Involvement of the works council in corporate transactions

In view of this, it is worth taking a closer look at this topic.

In companies with more than one hundred permanent employees in Germany a works council formed in accordance with Section 106 para.1 sent. 1 of the German Works Constitution Act (BetrVG) is obliged to form an economic committee. As an auxiliary body of the works council, the economic committee has the task of discussing economic matters with the employer and informing the rest of the works council body about them. If there is no economic committee, this task only falls to the works council in individual cases. 

According to Section 106 para. 2 BetrVG the entrepreneur is obliged to inform the economic committee in good time and comprehensively about economic matters, submitting the necessary documents, provided that this does not jeopardise the company's operational and business secrets. The matters to be discussed include, among other things, the merger or division of companies or businesses (Section 106 para. 3 no. 8 BetrVG) and the takeover of the company if this is associated with the acquisition of control (Section 106 para. 3 no 9a BetrVG). The latter only applies to the acquisition of control in connection with the acquisition of shares (share deal). In these cases, the works council is also responsible if there is no economic committee, Section 109a BetrVG. However, a transfer of operations by way of an asset deal falls under the limited general clause of Section 106 para. 3 no. 10 BetrVG and is thus also an economic matter about which the employer must provide information. 

The purchase price of the transaction and its calculation are not considered operational and business secrets that the entrepreneur is required to disclose to the economic committee. 

The obligation to provide information exists in both the transferring and the acquiring company, provided that an economic committee is in place. 

The information provided must not only reveal the scope and expected impact of the measures, but also the reasons for them. The economic committee must also be informed of the consequences for personnel planning, in particular any planned staff reductions and relocations. If a takeover of the company takes place, i.e. the acquisition of control (Section 106 para. 3 no 9a BetrVG) the entrepreneur must also provide information about the potential buyer and their intentions with regard to the future business activities of the company, The same applies if a bidding process is carried out prior to the takeover of the company. A potential buyer is someone who has submitted a binding offer to purchase the company or has contractually committed to the takeover.

The economic committee must be informed voluntarily and in good time so that the matter can still be discussed with the employer in an economic committee meeting and the works council can exercise any further rights of participation and co-determination before the planned measure is implemented. Purely entrepreneurial preliminary considerations without a certain degree of planning maturity do not yet trigger any obligation to provide information, but the assessment of different entrepreneurial options does. In any case, information provided after the employer has made a final decision and signed a purchase agreement is too late. 

The economic committee must receive all the information it needs to provide meaningful advice. There is no legal requirement for a specific form of information. The documents that the company must submit to the economic committee include all reports, plans and analyses relating to the planned economic matter. The company purchase agreement itself does not have to be made available for inspection.

If the employer fails to provide information about the company's economic affairs as defined in Section 106 BetrVG, or fails to do so in a timely or sufficient manner, despite a request from the economic committee, Section 109 para. 1 sent. 1 BetrVG stipulates that a decision be made by the time-consuming and costly external arbitration committee. Furthermore, failure by the employer to properly inform the economic committee constitutes an administrative offence under  121 para. 1 BetrVG, which can be punished with a fine of up to EUR 10,000. In the event of particularly serious violations of the duty to provide information, the labour court may, after being called upon by the works council, impose a fine or a penalty payment on the entrepreneur in accordance with Section 23 para. 3 sent. 5 BetrVG.

The employer should explicitly identify the information to be shared as requiring confidentiality. If this happens, members of the economic committee are subject to a penal-ty for violating the confidentiality requirement under Section 79 para. 1 , para. 2 BetrVG in accordance with Section  120 para. 1, no. 1 BetrVG. The members of the economic committee are not authorised to make photocopies or copies of the submitted documents without the consent of the employer. The entrepreneur only has to allow the taking of notes.

An existing works council must also be involved in the context of conversion-law measures. The merger agreement or its draft must be submitted to the responsible works council of each participating legal entity in accordance with  5 para. 3 of the German Conversion Act (UmwG) no later than one month before the date of the intended merger resolution. Since the submission to an unauthorised works council can prevent the registration, it is recommended to check the competence in advance in accordance with the Works Constitution Act (BetrVG) and, in case of doubt, to send the merger agreement as a precaution to all relevant employee representatives. Pursuant to Section 5 para. 1 UmwG, the merger agreement must comprehensively describe the consequences of the merger for the employees and their representative bodies. Proof of the timely forwarding to the competent works council must be attached to the application for entry in the Commercial Register. The works council may waive the one-month time limit, but not the forwarding itself. Such waiver must also be documented and evidence provided to the registration court. 

Corresponding forwarding requirements can be found in Section 126 para. 3 UmwG for the company division and takeover agreement and in Section 194 para. 2 UmwG for the change of form.

Changes at the company level often also have an effect at the operational level in terms of the Works Constitution Act (BetrVG). Mergers or demergers as defined by the German Converson Act (UmwG) can also result in changes to the operational structure. A merger with other operations or a demerger of operations constitutes a change in operations in accordance with Section 111 no. 3 BetrVG. Mergers with other operations can be effected by combining two operations into a new one or by one operation taking over another. The splitting of operations includes both intra-company division of operations by changing the organisational structures as well as the cross-company division of operations by transferring part of the operation to another owner.

In companies with more than twenty employees, the works council must be informed of any planned operation change. In addition, the employer is obliged to negotiate with the works council on the reconciliation of interests, i.e. on the ‘if, how and when’ of the operational change, Section 112 para. 1 sent. 1 BetrVG. In this case, the works council may also have the right to delay the operational change until the negotiations on the reconciliation of interests in the external arbitration committee fail.

The works council can enforce the establishment of a social plan, which is intended to compensate for or mitigate adverse consequences for employees in accordance with Section 112 para. 1 sent. 2 BetrVG.

Companies are advised to inform the economic committee and the works council in good time about planned transactions and to involve them in the process. The risk of sharing confidential information with third parties too early can be mitigated in practice by taking appropriate measures.