European Company (SE): Answers to questions frequently asked in actual practice (FAQs)

​published on 16 February 2023 | reading time approx. 6 minutes

The Societas Europaea (SE) as a European public limited liability company is becoming increasingly popular also among German medium-sized enterprises. Especially for companies with international operations, the SE can be a reasonable alternative to purely domestic legal forms. In addition to organising business under a single brand name throughout Europe and an image as a “global player”, the SE offers enormous flexibility in terms of structuring corporate co-determination (unternehmerische Mitbestimmung). This article addresses a number of questions that we receive time and again in connection with the formation of SEs.

How is an SE established and is there a model that is preferably used in practice?

Unlike purely domestic companies, an SE cannot be established by natural persons, but only by already existing companies. The list of ways of how an SE can be established (see below) is exhaustive. Another important aspect is that the formation of an SE must contain a  cross-border element (this will be addressed further down below).

In practice, however, an SE is usually established not by forming a company in the traditional sense. Instead, it is often the case that shareholders acquire a so-called “shelf SE” and later merge the ‘company to be transformed into an SE’ into such shelf SE. On the one hand, this way saves time as compared to forming a new company from scratch; on the other hand, it also allows the company concerned to overcome the lack of the cross-border element – a criterion that must always be met when establishing an SE.

a) Formation by conversion of legal form
“Formation” by way of conversion of a company’s legal form is frequently used in practice. Companies that can be involved in the formation of an SE include public limited liability companies (GmbHs) or partnerships limited by shares (KGaAs). Another prerequisite for the formation by conversion into a different legal form is that the company to be converted has had a subsidiary in another EU/EEA member state for at least two years.

 

b) Merger
An SE can also be formed by a merger of at least two public limited liability companies (or KGaAs) for the purpose of acquisition or to form a new company. The existence of a cross-border element in this option of forming a company is established by the fact that at least two of the companies involved in the merger must originate in different EU-EEA member states.

c) Forming an SE as a European holding company
This option of forming a company may be applied not only by public limited liability companies (or KGaAs) but also by private limited liability companies (GmbHs). In this case, (at least two) existing companies, which must either originate in different EU/EEA member states or have had a subsidiary or branch in another EU/EEA member state for at least two years, establish a joint holding-SE.

d) Forming an SE as a European subsidiary
A European subsidiary may be established by all types of companies, i.e. in addition to a private limited liability company (GmbH) partnerships in particular may also be involved in the formation of an SE. In the case of this option of forming a company, at least two companies, each of which must be from a different EU/EEA member state, establish a joint subsidiary SE.

e) Forming a subsidiary SE by an SE
Finally, it should be mentioned that already existing SEs may themselves form SEs without being required to meet the cross-border element again.

 

What other “ways of forming an SE” are available to private limited liability companies or partnerships and what can one do if one does not meet the cross-border element?

For private limited liability companies or partnerships that have had subsidiaries (for at least two years) in other EU/EEA member states, the main option – in addition to the solutions mentioned above – is the so-called serial change of legal form, where two conversions take place one after another. This option implies that the existing private limited liability company or partnership is first converted into a public limited liability company and immediately thereafter into an SE. In practice, these two successive conversions can be structured in such a way that the public limited liability company – as the transitional company that must be formed – only exists for a logical second.

Private limited liability companies or partnerships without this EU-EEA cross-border element can be transformed into the SE based on the model already described above, i.e. by acquiring the so-called shelf-SE into which the private limited liability company or the partnership is then merged.

What is the employee participation procedure?

At the centre stage of the SE formation process is usually the employee participation procedure. The aim of this procedure is to reach mutual arrangements between employees and the company on the involvement of employees in the SE. The arrangements lead to reaching the so-called (employee) participation agreement, which is concluded between the Special Negotiating Body (Besonderes Verhandlungsgremium – SNB) of the one part and the company of the other part. The SNB is composed of employees or employee representatives, who are elected by the employees in a secret and direct ballot.

The law leaves the parties a relatively large amount of leeway regarding the content of the agreement, but prescribes certain minimum requirements. Among other things, the regulations provide for the establishment of the SE works council, its composition, tenure, and notification, as well as employee participation, if applicable. As a rule, to register the SE in the commercial register one has to have proof of the conclusion of the employee participation agreement or, if the SNB and the company cannot reach an agreement (in this case, statutory fall-back provisions apply), proof of the (unsuccessful) implementation of the participation procedure.

How much time should be planned for the employee participation procedure?

There is no simple answer to this question. On the one hand, this depends above all on the size of the workforce, how “scattered” it is across many smaller locations or countries. On the other hand, the parties' willingness to negotiate and compromise, and the quality of the respective counselling also play an important role. As experience shows, the whole procedure from the call to form an SNB to the conclusion of the participation agreement can take between two to twelve months.

It should also be noted that according to the law, employees have up to ten weeks to form the SNB after being called to do so by the company's management. The subsequent negotiation phase is limited to a period of six months, but may be extended up to one year upon mutual consent.

What law applies to incorporated SEs?

Law applicable to the SE is based on a hierarchical relationship. At the first, or the top, level, there is EU law – first and foremost the SE Regulation – which has priority in all cases. It is followed by national implementing law of the respective member state where the SE is established – for Germany, this is primarily the SE Implementation Act (SE-Ausführungsgesetz, SEAG) and the SE Participation Act (SE-Beteiligungsgesetz, SEBG). Further down the hierarchy is the purely national (public limited liability company) law.

In fact, German SEs are generally subject to the same law in their daily business as a purely domestic public limited liability company. EU law and the corresponding national implementing laws contain mainly special provisions relating to the formation of companies, which in fact have no further relevance in the later existence of the SE. The only notable exception, however, are the regulations on the organisational /management structure (see below).

How does an SE with a one-tier management system differ from a two-tier SE?

Unlike German public limited liability companies (Aktiengesellschaften), which always have a two-tier structure, the SE also makes it possible to choose a one-tier system.

Like a German public limited liability company, a two-tier SE has an executive body (management board) and a supervisory body (supervisory board) in addition to the general meeting of shareholders. The two executive and supervisory bodies must be strictly separated from each other in terms of function and personnel.

This is, however, different in the case of the one-tier SE. In addition to the general meeting of shareholders, a one-tier SE only has an administrative board, which is the administrative body of the company. The administrative board thus assumes both an executive and a supervisory function. The company is represented in external relations by executive directors, who are appointed by the administrative board. Unlike the management board (in the two-tier system), executive directors are bound by instructions (from the administrative board). Members of the administrative body may also assume the function of an executive director, provided that the majority of the administrative board still consists of the so-called non-executive directors. Especially in owner-managed companies, this offers the opportunity to appoint a “strong” CEO in the company.

The management structure of an SE should be determined at the time of its formation, but may be adapted later by amending the articles of association.

Is an SE still a safe and sustainable option for structuring corporate co-determination at all in view of the recent announcements of the traffic light coalition?

In the coalition agreement, the traffic light coalition has set itself the goal of preventing “abusive circumvention of applicable co-determination laws”. After analysing past statements of the members of the coalition parties, the focus here is probably first of all on preventing the so-called “effect of freezing the status quo”.

According to the Employee Involvement Directive (Council Directive 2001/86/EC), the status of the SE in terms of co-determination law generally corresponds to the status of companies involved in its formation. Simply put, an SE whose founding company(ies) involved in its formation was/were not subject to the statutory provisions on corporate co-determination before the formation of the SE is also not subject to corporate co-determination, but with the difference that this does not change even if the SE later exceeds the relevant statutory thresholds (500 employees (One-Third Participation Act (Drittelbeteiligungsgesetz, DrittelbG) or 2,000 employees (Co-determination Act (Mitbestimmungsgesetz, MitbestG). In SE law, there are only a few exceptions to this principle known under the heading of the so-called “structural change”. The concept of a structural change, the existence of which makes it necessary to renegotiate a participation agreement concluded between the SE and the employees, is not clearly defined and must be interpreted in an extremely restrictive manner. A prerequisite is, however, that a “transaction must be of a formation-like nature and great significance”. Purely organic growth of the SE or an acquisition of additional employees as in the acquisition of a business cannot be considered as a structural change in any case.

If a company involved in the formation of an SE was already subject to corporate co-determination before the SE was formed, the SE is subject to the same level of co-determination after it is formed, but here again with the difference that a stricter level of co-determination will not apply if the thresholds are exceeded further on. This is the so-called “effect of freezing the status quo”.

Because the applicability of the “effect of freezing the status quo” is regulated in European law, this cannot, according to the prevailing view, be cancelled out by national legislation. For this, the law would have to be changed at European level. However, it seems more than unlikely that the necessary majorities will be found at the EU level – especially considering the history of adopting the regulations on employee participation in the SE.

For more information, see here Reform of corporate co-determination – German Mittelstand has to fear negative implications (roedl.de).