Are employees at foreign undertakings to be included in corporate codetermination?

Decision handed down by Frankfurt am Main Regional Court (Landgericht) of 16 February 2015 (3-16 O 1/14)

One of the factors which can trigger corporate codetermination in Germany pursuant to the One-Third Participation Act (Drittelbeteiligungsgesetz – DrittelbG) and the Codetermination Act (Mitbestimmungsgesetz – MitbestG) is the number of employees, with the One-Third Participation Act applying for companies with over 500 employees and the Codetermination Act for companies with at least 2,000 employees. For various reasons, many companies try not to exceed these thresholds. This may result in operative restrictions if, despite elaborate endeavours to the contrary, these thresholds are at risk of being exceeded due, for example, to the hiring of temporary personnel. However, foreign undertakings and subsidiaries have seldom constituted any such risk up to now.

Previous understanding: Territoriality principle excludes employees from foreign undertakings

To date, the opinion has prevailed that employees in foreign undertakings, and particularly those in foreign subsidiaries, should be excluded from the threshold figures as the “territoriality principle” applies to corporate codetermination. This principle states that only personnel employed in the territory of the Federal Republic of Germany by German enterprises and undertakings should be included in the threshold figures. In recent years, however, the literature on codetermination law has increasingly indicated that European law might be opposed to the non-inclusion of employees from foreign undertakings located elsewhere in the EU. There was uncertainty, however, even amongst the sceptics, whether an (alleged) breach of European law would result in German corporate codetermination contravening European law and thus being inapplicable, or whether the provisions on corporate codetermination should instead be interpreted in line with European Union law thus including employees from undertakings in other EU Member States.

Frankfurt am Main Regional Court: Personnel employed abroad to be included in the threshold figures

In its decision of 16 February 2015 (file no.: 3-16 O 1/14) as part of “status proceedings” (Statusverfahren) on the proper composition of the supervisory board, Frankfurt am Main Regional Court had to decide on how to implement this rather academic dispute in practice. The judgement which has received little attention up to now and has yet to become final, could have far-reaching implications. The specific proceedings were concerned with a listed company codeter-mined under the One-Third Participation Act (DrittelbG) which had 1,624 employees in Germany and a further 1,747 employees in other EU Member States. Frankfurt am Main Regional Court ruled that neither was the One-Third Participation Act inapplicable due to contravention of European law, nor were the proceedings to be suspended for the matter to be referred to the ECJ. Moreover, the Court said, the company was not codetermined in accordance with the One-Third Participation Act but in accordance with the Codetermination Act (MitbestG). This arose from Section 1(1) in connection with Section 5(1) of the Codetermination Act, under which a company that usually has more than 2,000 employees is subject to codetermination by the employees, with the employees of group companies being deemed to be employees of the controlling company. Contrary to widespread opinion, employees outside Germany thus had to be included both in elections for employee representatives to the supervisory board and in the number of employees required for application of the Codetermination Act. This also applied to the employees of foreign subsidiaries.

What precautionary action is advisable?

Should the decision become final and set a precedent, numerous companies stand to become subject to parity codetermination under the Codetermination Act. Forward-thinking companies codetermined under the One-Third Participation Act should certainly prepare themselves for impending “status proceedings” (Statusverfahren) under Section 98 of the German Stock Corporation Act (Aktiengesetz – AktG). It is more important, however, to take time right now to consider strategies for preserving the existing codetermination structure. This could, for example, take the form of a change in group structures or a corporate transformation, particularly into a European stock corporation (Societas Europaea – SE). In that case, at any rate, the smallest challenge – although still not to be underestimated – is likely to be that, if foreign employees are to be included in elections to the supervisory board, the already complex election regulations will become even more complicated.