Consideration of foreign subsidiaries in co-determination

Regional Court Frankfurt a. M., ruling dated 16.2.2015 – 3-16 O 1/14

A recent decision by the Regional Court Frankfurt a. M. is currently attracting attention from numerous German companies. Supervisory Boards of German companies operating internationally may be made up incorrectly, or a co-determination Supervisory Board may have to be formed for the first time in a number of such companies.

The Petitioner, a Professor of Labor Law from Munich, had acquired several shares in Deutsche Börse AG with the aim of subsequently initiating so-called status proceedings. The aim of the proceedings was to establish that the Supervisory Board of Deutsche Börse AG has been formed incorrectly. The Respondent’s Supervisory Board was formed in accordance with the Law on One-Third Participation (DrittelbG), and one third of its members are employee representatives. At the time of the decision, Deutsche Börse AG had approx. 1,600 employees in Germany, but more than 2,000 employees worldwide.

Whether and to what extent a co-determination Supervisory Board has to be formed is based on the number of employees in the respective company. If the company has more than 500 employees, one third of the members of the Supervisory Board must be employee representatives in accordance with the provisions of the DrittelbG. If the respective company has more than 2,000 employees, the composition of the Supervisory Board is based on the provisions of the Co-Determination Act (MitbestG). In this case, half the members of the Supervisory Board must be representatives of the employees. The ruling previously applicable under prevailing opinion was that employees working in foreign companies, in particular those in foreign subsidiaries, are not to be taken into account as regards the threshold levels, because company co-determination is subject to the so-called “principle of territoriality”. Only employees of group subsidiaries with their registered office in Germany were taken into account.

Background to the decision

Contrary to this previously prevailing opinion, the Regional Court Frankfurt a. M. has now decided that the employees based abroad must be involved in the election of employee representatives to the Supervisory Board, and they must be taken into consideration as regards the number of employees authoritative for application of the Co-Determination Act. This also applies to employees of foreign subsidiaries.

Decision: Employees working abroad count

In the opinion of the court, this results in a situation where not just a third but rather half the members of the Supervisory Board of Deutsche Börse AG must be employee representatives, meaning that the current composition is not correct. If the workforce in other countries is taken into account, Deutsche Börse AG would have more than 2,000 employees.

The general definition of a group of companies also includes foreign subsidiaries

In its reasons, the Regional Court Frankfurt a. M. refers to the wording of Section 1 Subsection 1 MitbestG (Co-Determination Act) in conjunction with Section 5 Subsection 1 MitbestG. This does not provide for any restriction just to employees working in Germany. Consequently, exclusively the general term of “group” as per Section 18 Subsection 1 AktG (German Stock Corporation Law) is authoritative. This also includes foreign subsidiaries.

Practical tip

Even now, German companies are well advised to give thought to possible construction options. This is undoubtedly also true in view of the fact that the corresponding threshold levels of 500 or 2,000 employees can quickly be exceeded as a result of a completed company purchase. The judgment of the Regional Court Frankfurt a. M. can also give cause to think more closely about transformation into a European Company (Societas Europaea – SE) or the formation of an SE by way of cross-border merger.

Summary

If the opinion of the Regional Court Frankfurt a. M. were to establish itself, this would have significant effects on many small and medium-sized companies with dependent foreign group companies. They would be obliged to take the employees of these group companies into account when determining the number of employees for the threshold levels under the co-determination laws and, if the threshold levels are exceeded, to have one third or half the members of the Supervisory Board elected by the employees. If no Supervisory Board exists at present, there would be an obligation to form one, with corresponding participation of the employees.