Board-Level Co-determination

Board-level co-determination in Germany

Board-level co-determination in Germany means that employees elect representatives to the supervisory board of larger companies. Two statutes set the main thresholds. Under the One-Third Participation Act (Drittelbeteiligungsgesetz, DrittelbG), an AG, KGaA, GmbH, mutual insurance association or cooperative with more than 500 employees must have a supervisory board of which one third are employee representatives (§ 1(1) and § 4(1) DrittelbG). Under the Co-determination Act (Mitbestimmungsgesetz, MitbestG), these companies must have a supervisory board with equal numbers of shareholder and employee representatives once they have more than 2,000 employees (§ 1(1) MitbestG).

Special regimes apply to the coal and steel industries and to companies formed through cross-border mergers or as a European company (SE).

Co-determination is distinct from works council representation at establishment level. Works councils negotiate working conditions with management; employee representatives on the supervisory board take part in monitoring management, appointing management board members, approving the annual accounts and deciding on transactions subject to supervisory board consent. They have the same rights and duties as shareholder representatives, including confidentiality and liability. For the works council level, see works councils and co-determination rights.

This page explains how employees are counted, the composition of co-determined boards, elections, the effects on governance, the options available in SE and cross-border structures, and the legal limits of planning around co-determination. It is written for owners, boards and HR directors of growing companies, international groups with German subsidiaries and investors acquiring German businesses.

Thresholds and counting employees

The thresholds refer to the number of employees "usually" employed, which means the headcount that is typical for the company over a reference period, taking into account past development and expected changes, rather than a figure on a single day. Part-time employees count as full heads. Managing directors and executive staff (leitende Angestellte) have special status: executives count for the MitbestG but have their own representation on the board. Temporary agency workers count towards the thresholds of the user company under certain conditions, particularly if the employment is long-term.

Group attribution is the most important planning issue. Under the MitbestG, the employees of group companies controlled by a parent within the meaning of § 18(1) AktG are attributed to the parent if the parent is itself a company of a type covered by the Act (§ 5(1) MitbestG). In a GmbH & Co. KG, the employees of the limited partnership are attributed to the general partner GmbH where the majority of the limited partners also hold the majority in the GmbH (§ 4(1) MitbestG). Under the DrittelbG, attribution of group employees to the parent is narrower: it requires a domination agreement or integration (§ 2(2) DrittelbG).

Composition of co-determined boards

Under the DrittelbG, the supervisory board must consist of one third employee representatives (§ 4(1) DrittelbG). If one or two employee representatives are to be elected, they must be employees of the company; if more, at least two must be employees. The size of the board follows the articles, subject to statutory minimum and maximum numbers, and the number must be divisible by three.

Under the MitbestG, the supervisory board has six shareholder and six employee representatives in companies with up to 10,000 employees, eight each with more than 10,000 and up to 20,000 employees, and ten each with more than 20,000 employees (§ 7(1) MitbestG); the articles can choose a larger board.

Among the employee representatives, a defined number of seats is reserved for trade union representatives, and executives have at least one seat. The chair is elected with a two-thirds majority or, failing that, by the shareholder representatives, and in the event of a tie in a second vote on the same matter, the chair has a casting vote (§ 29(2) MitbestG). This casting vote ensures that shareholders retain the final say despite formal parity.

Co-determination also affects the management board. A company subject to the MitbestG must appoint a labour director (Arbeitsdirektor) as an equal member of the management board or of the managing directors, usually responsible for HR (§ 33 MitbestG). The appointment and removal of management board members, and in a co-determined GmbH also of managing directors, is a matter for the supervisory board, with special majority rules in the MitbestG. For a GmbH this shifts important powers from the shareholders to the supervisory board.

Rights and duties of employee representatives

Employee representatives on the supervisory board have the same legal position as shareholder representatives. They are entitled to the same information, take part in all decisions, may be members of committees, receive the same remuneration under the articles and are subject to the same duty of care and the same confidentiality obligations (§§ 116, 93 AktG). In practice, employee representatives frequently prepare board meetings in separate pre-meetings, as do shareholder representatives, and both sides need the information in good time to do so.

Confidentiality is a recurring concern for international groups. Employee representatives may not pass board information to the works council or to unions unless it has been released for that purpose, and breaches can lead to liability and removal. Clear information policies, an agreed approach to sensitive topics and early engagement with the employee side on strategic projects reduce the risk of leaks and conflict.

Gender quota and composition targets

Listed companies subject to the MitbestG must have a supervisory board composed of at least 30% women and at least 30% men (§ 96(2) AktG). The quota applies to the board as a whole unless either side objects, in which case it must be met separately by shareholder and employee representatives. Elections that violate the quota are void, and the seat remains empty. Other listed or co-determined companies must set targets for the proportion of women on the supervisory board, the management board and the two management levels below the board, and report on them.

Elections and the status procedure

Employee representatives are elected by the employees of the company and, where group attribution applies, of the group companies. The employer must support the election administratively and bear its costs, and candidates and election committee members enjoy protection against disadvantage. Under the MitbestG, companies with more than 8,000 employees elect through delegates unless the employees vote for direct elections, and smaller companies elect directly unless the employees decide on delegates (§ 9 MitbestG). Elections under the MitbestG are complex procedures governed by election ordinances, often lasting several months and involving election committees in each establishment. Elections under the DrittelbG are simpler and can usually be organised within a few weeks once the election committee has been formed.

The composition of the supervisory board is determined in the status procedure under §§ 97 to 99 of the Stock Corporation Act, which applies to the AG and, through references, to the GmbH. If the management believes the board is not composed in accordance with the applicable rules, it must publish a notice; the notice becomes binding unless an application is made to the court within the statutory period. Disputes can also be brought directly to the regional court. The articles must then be adjusted, and the mandates of existing members end within the periods set by statute, so that the newly composed board can take office.

SE and cross-border structures

The European company (SE) offers a different approach to employee participation. On the formation of an SE, management must negotiate employee involvement with a special negotiating body representing the employees of all companies involved across the EU. The negotiations can last up to six months, extendable by agreement to one year (§ 20 SEBG). If the parties agree, the agreement governs board-level participation; if not, statutory fallback rules apply, which in essence preserve the highest level of participation existing in the participating companies before the SE was formed (the "before and after" principle).

The SE is therefore not a way to abolish existing employee representation, but it can freeze the level of participation at the time of formation.

A company that converts into an SE while it has fewer than 2,000 employees, for example, may keep a one-third or non-co-determined board even if its workforce later grows, subject to rules on structural changes that can require renegotiation. The SE also allows a smaller supervisory board or a one-tier board, and the employee representatives can come from several countries. Similar negotiation rules apply to cross-border mergers, conversions and divisions under the German implementing statutes. Our page on corporate governance explains the SE's board structures.

Foreign legal forms

The German participation statutes apply to companies in the listed German legal forms. Companies incorporated abroad with their administrative seat in Germany, for example a UK limited before Brexit or an EU company using its freedom of establishment, are generally not subject to the German statutes. In practice, groups sometimes use foreign or European legal forms at the top of their German structure. The legal analysis of such structures is complex, depends on the specific facts and should take account of reputational effects and political debate about extending co-determination.

Co-determination in transactions and planning

Transactions can change the board representation status of a company. An acquisition can push a group above a threshold through attribution of the target's employees; a carve-out can take a company below a threshold; a merger can change which company in the group is the controlling company. Investors should include co-determination in due diligence, because a co-determined supervisory board changes the governance of the target, including the appointment of management and the approval of key transactions. See our pages on mergers and acquisitions and private equity.

Lawful planning options include the timing of a conversion into an SE, structuring holding companies so that attribution rules do not apply, choosing between a GmbH and a GmbH & Co. KG with a different shareholder structure, and organising the group so that headcount is distributed across companies. Each option must respect the statutory rules, and arrangements that are artificial can be challenged by unions or employee representatives in status proceedings. Avoidance planning carries reputational and employee relations risks that should be weighed alongside the legal analysis. Customers, investors and prospective employees increasingly look at governance and employee relations when assessing a company, and a structure perceived as avoiding employee participation can attract public criticism and union campaigns.

The practical effects of a co-determined board are often less dramatic than feared. Most decisions are taken unanimously or by large majorities after preparation, and shareholders retain the decisive vote in the MitbestG through the chair. The main changes are procedural: more formal board meetings, longer preparation times, an obligation to explain strategy to employee representatives and, in a GmbH, a shift of the power to appoint managing directors to the supervisory board. Companies that prepare well can integrate the new board into their governance without losing decision speed.

• Track usual headcount across the group, including executives and agency workers.
• Assess the board representation effects of every acquisition, merger and carve-out.
• Consider SE conversion before a threshold is crossed, not after.
• Prepare articles and board rules for a co-determined board in advance.

Family businesses and the Mittelstand

For family-owned companies, crossing a threshold raises questions beyond the law. A supervisory board with employee representatives changes how strategy is discussed, how managing directors are appointed and how much information leaves the family circle. Some families welcome the additional perspective and use the board as a forum to involve the workforce in long-term decisions; others restructure before a threshold is reached.

In both cases, it helps to align the articles, the family's own governance rules and any advisory board with the statutory framework, so that responsibilities are clear and decisions are not duplicated. A family constitution can set out how family shareholders will act on the board and how they coordinate with employee representatives.

How TRW & Co helps

We advise companies, shareholders and boards on co-determination in Germany. We analyse headcount and group attribution, conduct status procedures and supervisory board elections, draft articles and rules of procedure for co-determined boards, and advise on the role of the labour director. We negotiate employee involvement agreements in SE formations and cross-border transactions, assess employee board representation in M&A due diligence, and advise on lawful structuring options and their risks. To discuss your company's position, please contact us.