Corporate Co-Determination German-Style as a Model for the UK?

On 13 July 2016, Theresa May took up office as Prime Minister of the United Kingdom. Only shortly before, she had made headlines when she proposed to adopt European-style worker representation on the boards of leading companies.

Corporate co-determination hence seems to gain a certain degree of popularity with the British government – which is highly astonishing, considering that it was the UK which most fiercely fought against co-determination on a European level. It was mainly the diverging views of the UK and Germany on co-determination which have thwarted projects like the Draft Fifth Company Law Directive or the establishment of a European Private Company (Societas Privata Europaea, SPE). It is downright ironic that while the UK now shows an interest in co-determination, the concept is being questioned in Germany after decades of lying dormant. The reason for the new German discussion of co-determination are doubts regarding the compatibility of its specific form of co-determination with higher-ranking Union law. This post provides a brief overview of the most recent developments in German co-determination law that were the focus of a joint Oxford/Munich conference at the Ludwig-Maximilians-Universität (LMU) in Munich in March 2016.      

The German model of corporate co-determination is, in its concrete form and specifically in its intensity, a unique phenomenon: depending on the size of a German limited company, a third or even half of the members of its supervisory board are voted in by its employees. Both case law and scholarly works nearly unanimously find that in the elections for the supervisory board the right to vote and to stand as a candidate is reserved for employees of German companies and their subsidiaries. In contrast, employees of foreign branches and foreign subsidiaries of German companies can neither vote employee representatives to the supervisory board, nor be voted into the board themselves.

This has to be regarded as a serious legitimacy deficit, since corporate co-determination serves the purpose of democratising decision-making processes and of redistributing leadership powers within a company. However, these intentions can be counteracted by German employees because the current German rules on co-determination enable them to unilaterally advance their interests on the supervisory board even against the interests of their foreign colleagues. This problem becomes particularly apparent when the board is dealing with matters like location decisions or cross-border restructuring.

Note that there is no political or economic justification for this exclusion of foreign employees from co-determination under the German model – quite the contrary. The experience of many companies in the legal form of a Societas Europaea (SE) has shown that the quality of the work of supervisory boards can only benefit from the involvement of foreign employee representatives. At best, the current legal position can be explained from a historical perspective: the inclusion of foreign employees in the election of employee representatives would – notwithstanding the existing legitimacy deficit – clearly contradict the intentions of the German legislator at the time when board-level representation was introduced. 

In recent years there has been a discussion on whether the exclusion of foreign employees is compatible with EU law. Firstly, one could find it in breach of the general principle of non-discrimination (Art. 18 TFEU). Secondly, there could also be a breach of the free movement of workers (Art. 45 TFEU) since moving from a domestic to a foreign branch or subsidiary will inevitably lead to the loss of the right to vote or be voted into the supervisory board. In the individual case, this can entail the loss of a mandate for the supervisory board or at least the loss of the chance to acquire such a mandate (and thereby the loss of the financial and non-financial advantages linked therewith). On the other hand, some scholars attempt to justify the exclusion of foreign employees by relying on the so called “principle of territoriality:” according to this position, the German legislator, due to the territorial limitation of its regulatory authority, cannot ensure the holding of elections in foreign branches or subsidiaries.

Different views also exist as to the consequences of a possible breach of European primary law by the current model of German co-determination. Because of the priority of application of EU law, some plead for the inapplicability of the German laws on co-determination – which would mean that all supervisory boards of co-determined companies would be wrongfully composed. Others consider it possible that the national law could be interpreted in line with Union law. However, there is broad agreement that the inclusion of foreign employees into the German model of co-determination seems desirable for reasons of legitimacy and that, therefore, the German laws on co-determination should be reformed and made more flexible.

The question of whether the German model of co-determination is in breach of EU law is not only of mere academic interest, but also has a considerable public policy dimension and is of particular importance for the lawmaker. From an early stage, the German discussion has also been critically followed and enriched internationally. The “Reflection Group on the Future of European Company law”, a group of internationally renowned corporate law experts from different Member States that was brought into being by the European Commission, even declared itself in favour of the European Commission initiating infringement proceedings against the Federal Republic of Germany and other Member States with similar rules on co-determination (see here).

More recently, various plaintiffs have made it a subject of legal proceedings whether supervisory boards of various German co-determined listed companies might be wrongfully composed due to the German rules on co-determination violating EU law. The Berlin Court of Appeal (Kammergericht) has stayed such legal proceedings and referred the case to the Court of Justice of the European Union (CJEU) under Art. 267 TFEU for a preliminary ruling (Case C-566/15). It asked whether it is compatible with Art. 18 TFEU (principle of non-discrimination) and Art. 45 TFEU (free movement of workers) for a Member State to grant the right to vote and stand as a candidate for the employees’ representatives in the supervisory body of a company only to those workers who are employed in establishments of the company or in affiliated companies within the domestic territory. By now, the parties to the proceedings have submitted their pleadings to the CJEU. It is noteworthy that the European Commission submitted written observations according to Art. 23 (2) of Protocol No. 3 on the Statute of the CJEU. In these observations, the Commission agrees with the applicant in the main proceedings insofar as it considers the current German rules on co-determination to be contrary to Union law.

This reference for a preliminary ruling attracted substantial media attention; the Frankfurter Allgemeine Zeitung referred to the case as having the potential to foster a “cultural revolution.” The authors of this blog post organised a joint Oxford/Munich conference at the Ludwig-Maximilians-Universität (LMU) in Munich in March of this year. During this conference, not only the issues that are subject to the case pending before the Kammergericht and the CJEU were discussed. Participants also developed specific ideas and proposals on what a future German system of corporate co-determination might look like (see the conference website for an overview of this discussion). The challenge lies in, on the one hand, taking account of the relevant Union law, and, on the other hand, developing practice-oriented and “doable” solutions for the future design of German co-determination law. In addressing this challenge, regulatory models from other (European) states have to be taken into account insofar as they regulate (also) the issue of the inclusion of foreign workforces into their respective national system of co-determination.

The contributions to the conference will be published in a special edition of the “Zeitschrift für das gesamte Handels- und Wirtschaftsrecht”. The conference volume is structured into four topical sections which are each complemented by a report of the intensive discussions that took place. After placing the subject into the broader context of the Europeanisation of Corporate Governance, the first section of the volume deals with the order for a preliminary CJEU ruling of the Berlin Court of Appeal and examines how the CJEU will presumably decide on the question put before it. The second section is concerned with the question of what inferences could/should be drawn from these proceedings and how, already de lege lata, an inclusion of foreign employees into co-determination can be ensured. The third section focuses on possibilities of a reform of the German co-determination rules. Finally, the fourth section covers the consequences of the Berlin Court of Appeal decision for legal practice. The conference volume also contains a contribution on the future of corporate co-determination from an Austrian perspective.

Further information on the conference volume (Habersack/Behme/Eidenmüller/Klöhn (eds.), Deutsche Mitbestimmung unter europäischem Reformzwang (Frankfurt a.M.: Recht und Wirtschaft, 2016)) can be found here.

Horst Eidenmüller is the Freshfields Professor of Commercial Law at the University of Oxford. Mathias Habersack is Professor of Law, and Caspar Behme is Wissenschaftlicher Assistent (Assistant Professor) at the Ludwig-Maximilian-Universität München, and Lars Klöhn is Professor of Law at the Humboldt-Universität zu Berlin.