questions:

Is the participation agreement void in its entirety or do at least the provisions on information and consultation of employees remain in force? Is a new participation procedure triggered or is direct recourse made to the fall-back solution? In the case of a new participation procedure, is it mandatory to elect a new special negotiation body (sec. 18 para. 1 sentence 1 in conjunction with sec. 4 et seq. SE Employee Participation Act analogously) or can the existing SE works council represent the interests of the employees (sec. 18 para. 3 sentence 2 SE Employee Participation Act)? Do the "components of employee involvement" within the meaning of sec. 21 para. 6 SE Employee Participation Act also include, inter alia, the size of the supervisory board and not only the proportion of employee representatives? Are deviations from the election procedure for the chairperson of the supervisory board and his deputy (sec. 27 German Co-Determination Act) to be provided for – and, if so, how – in the participation agreement? Is the appointment of a labour director (sec. 33 German Co-Determination Act) now also mandatory for the SE?

Until the matter is clarified in court, considerable uncertainty will prevail. Although the appointment of the executive bodies and their legal acts as well as the existence of the SE itself are likely to remain unaffected, at the latest in connection with the next elections of employee representatives to the supervisory board of the SE, a large number of disputes between the management and the trade unions represented in the group, and possibly also distribution disputes between domestic and foreign trade unions, can be expected. Instead of initiating an election procedure on the basis of a participation agreement – which may already have been challenged in court – it may make sense to bring about an adjustment to the participation agreement with the SE works council, although legal risks may also arise due to the open questions described above.

• The ruling is also relevant for the cross-border change in legal form and cross-border demerger. Pursuant to the reference of Art. 96l para. 3 lit. b), 160l para. 3 lit. b) of Directive 2019/2121/EU, which are currently still being implemented, the case law on Art. 4 para. 4 of the SE Directive is also very likely to be taken into account when interpreting the national transposition standards (according to the status of the government draft of 6 July 2022 sec. 24 para. 2 Draft Act on Employee Participation in Cross-Border Conversions, Mergers and Demergers (MgFSG-E).

• In this respect, the requirements for the election of trade union representatives on the supervisory board in cross-border change in legal form and demerger constellations must be included in the participation agreements if the German Co-Determination Act previously applied.
• In deviation from the SE Employee Participation Act, the Draft Act on Employee Participation in Cross-Border Conversions, Mergers and Demergers (MgFSG-E) also contains for the fall-back solution the provison that "all components of employee co-determination" will be preserved in the resulting company after the cross-border transaction. However, since this provision only applies if the company is to have its registered office in Germany after the cross-border change in legal form/division, the practical relevance of this norm is rather low.
• The government draft gives the example of an Austrian GmbH with 300 employees being converted into a German GmbH, where "at least a one-third representation on the supervisory board" must be ensured. Taking into account the SAP ruling, it would now have to be determined which "components" of corporate co-determination Austria has in store. These components would then also have to be reflected in the participation agreement for the company domiciled in the target country Germany in the future – regardless of whether the corporate co-determination is based on a participation agreement or the fall-back solution. This will result in a considerable degree of legal uncertainty, as it will now have to be determined for each national co-determination law what its defining procedural elements should be!

Conclusion

The ECJ's SAP ruling may have a significant impact on the structure of corporate co-determination in SEs that have already been established, but also on ongoing participation procedures. First, however, it must be carefully examined as to whether the ruling is actually "relevant" for the company. If this is the case, the first step is to take stock of which provisions in the participation agreement could actually violate sec. 21 para. 6 of the SE Employee Participation Act. Only on this basis is it then possible to develop a well-founded risk assessment and, based on this, a tailor-made catalogue of measures.