Freedom of co-determination of a group holding SE founded without employees

Background

In practice, an SE is typically formed by way of (1) a merger involving at least two public limited companies from different EU jurisdictions, (2) a transformation of the legal form of a public limited company with at least one foreign EU subsidiary, or (3) a merger of a company into a shelf SE. A mandatory component of establishing an SE is the procedure for determining employee co-determination in the supervisory body of the SE. Co-determination is primarily to be defined in an agreement between the managements of the companies involved in the formation and the special negotiating body of the employees (SNB) set up for this purpose.

In practice, it has already been permissible in Germany to establish a (shelf) SE without conducting an employee involvement procedure, provided that neither the SE nor the founding companies have employees. However, according to the prevailing opinion to date, the employee involvement procedure should be carried out as soon as the SE is activated, i.e. began operational activity. Among other things, a distinction was made as to whether the SE itself employed staff or merely receives shares in subsidiaries which in turn employ staff. With regard to the latter scenario, the ECJ and the BAG have now recognised that there is no obligation to retroactively conduct the employee involvement procedure.

Facts of the case

In 2013, an employee-less SE was founded by two employee-less founding companies under UK law, without conducting negotiations on employee participation. One day after registration, the SE became the sole shareholder of a German holding GmbH with its own employees and several (EU-wide) subsidiaries with a total of approx. 2,200 employees, which itself was subject to the German One-Third Employee Participation Act (DrittelbG). The holding GmbH was subsequently converted into a KG, as a result of which employee co-determination under the DrittelbG no longer applied. As part of the conversion, the SE became the sole limited partner and sole shareholder of the general partner in the form of another SE. Both SEs remained without employees. The registered office of the SE was relocated from England to Germany in 2017. Shortly afterwards, the group works council of the KG applied to the Hamburg Labour Court (ArbG) for the SE to catch up on the participation procedure. The Hamburg ArbG and the Hamburg Higher Labour Court (LAG) rejected the Group Works Council's application. The BAG, which was subsequently called upon by the group works council in the labour court proceedings, referred the question to the ECJ for an answer as to whether, in such a case of the subsequent activation of the SE as the controlling company of subsidiaries employing employees, the procedure for the involvement of employees in the SE must be carried out later.

The ECJ's decision – and the BAG's conclusion

In its judgement of 16 May 2024 the ECJ ruled that the involvement procedure does not need to be retroactively conducted in the case of an SE that was lawfully founded without co-determination, even if the SE later becomes the controlling company of subsidiaries with employees in various EU member states. Catching up could only be necessary in the event of abuse, with the respective national legislator having the right to regulate this.

The ECJ based its decision on an examination of the wording, structure, purpose and history of the relevant provisions of European law of the SE Regulation (Regulation EC 2157/2001) and the SE Directive (Directive 2001/86). The Court emphasized that the negotiation procedure between the parties must generally take place prior to the formation of the SE, and that the regulations in this regard are therefore not applicable to an SE that has already been established. The exceptions provided for by the SE Directive were also not relevant to the present case. The recitals of both the SE Regulation and the SE Directive indicate, on the one hand, the intention to safeguard the participation rights acquired by the employees of the companies involved in the formation, and on the other hand, to ensure the conduct of negotiations between the parties regarding the continuation of these participations within the framework of the SE and, in this respect, are clearly linked to the formation of an SE. An obligation to catch up with regard to an already established SE cannot be justified. Furthermore, in the interests of predictability for shareholders and employees and the stability of the existing SE, the European legislator deliberately decided in favour of carrying out the involvement procedure before - and not after - the formation of the SE and, although the possible requirement to resume negotiations in the event of structural changes to the SE was considered, it was deliberately not included in the statutory provisions. In this respect, there is no regulatory gap, but rather a genuine decision by the Union legislator resulting from the compromise on the before-and-after principle.

In its decision of 26 November 2024 (1 ABR 37/20) and in two parallel proceedings on SE & Co. KGs with similar facts (decisions of 26 November 2024, 1 ABR 6/23 and 1 ABR 3/23), the BAG now agreed with the ECJ and ruled that a procedure for negotiating the employee participation in an SE does not need to be conducted retrospectively if this was not permitted when the SE was founded, as no employees were employed at the time of foundation, i.e. it was a so-called shelf foundation.

Pursuant to Sec. 4 and 18 SEBG, there is no provision for catching up on such negotiations, as these provisions only apply to the planned formation of an SE and to structural changes pursuant to Sec. 18 (3) SEBG or the circumstances specified in Sec. 18 (1)and 2 SEBG in the case of an SE where a special negotiating body has already been formed as part of the formation.

According to the BAG, an analogous application of these provisions is also ruled out, as there is no unintended regulatory gp. According to the case law of the ECJ, the lack of regulations on the subsequent commencement of negotiations is based on a deliberate decision by the EU legislator. According to the BAG, there are also no indications that the national legislator would have wanted to regulate an obligation to enter into subsequent negotiations in the event of the formation of an SE without employees.

According to the BAG, Sec. 43 SEBG, which contains a prohibition of abuse, also does not establish an obligation to make good, as the standard merely prohibits certain behaviour without standardising positive obligations to act. In this respect, the BAG left open the question of when abuse must be assumed at all. The BAG rejected any interpretation that went beyond the wording of Sec. 43 SEBG – possibly by way of judicial development of the law – as it was neither required by EU law nor provided for by the national legislator.

Conclusion and practical tip

As a result of the cases decided, there is now legal certainty for the use of a shelf SE as a limited partner or general partner of an SE & Co. KG, which is the head of a group with more than 2,000 employees or itself employs more than 2,000 employees.

In practice, the key question is the extent to which the ECJ's decision applies to comparable structuring options. This question arises in particular regarding the practice-relevant case of the subsequent economic activation of an SE that was previously founded without employees by transferring an active company with employees to the SE or the merger of a co-determined company into the SE. However, the prevailing opinion to date that there is an obligation to catch up in such cases is likely to be difficult to reconcile with the decisions of the ECJ and BAG. However, as long as there are still no supreme court decisions on such cases, it is probably still advisable, as a precautionary measure, to make up for the participation procedure by analogous application of the provisions of the SEBG relevant for the formation or to take the route via a holding structure, even if, taking into account the current reasons for the decision, there is much to suggest that the BAG will probably also reject an obligation to catch up in these cases. In any case, the recently concluded coalition agreement does not provide for an adjustment of the law on co-determination.