Employee participation in cross-border changes of legal form, divisions and mergers

The government bill reads that if a cross-border merger or division or change of legal form has been carried out, applicable should be the employee participation rules of the state in which the resulting (domestic) company has its registered office. In order to prevent situations where the respective national employee participation rules are circumvented shortly before a respective statutory threshold is reached (in Germany, for example, a threshold arising from the Employee Participation Act or the One-Third Participation Act), the government bill provides for three far-reaching exceptions to this principle. These exceptions are (i) the so-called “four fifths” rule, (ii) the  reduction of employee participation and (iii) the discrimination of foreign employees. If criteria for one of these exceptions are met, a so-called special negotiating body (SNB) for employees must be formed. The management of the participating companies must then negotiate with the SNB on the form of employee participation in the company resulting from the transaction.

According to the bill, the criteria for the first exception are met and an SNB must be formed already if, within six months prior to the publication of the conversion plan for the cross-border operation, the initial company's average number of employees represents at least four-fifths of the national threshold that is applicable to the company changing the legal form or being divided and triggers the necessity to apply the national employee participation rules. In the case of cross-border mergers, the formation of an SNB is required if at least one of the companies involved reaches the above-mentioned threshold. When calculating the threshold, employees of group companies should also be included if this is mandatory under the employee participation law of the departure Member State. 

In addition, the criteria for the second exception are met and an employee involvement procedure needs to be initiated if the scope of employee participation is reduced at the resulting company compared to the initial company or the companies involved in the merger. 

Furthermore, according to the third exception, the bill reads that  negotiations with the SNB  must be conducted if the national law of the state in which the resulting company has its registered office does not provide for the same level of employee participation for the employees of companies established in other member states as for domestic employees.

According to the bill, if the criteria for one of the three exceptions discussed above are met but the employee involvement procedure has not been completed, it will not be possible to register the respective cross-border conversion, division or merger.

In principle, such an employee involvement procedure can be completed by concluding an agreement between the management and the SNB, above all. If it is intended to conclude such an agreement, it should be noted, however, that in the case of cross-border changes of legal form and divisions, reducing the level of employee participation will not be allowed according to the bill. In the case of cross-border mergers, however, such a reduction should continue to be possible.

In addition, the SNB should have the possibility to decide by a 2/3 majority not to start or to break off negotiations. In this case, the employee participation law of the state in which the company has its registered office applies. 

If the period for negotiations with the employees (6 months) has expired to no effect and no decision has been taken to break off the negotiations, the bill envisages that the catch-all rules of MgFSG and MgVG will apply. These catch-all rules implement the so-called “before and after principle”. According to that principle, the level of employee participation applicable prior to the cross-border operation is maintained after the conversion measure. However, the consequence of this principle is also that the four fifths rule may not lead to the introduction of employee participation in a company that previously did not have any employee participation system in place. A decision by the SNB to apply the employee participation law of the state in which the company has its registered office thus makes it possible for employees to avoid that a status of no-employee-participation is permanently perpetuated. 

In cross-border changes of legal form and divisions, company management may not unilaterally decide not to conduct negotiations. This scenario is, however, possible in cross-border mergers. However, it only applies if at least one of the companies involved has a system of employee participation in place. The reason for this restriction is that the management should not have the possibility of unilaterally causing perpetuation of the status of no-employee-participation.

It should be noted that in the case of domestic changes of legal form, divisions and mergers carried out within four years after the effective date of the cross-border measure MgFSG or MgVG should also apply accordingly, if the resulting company has an employee participation system in place. Thus, the company may be required to conduct an employee involvement procedure also if it subsequently carries out a domestic conversion measure. In the case of a subsequent cross-border change of legal form or a cross-border division or merger, on the other hand, the laws should apply for an unlimited period of time if the company resulting from the operation has its registered office in Germany.

Due to the four-year time limit applicable to subsequent domestic conversion measures, in future it will be necessary to more closely examine the company history also in the case of purely domestic changes of legal form, divisions and mergers.