ECJ – C-677/20 SAP SE / IG Metall and Ver.di: severe setback for contractual freedom concerning the design of arrangements for the involvement of the employees in the case of an SE formed by conversion: possible consequences for SEs with registered office in Germany

In the above mentioned ruling of October 18, the ECJ´s Great Chamber declared a claim filed by the German trade unions IG Metall and Ver.di against the agreement on the involvement of the employees in the company SAP SE well-founded. The agreement contained a provision applying to a reduced supervisory board of 12 members in total and subject to a system of equal co-determination, providing in addition that out of the 6 representatives the employees were entitled to in total, 4 were assigned to the employees in Germany, whereby the German trade unions were granted the right to nominate candidates for several of these German seats. However, th employee involvement agreement refrained from safeguarding the trade union´s right to propose candidates by a seperate ballot, in contrast to Sec. 16 para. 2 sentence 1 of the German Co-Determination Act (MitbestG) applicable to the company prior to its conversion into a Societas Europaea (SE). Consequently, the employee involvement agreement could not exclude that on the ocassion of elections to the supervisory board, other employees not nominated by one of the suing trade unions were eligible.

The ECJ ruled that this provision infringed Art. 4 para. 4 of the Council Directive 2001/86/EC (the “EC Directive”). For the particular case of an SE formated via conversion the legal proceedings were based on, latter rule establishes that the employee involvement agreement must provide for at least the same level of all elements of employee involvement as the ones existing within the converting company (the ‘before and after’ principle). The ECJ shared the view of the referring court, the German Federal Labour Court („BAG“), that even though it did not lead to an absolute petrification of the composition and inner functioning of the Supervisory Board as under the German MitbestG, this prohibition to deteriorate the former terms on employee participation hinders any posterior deline of elements of employee involvement considered as caracteristic and madatory under domestic law via contractual agreement. The ECJ concluded that both the trade unions‘ right to propose candidates for elections as well as their election in a separate ballot belonged to that category of characteristic elements of co-determination under German law. Thus, it rejected the prevailing doctrine which prior to this ruling supported that only the proportional allotment of seats to the employees’ representatives would be covered by Art. 4 para. 4 of the EC Directive.

At the same time, the ECJ emphasised several times that such mandatory components of employee involvement under domestic law must be extended to all other trade unions existing in subsidiaries or branches of the company in other Member States of the EU or the EEA. By doing so, it not only approves the „German Sonderweg“ to involve external trade unions´ representatives lacking an employment relationship by mandatory rules, but via the gateway of Art. 4 para. 4 EC Directive, this rule leads furthermore to a mandatory export of this de facto right to appoint employees’ representatives to all remaining EU/EEA States of employment, whose compatibility with the Directive in all other events (ergo standard rules or employee involvement agreement in cases of formation of on an SE different from a conversion) is highly debated and can hardly be reconciled with the EC Directive, given that latter uses to grant rights on employee involvement exclusively to employees, but not to external representatives. In addition, due to the frequent emphasis by the Court of a mandatory extension of employee involvement rights even in the event of an agreement, it seems questionable if any allocation of seats to the different Member States by means of private autonomy that deviates from the standard rules is still allowed. As a result of the extensive interpretation by the ECJ of Art. 4 para. 4 EC Directive, it even seems possible that contrary to widespread practice, in the future Courts may include also other elements such as the total size of the Supervisory Board into a kind of open-ended list of mandatory rules under domestic law.

If in the case of the SE, the employee involvement agreement still has a future, can indeed be questioned as a result of the lack of legal certainty and a considerably reduced degree of private autonomy it has been given by the ECJ. In the Advocate General´s opinion by the way, the same applies to the cross-border conversion and division of domestic legal forms, for which the Company Law Directive also refers to Art. 4 para. 4 EC Directive. Are there any alternative solutions? It seems questionable if as far as the SE formed by conversion is concerned, companies and groups can take recourse to the standard rules in order to avoid intrusion of external trade unions´representatives. Even though it argues for an affirmative answer to this question that contrary to the German MitbestG, secondary law (the EC Directive) limits employee involvement in the Supervisory Board to employees of the corporate group involved, this solution is uncertain as for the SE, the EC Directive provides for the conservation of all domestic elements of employee involvement also in the event of the standard rules. For existing public limited liability companies incorporated under a domestic EU/EEE jurisdiction, the other ways to constitute an SE often are not suitable, and therefore do not offer an alternative in order to make employee involvement more flexible compared to German domestic law.

Thus, the highest degree of legal certainety probably can be offered by shifting to the tool of cross-border mergers of domestic legal forms, and a subsequent „total escape from the SE“. Because for cross-border mergers, the Company Law Directive expressly avoids any reference to Art. 4 para. 4 EC Directive. In this variant of a cross-border merger, particularly in the constelation of a Supervisory Board composed by twice 6 members respectively that gave rise to the preliminary ruling and that is very common in practice, the standard rules offer quite an effective tool in order to limit at least the de facto nomination rights for German trade unions. Because due to the mandatory internationalisation of the employees´ representatives in the board, German employees use to hold only 5 seats, whereby the German  Act on the Involvement of Employees on cross-border Mergers (MgVG) provides that a trade unions´ right to nominate candidates is only granted for each third seat. Even if the foreign act on employee involvement applicable to the allocation of the sixth´s seat also grants a right to trade unions to propose candidates (which is not always the case), provisions in many Member States limit this right to trade unions´ representatives that are simultaneously employees of the group, such as Austrian law (vide ArbVG) or Spanish law (vide LITSE). Sad conclusion: the (German) SE is dead, long live the cross-border merger!

Florian Deck, 21/10/2022

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