SE and Co-determination: Negotiating the Status Quo

SE and co determination: why the status quo matters

The European Company (Societas Europaea, SE) has become a popular legal form for German groups, and SE and co determination planning is one of the main reasons. Unlike a German stock corporation, an SE is not subject to the thresholds of the Co-determination Act (MitbestG) and the One-Third Participation Act (DrittelbG).

Instead, employee involvement in an SE, including board-level co-determination, is determined by negotiation between management and a special negotiating body (SNB) of employee representatives under the SE Employee Involvement Act (SE-Beteiligungsgesetz, SEBG), with statutory fallback rules if no agreement is reached. The governing idea is the before-and-after principle: the level of co-determination existing before the SE is formed is protected, but it is in principle frozen at that level. That is why the timing of an SE conversion relative to the co-determination thresholds is so important for SE and co determination planning.

A company that converts into an SE while it has fewer than 2,000 employees in Germany can keep a one-third co-determined, or even a non-co-determined, supervisory board even if the workforce later grows above the MitbestG threshold. The SE can also have a smaller board than the MitbestG would require, and an SE with a one-tier board is possible. These effects, however, are hedged by statutory safeguards that management must understand before starting the process.

The negotiation procedure with the special negotiating body

An SE can be registered only once the procedure on employee involvement has been completed. Management of the participating companies must inform the employees and invite them to form an SNB, in which employees from all affected member states are represented. Negotiations begin when management invites the SNB to its constituent meeting and may last up to six months; the parties may jointly extend them to a total of one year (§ 20 SEBG).

The SNB generally decides by a majority of its members that also represents a majority of the employees.

If the agreement would reduce co-determination rights, a qualified majority is required: two thirds of the members representing at least two thirds of the employees in at least two member states, where co-determination covers a certain share of the workforce (§ 15(3) SEBG). The SNB may also decide by the same qualified majority not to negotiate or to break off negotiations, in which case the national rules on information and consultation apply and no statutory co-determination arises; this option is not available in an SE formed by conversion if the employees of the converting company have co-determination rights (§ 16 SEBG).

The negotiated agreement (Beteiligungsvereinbarung) covers the SE works council or alternative information and consultation procedure and, where agreed, board-level participation: the number of employee representatives, the procedure for their election or appointment and their rights.

The before-and-after principle and the statutory fallback

If no agreement is reached within the negotiating period, or if the parties agree to apply them, the statutory rules on co-determination apply under § 34 SEBG. Their content depends on how the SE is formed:

For an SE formed by conversion, the protection is even stronger. The agreement must ensure at least the same level of all components of employee involvement as existed in the converting company (§ 21(6) SEBG). A one-third co-determined AG converting into an SE therefore retains one-third co-determination, and a parity co-determined AG retains parity. But a company that was not co-determined at the time of conversion does not become co-determined later merely because its German workforce grows, as long as no structural change triggers new negotiations.

Board size, one-tier structures and union seats

Preserving the proportion of employee representatives does not necessarily mean preserving the absolute number of seats. Under the prevailing view, an SE can agree on a smaller supervisory board than the MitbestG would prescribe, for example twelve instead of twenty members, provided the proportion of employee representatives remains the same. This flexibility is a frequent motive for conversions of large listed companies.

Union seats are a sensitive point. In a German AG subject to the MitbestG, a number of the employee seats are reserved for trade union representatives elected in a separate ballot. The Court of Justice of the European Union held in its judgment of 18 October 2022, IG Metall and ver.di, C-677/20, that where an AG with such union seats is converted into an SE, the participation agreement must provide for a separate ballot for union-nominated candidates.

The Federal Labour Court applied this in its order of 23 March 2023 – 1 ABR 43/18: in the conversion of a parity co-determined AG into a two-tier SE, the agreement must contain a separate election procedure for union-nominated employee representatives, covering all employees of the SE and its subsidiaries.

Negotiating SE and co determination terms in practice

In practice, most SE and co determination projects end with a negotiated participation agreement rather than the statutory fallback, because both sides gain flexibility. Management typically seeks a smaller board, efficient meeting formats and a clear allocation of employee seats among countries. Employee representatives typically seek guarantees: preservation of the proportion of employee seats, protection of union seats, a well-resourced SE works council, training rights and clear rules for renegotiation when the group changes.

Typical points of a participation agreement include the number and distribution of employee seats among member states, the election procedure in Germany and the appointment procedures abroad, the term of office aligned with shareholder representatives, the composition, meeting frequency and costs of the SE works council, the treatment of confidential information, the definition of structural changes that trigger renegotiation, and a duration or termination clause. Where the agreement reduces participation rights compared with the statutory fallback, the qualified majority in the SNB is needed, which gives German employee representatives a strong position in negotiations on SE and co determination.

Agreements should be drafted with an eye on enforceability. Disputes about the validity and interpretation of participation agreements are decided by the labour courts in proceedings in which works councils and unions can participate, as the litigation leading to the BAG's 2023 order shows. Clear drafting on election procedures, especially for union-nominated candidates, avoids the risk that an election of employee representatives is later challenged.

Structural changes and the prohibition of abuse

The status quo is not absolutely frozen. Where structural changes to the SE are planned that are capable of reducing employee participation rights, negotiations must take place at the initiative of SE management or the SE works council (§ 18(3) SEBG). What qualifies as a structural change is debated; mergers of substantial companies into the SE are typical examples, while organic growth of the workforce is generally not regarded as one.

§ 43 SEBG prohibits misusing an SE to withdraw or withhold participation rights from employees. Abuse is presumed if, within one year of the SE's formation, structural changes take place without a renegotiation procedure and have the effect of withholding or withdrawing participation rights. Misuse is also a criminal offence punishable by imprisonment of up to two years or a fine (§ 45(1) no. 2 SEBG). Transactions planned shortly after an SE conversion, such as the merger of a large German subsidiary into the SE, therefore need careful sequencing and, where appropriate, a renegotiation.

Two years after a decision by the SNB not to negotiate, at least 10% of the employees of the SE and its subsidiaries can request the formation of a new SNB (§ 18(1) SEBG).

Timing an SE conversion

The time needed for an SE conversion is driven largely by the employee involvement procedure. A realistic plan allows several months for informing employees, forming the SNB and conducting negotiations, plus the corporate steps: a conversion plan, an expert report on the company's net assets, the general meeting resolution and registration. Planning tips include:

1. Establish reliable employee numbers per member state and per company, because they determine the composition of the SNB.
2. Decide early whether a negotiated agreement or the statutory fallback is preferable, and prepare a term sheet for the SNB.
3. Coordinate with works councils and unions in Germany, whose members often form the core of the SNB.
4. Consider the interaction with European Works Councils, which may be replaced by the SE works council; see our article on European Works Councils after the directive revision.
5. Plan follow-up transactions with the one-year abuse presumption in mind.

Illustration: a family-controlled AG with 1,700 employees in Germany and growing operations abroad expects to exceed 2,000 German employees within two years. If it converts into an SE now, the statutory fallback would preserve its current one-third participation, and the SNB cannot decide to forgo negotiations because the company is already co-determined. If it waits until the MitbestG applies, any SE would have to preserve parity co-determination.

More broadly, the SE is one of several options for structuring board-level co-determination, and the same before-and-after logic now appears in other cross-border transactions. Cross-border conversions and divisions under the Conversion Act now follow similar negotiation mechanisms. Our page on co-determination explains the MitbestG and DrittelbG thresholds, our article on employee supervisory board elections covers the election procedures, and our corporate governance page addresses board structures.

How TRW & Co helps

We advise companies and shareholders on SE and co determination projects: assessing whether and when a conversion or merger makes sense, preparing headcount analyses, informing employees and constituting the special negotiating body, and negotiating participation agreements, including union seat arrangements after C-677/20. We coordinate the corporate law steps of the SE formation and plan subsequent structural changes in compliance with § 18(3) and § 43 SEBG. Where disputes arise, we represent companies before the labour courts. To discuss your plans, contact us. This article provides general information and is not legal advice.