On December 7, 2021, the Social Democrats (SPD), the Greens (BÜNDNIS 90/DIE GRÜNEN) and the Free Democrats (FDP) concluded the coalition agreement for the 20^th legislative period of the German Parliament (2021 until 2025), in which they announced, inter alia, their intention to amend the German corporate co-determination law and to extend the scope of application of the German One-Third Participation Act (Drittelbeteiligungsgesetz).

Background of the Change

In Germany, corporate co-determination for employees generally takes the form of employee representation in the supervisory board of the relevant company (i.e., either one third or half of the supervisory board members will be elected by the employees).

Typically, a co-determined supervisory board has supervision and monitoring duties, information rights and veto rights with respect to certain transactions and business decisions of the management.

German corporate co-determination law applies only to certain types of companies established under German law, and only in case certain headcount thresholds are exceeded:

• The German One-Third Participation Act provides for mandatory one-third employee representation in supervisory boards of companies with more than 500 employees.
• Under the German Co-Determination Act (Mitbestimmungsgesetz), a 50% employee representation in supervisory boards is mandatory for companies with more than 2,000 employees.

So far, different rules apply with respect to the question as to whether employees of subsidiaries are taken into account when determining the headcount of a parent company.

• Under the German Co-Determination Act, employees of all subsidiaries that are controlled by the parent company (whether de jure or de facto) count towards the applicable threshold. It is sufficient that the parent company is able to exercise a controlling influence on the subsidiary, which is generally possible in case of a majority shareholding.
• Under the German One-Third Participation Act, employees of a subsidiary only count towards the headcount threshold, if
  • a corporate domination agreement (Beherrschungsvertrag) exists between the parent company and its subsidiary, or
  • the subsidiary is integrated under corporate law (eingegliedert) into a parent company.

In these two specific cases, the subsidiary retains its status as separate legal entity, but it is fully subject to instructions of the parent company (even to the subsidiary’s detriment).  The subsidiary’s creditors are protected by certain rights against the parent company and the parent company’s obligation to balance all losses of the subsidiary.

According to the coalition agreement, this significant difference in how employees of subsidiaries are counted towards the applicable thresholds, which is also called the “one-third participation gap”, shall be closed by way of extending the rules of the German Co-Determination Act dealing with the attribution of employees of subsidiaries also to the German One-Third Participation Act.

Outlook

The new German government has expressed its intention to strengthen corporate co-determination for employees in Germany.  Given the current majorities in the German Parliament and the Federal Council, the government coalition’s plans could be implemented quickly.  In this context, it remains to be seen whether further changes might be introduced in the German corporate co-determination law.

In particular, parent companies with 500 or less employees, which, however, have subsidiaries whose employee population, once attributed to these parent companies, would push them over the headcount threshold of the German One-Third Participation Act, should prepare themselves in light of the announced reform plans.  Once the attribution of all employees of controlled entities (irrespective of de jure or de facto) also applies under the German One-Third Participation Act, such parent companies would become subject to corporate co-determination rules and might need to establish a supervisory board with one third of its members being employee representatives.

Against this background, companies may consider to assess possibilities that would allow them to avoid corporate co-determination for employees, e.g., a change of their legal form into an SE (Societas Europaea), to which the German corporate co-determination law generally does not apply.  For further details in this respect, please see also“German Reform Plans regarding Corporate Co-Determination for an SE”.