Parity co-determination in the SE: It is getting more complicated

Parity co-determination - what is it about? 

In companies with usually more than 2,000 employees, a supervisory board must be formed, half of whose members are elected by the employees. However, this parity co-determination does not apply to all companies. The following principles apply:

• Excluded are so-called tendency enterprises, i.e. those that serve e.g. political, denominational, charitable, scientific or artistic purposes or belong to the press. 
• The coal and steel industry is excluded. A separate law applies to them.
• Co-determination is only applicable to companies of the following legal forms: Stock corporations, partnerships limited by shares, limited liability companies and cooperatives as well as certain limited partnerships whose general partner has one of the aforementioned legal forms. This includes in particular the GmbH & Co. KG. 

Special features of the Societas Europaea (SE)

The Societas Europaea (SE) is not covered by the scope of application. This is despite the fact that it is indisputably a capital company, namely a public limited company according to largely unified European legal principles. An SE can be established in all countries of the European Economic Area since 2004. However, the German legislator deliberately did not include the SE in the scope of application of the Co-Determination Act. This was and is sensible or even necessary because the German system of parity co-determination in the supervisory board does not easily fit the organisational structure of an SE. This is because, according to the explicit European regulation, an SE can be established not only in the dualistic structure (management board and supervisory board) typical of, for example, German public limited companies, but also in a monistic structure (management board or administrative board) common in other countries. If monistic companies lack a supervisory board, the German system of parity co-determination would come to nothing.

Instead, a separate law, which came into force in 2004, regulates corporate co-determination (as well as works constitution) in the SE, insofar as it has its registered office in Germany. One of the aims of this SE Participation Act is to guarantee co-determination in the SE, but it is primarily based on a negotiated solution rather than on rigidly prescribed structures. If the SE results from the conversion of one or more existing companies, the level of participation that existed before the conversion is to continue to apply as far as possible for the possibly different organisational structure of an SE.
The "freezing effect

This principle, which has always been controversial, has (at least) one gap. The current federal government has set out to close this gap (coalition agreement of 7.12.2021, p. 56 below): Since co-determination in the SE resulting from a conversion is based on the previously applicable co-determination status, co-determination remains "frozen" at this level, even if the SE later exceeds the threshold of 2,000 employees at which parity co-determination applies to other corporations in Germany ("freezing effect").

The defining content of German parity co-determination

The ECJ has now closed another loophole, at least to a certain extent: already according to the law, the negotiated solution after a conversion may not fall below the previously existing level of co-determination. So far, this has essentially been related to the proportion of supervisory or administrative board members determined by the employees. 

However, in a case brought by IG Metall and ver.di against SAP SE, the ECJ has now ruled that the separate ballot under section 16 (2) of the Co-Determination Act also counts as part of the formative and thus inviolable content of prior co-determination. This separate ballot ensures that the trade unions represented in the company have a considerable influence on the composition of the supervisory board. Now that the ECJ has guaranteed the continued existence of this principle in the case of conversion into an SE, the question arises as to which other elements of German parity-based co-determination are equally formative. For example, the appointment of labour directors or the election procedure and voting rights of the chairpersons of the supervisory board and their representatives.

Outlook

On the whole, this not only makes the SE less attractive for companies that would like to avoid strict German co-determination. Rather, the negotiated solution aimed at a fair balance is now more at risk of becoming ineffective than before; this legal uncertainty will not increase the attractiveness of the SE, especially for medium-sized companies.