Negotiations with the Special Negotiating Body and the Story of Soup-Kaspar

published on 15 September 2022 | reading time approx. 4 minutes

Do you know the German children's books Der Struwwelpeter and The Story of Soup Kaspar? If you do, you will probably remember the most memorable quote in the book is the one by Soup-Kaspar: “I will eat no soup! No! I will not eat my soup! No, my soup will I not eat!” Finally, Soup-Kaspar dies because he stubbornly refuses to eat his soup, a pretty harsh ending for a children’s book.

Soup-Kaspar’s stubborn behaviour brings to mind some negotiation situations: the parties relentlessly insist on their own standpoint and thus, eventually, frustrate a deal in many cases. Yet, what negotiations are usually about is to find a compromise.

Negotiations are an integral part of M&A deals and are conducted throughout the transaction process, even if sometimes it seems they are held perhaps rather for their own sake. After all, they offer an opportunity to play interesting little games with the counterparty.

But negotiations also take place outside of typical M&A deals, which is no less exciting. In concrete terms, we have just recently experienced negotiations with the so-called “special negotiating body” (Besonderes Verhandlungsgremium) as part of transformation of a company into an SE. They are about the company’s future, changes, and differing interests that need to be considered, and they, too, are conducted with the ultimate goal to find a solution that would be as satisfactory as possible for all parties – that is, exactly, to strike a deal. But let us first take look at the basics:

Options to establish an SE in a nutshell

A European Company (Societas Europaea - SE) can be established in various ways. Two very popular methods will be mentioned here:

The first way is the transformation of the legal form of a German joint-stock company (AG) into an SE. A crucial condition for this is that the AG to be transformed must for at least two years have held a subsidiary governed by the laws of another EU member state. This pure change of a legal structure can be applied under the same conditions to a German limited liability company (GmbH). It is a so-called double change of a legal form – first from a GmbH into an AG and then from an AG into an SE.

If there is no subsidiary in another EU Member State and only German companies are involved in the transformation, the company to be transformed can, alternatively, be merged with a shelf SE. Although, surprisingly, we repeatedly meet in our counselling practice with an opinion according to which shelf companies have at times bad reputation, which is completely wrong, they are a common and fully legitimate first-choice method to overcome the hurdle of lacking subsidiaries in other EU Member States.

Employee participation

But going back to the negotiations mentioned at the beginning: If the company to be transformed into an SE has employees, an employee participation procedure must generally be carried out. The purpose of this procedure is to secure the employees' acquired rights to participate in company decisions. This is because employees may not be deprived of their rights as a result of company’s transformation into an SE.

The most important German labour law to be named in this context is probably co-determination under the One-Third Participation Act (Drittelbeteiligungsgesetz - DrittelbG) or the Co-Determination Act (Mitbestestimmungsgesetz - MitbestG), according to which a supervisory board must be formed if the threshold values of 500 (DrittelbG) or 2,000 (MitbestG) employees are exceeded and one third (DrittelbG) or half (MitbestG) of the supervisory board must be composed of employee representatives. If the company to be transformed was already obliged to apply the relevant provisions before becoming an SE, the transformation into an SE does not change anything in this regard. However, the SE allows the status existing at the time of transformation to be preserved, to be frozen, so that a later or further exceeding of the threshold values no longer leads to any change in the co-determination status.

In addition, the SE Participation Act (SE-Beteiligungsgesetz - SEBG) stipulates that employees have, as a rule, the right to be informed and consulted, i.e. the employees must participate in the company. At this point, the SEBG assumes the formation of an SE works council (SE-Betriebsrat). This should not be confused with what is commonly known as the work council (Betriebsrat) under the Works Constitution Act (Betriebsverfassungsgesetz - BetrVG). The SE works council’s rights are limited to the right to be informed and consulted, the SE works council has no co-determination or co-decision rights – at least as long as no other bargain has been made.

Negotiations with employees

And this brings us to the starting point of this article: the SEBG provides that the company to be transformed and its employees negotiate and conclude an agreement on the future participation of employees in the SE, on the specific powers of the SE works council and the scope of the employees’ rights. For this purpose, the employees should form a dedicated negotiating body – the so-called “special negotiating body” . Depending on whether or not the company to be transformed has a works council, the special negotiating body is elected either by the works council or with the participation of all employees. As one can imagine, the latter can sometimes be a challenge.

If, in any case, no participation agreement is reached by mutual consent, the statutory standard provisions of the SEBG apply as a rule; however, the advantage of an agreement tailored to the company and its specific needs is significantly greater.

The interests of both parties are naturally somewhat different here. Employees would like to secure as much participation as possible, while the company is often interested in a smaller scope of participation. The reasons for both positions are manifold – may they be justified or unjustified. In any case, it is understandable that each party wants to find the best possible solution for itself; after all, such a participation agreement has a certain forward-looking character when it comes to the company's management.

The decisive factor is to enter into such negotiations with the necessary transparency, empathy and willingness to compromise and not to insist on one's own standpoint in a persistent and relentless manner à la Soup Kaspar. This was also the case recently in negotiations held in three languages with a number of workers from different EU countries. Within a short time, a satisfactory participation agreement was reached for all parties. This could be achieved largely due to the good preparation and conduct of the negotiations by all parties involved, but there was also no Soup Kaspar in the negotiating round, and this was certainly also an advantage.