How is it possible to circumvent co-determination?
Through European law. Since October 2004, companies have had another option when choosing their legal form: the European Company (Societas Europaea, SE).
So what?
Under German law, companies above a certain size must include employees on the supervisory board. For companies with more than 500 employees, one-third of the board must be made up of employees; for those with more than 2,000 employees, representation must be equal. With an SE, it’s different. It’s based on European law. An SE is not subject to the German One-Third Representation Act or the German Co-Determination Act. Anyone who establishes an SE or converts a company into an SE has the option of doing away with a supervisory board entirely.
Is there no employee participation at all in an SE?
Yes and no. A company may only establish an SE if the employer and employees have reached an agreement on the employees’ future participation rights. Additionally, it is a prerequisite that some form of corporate co-determination already existed. Thus, there are certainly companies that have chosen the legal form of an SE and in which co-determination exists. For example, Traton SE and Bilfinger SE have equal representation.
So what’s the problem, then?
Although employers and employees must have reached an agreement on participation rights before establishing an SE, employees are at a disadvantage under European law. In practice, employers can obstruct the process. This is because if no agreement is reached after six months, statutory minimum standards take effect, which severely restrict the rights of the employee side. On the one hand, the so-called “fallback provision” stipulates that theSE works council may meet only once a year. On the other hand, the “before-and-after” principle applies to corporate co-determination.
What is the “before-and-after” principle?
The “before-and-after” principle states that, following the establishment of the SE, the level of co-determination in the company is the same as it was before the SE was established. The crux of the matter: If there was no corporate co-determination beforehand, there will be no employee representation on the supervisory board in the future either. “In recent years, there has been a veritable craze among employers of small and medium-sized enterprises to convert their companies into an SE just before they reach the 500- or 2,000-employee threshold,” noted Daniel Hay, a co-determination expert at IG Metall. This is because doing so excludes one-third representation or equal representation, even if the number of employees exceeds these thresholds after the SE is established.
Is conversion to an SE really that straightforward?
It does require some effort. Depending on the form of incorporation, companies must meet different requirements. For example, stock corporations (Aktiengesellschaften) can establish an SE only through a merger. The same applies if a company wishes to convert itself into an SE. Limited liability companies (GmbHs), on the other hand, can establish a subsidiary or a newly created holding company in the form of an SE.
Do these requirements deter companies from establishing SEs that are hostile to co-determination?
No. “SEs are now simply available for purchase,” Hay explains. Here’s how it works: There are firms that establish SEs through roundabout means—SEs that produce nothing and have no employees. Such a “shelf SE” is essentially a shell company. The key point here is that it excludes co-determination from the very beginning. After all, where there were no employees, there was naturally no co-determination either. Through the “before-and-after” principle, this situation is cemented for all time by the establishment of the SE.
The founder company later sells the employee-less—and thus co-determination-free—shelf SE for a large sum to companies that want to establish an SE in an uncomplicated manner while excluding co-determination. The shelf SE is then skillfully integrated into the existing corporate structure.
Who does something like that?
One example is Tesla. The American corporation did exactly that for its plant in Grünheide. “Tesla bought a Düsseldorf-based ‘shelf’ SE, changed the company name, and moved the registered office to Brandenburg,” explains Hay.
Is this an isolated case?
No. Since the introduction of the SE in 2004, there has been a rush to adopt this corporate form. There are nearly 3,300 SEs in Europe. Only 700 of these are standard companies that are operational. 185 are “shelf” SEs that have been activated. In Germany, there are about 390 standard SEs.
What is IG Metall demanding?
IG Metall is demanding that companies wishing to convert to an SE—or that have already done so—ensure appropriate co-determination. “Even though we’re at a legal disadvantage in these cases, we often find a way to exert pressure on the employer in other areas to force them to the negotiating table,” explains Hay. Together with the other unions in the DGB, IG Metall is calling on lawmakers to close loopholes that allow companies to circumvent co-determination—such as through European and foreign corporate structures—and to penalize violations.
- There are 3,285 SEs in Europe.
- 700 of these are “standard” SEs. This means they are operational with at least 5 employees.
- There are 389 standard SEs in Germany.
- Of these, 237 have a supervisory board (48 with one-third employee representation, 26 with equal employee representation).
Source: Institute for Co-determination and Corporate Governance (I.M.U.) of the Hans Böckler Foundation
