If companies in Germany are set up according to certain legal structures they can avoid their obligation to have employee representatives on their supervisory boards. For a long time only a few companies made use of this legal loophole. However, since the year 2000 more and more are doing so. Experts think that politicians need to act.
In Germany, once a company has a workforce of more than 500, employee representatives have the right to a third of the seats on the supervisory board – the body that sets the company’s broad strategy and monitors the work of the management. In companies with more than 2,000 employees, this goes up to half. These are the rules that apply to German limited companies, and they date back to a time when it was not foreseeable that the process of European integration would lead to a whole range of foreign company structures being permitted in Germany. As a consequence, the German legislation on employee participation – co-determination – does not contain any guidance on how to deal with companies which are set up using the British structures of Ltd or PLC, or the Dutch BV. There are some interpretations that suggest that the law on board level representation should apply in an analogous way to these companies, says co-determination expert Sebastian Sick. However, the “dominant opinion” rejects this view, because the two laws, on 50% and one third board level participation, only refer to German company structures.
For a long time there were relatively few companies, above all the branches of American companies, who were able to manage their operations in such a way that they had no employee representatives on their supervisory boards, despite having more than 500 employees. However, things have now changed. Since 2000 the number of co-determination refuseniks has grown sharply. There are now more than 200,000 employees in 94 companies who are shut out of board-level participation, according to a study, commissioned by the Hans Böckler Foundation, and carried out by Walter Bayer, a law professor.
However, businesses which are not separate legal entities, such as simple branches of foreign companies, are not the main reason for this change, according to the study. Instead there has been an enormous growth in the number of German companies that are using a foreign company structure for their German operations. This is mostly done by adding the suffix “& Co. KG” – an abbreviation which indicates that the business is combination of a limited partnership and a limited company– to the foreign company name. The wording “Ltd. & Co KG” is an example of a British limited company. Sometimes it is not immediately obvious that a foreign company structure is being used. GmbH is the German name for a limited company, but GmbH & Co KG is also the name for companies set up under Luxembourg, Swiss or Austrian law.
In 2014, there were 69 companies set up in this way, thus avoiding employee representation at supervisory board level. Before 2000, there were only three. Of these 69, 51 had more than 2,000 employees. Already in 2006, the academics in the “Government Commission on the modernisation of board-level co-determination”, known as the Biedenkopf commission, had recognised the problem, although they thought it was a minor one. Their recommendation at the time was to keep it under review.
However, in the light of more recent developments, Sick, as a co-determination expert, believes it is time to act. The number of companies affected has “grown dramatically” and, irrespective of “the motives which lie behind the choice of a particular company form, this special legal status means that they cannot exercise their right to board-level representation. The practical removal of rights is not justified,” Sick says. He argues that, in Germany, the legislator must “extend” board-level representation to foreign companies. In addition there should be general minimum standards for board-level employee participation across Europe.
A particularly absurd aspect of the current situation is the companies with no real links outside Germany can eliminate employee participation at board level by choosing a particular company structure, Sick says. Setting up a simple foreign letter- box company is enough to do this, even if a company’s entire operations are in Germany. He names the Berlin waste-disposal and recycling company Alba Group plc & Co.KG as an example of a fake foreign company. Its boss is, incidentally, Eric Schweitzer, president of the Association of German Chambers of Commerce and Industry (DIHK). It is striking, Sick says, that he “attaches no importance to adhering to German co-determination standards in his own company”.
Sebastian Sick: Der deutschen Mitbestimmung entzogen: Unternehmen mit ausländischer Rechtsform nehmen zu (Removed from German co-determination: the number of companies with foreign legal structures is increasing (pdf), Report der Mitbestimmungsförderung in der Hans-Böckler-Stiftung Nr. 8, Februar 2015 (Report of the Promotion of Co-determination Department of the Hans Böckler Foundation , no.8 , February 2015)