Abstract
Corporate codetermination is one of the most controversial parts of labour law. This applies, in particular, to the participation of trade unions, which is notably permitted in Germany and Sweden. This article examines the legitimisation and economic impacts of union participation. Special attention will be given to the recent decision of the ECJ concerning the legal protection of trade union involvement in the course of a transformation into a European company (SE). The general aim of this article is to bring the various interests into appropriate balance.
Introduction
The different versions of concepts of employee codetermination are heavily debated. It is a topic where opinions differ more than in any other area of labour and corporate law. 1 In a number of countries like Austria, Denmark, France, Germany, Sweden and the Netherlands, codetermination is institutionalised within two channels: at shop-floor level via works councils acting as counterparts to management; and at enterprise level via staffing the board with employee representatives. 2 Other countries like the United States and 14 Member States of the European Union do not have any form of codetermination at enterprise level. This form of employee participation has various designations like supervisory codetermination, board-level codetermination or shared governance. In the following it will be neutrally referred to as corporate codetermination, since it may be embedded both in the supervisory board in two-tier board systems and in the board of directors in one-tier systems.
Corporate codetermination has always been a divisive issue in politics, economy and jurisprudence. A particularly controversial aspect is the participation of trade unions, which is legislated in some countries. Germany allows the election of external union representatives. Sweden entitles trade unions to appoint the employee representatives and to negotiate with the employer on issues concerning the relationship between the employer and the member of the union. The involvement of trade unions could become increasingly important at European level, since it is in line with the motion for a European Parliament resolution on democracy at work. 3 This motion calls for ‘the full involvement of trade unions and workers’ representatives throughout the due diligence process, including the development and implementation process’; 4 ‘that workers’ representatives, including trade unions, must have access to the requisite expertise and support documentation regarding management decisions to assess the implications of these cross-border policies and processes for the workforce and to propose alternatives’; 5 and ‘that a genuine dialogue on those alternatives must take place between trade unions, workers’ representatives and management’. 6 All this would give greater significance to trade unions within the company. The topic gained special relevance after a recent decision of the European Court of Justice (ECJ) regarding the transformation of SAP into a European Company (SE). The extent to which the participation of trade unions, as granted by national law, must continue to exist in an SE established by transformation has been disputed. The ECJ ruled sitting in the Grand Chamber, which shows the importance of the decision. According to the ECJ, the agreement on arrangements must provide for a separate ballot with a view to electing a certain proportion of candidates nominated by the trade unions, where the applicable national law requires such a separate ballot. 7 While this view guarantees trade unions a certain number of seats at the board, it does not necessarily strengthen employee rights and also weakens negotiation autonomy.
These current developments provide an opportunity to take another fundamental look at the topic. The aim of this article is to bring the various interests into appropriate balance. For this purpose, the article begins with a depiction of selected models of trade union participation (II.). Subsequently it discusses the general legitimisation and economic impacts (III.). Finally, it examines the scope of legal protection in the course of the transformation of the company into an SE (IV).
Models of trade union participation
The following presentation focuses on the regulations in Germany and Sweden, both of which provide for some of the most extensive union participation. The German regulation often serves as a point of reference for alternative policy proposals anyway. 8 Codetermination based on the Swedish model is currently being discussed in Australia in order to strengthen employee rights. 9
The German model
The German Stock Corporation Act (Aktiengesetz, AktG) establishes a mandatory two-tier board structure of stock corporations including a managing board and a supervisory board. The supervisory board appoints the members of the managing board, monitors their work and has the power to remove managing board members with just cause. With regard to these powers, the supervisory board is of great importance, although it meets only a few times a year and therefore cannot take direct influence with management. Corporate codetermination law dictates the composition of the supervisory board. The degree primarily depends on the number of employees. Under the main codetermination statute, the 1976 Codetermintion Act (Mitbestimmungsgesetz 1976, MitbestG) affecting corporations with more than 2000 employees, shareholders elect half of the members of the supervisory board and employees elect the other half. This form of codetermination is called ‘quasi-parity’ or ‘sub-parity’ because the balance tilts slightly in favour of the shareholders: if the board is deadlocked, the chairperson of the board—elected by shareholder representatives—holds the casting vote. 10
The supervisory board must include two trade union representatives if the board has six or eight members appointed by the employees and three trade union representatives if the board has ten members appointed by employees. 11 This so-called guarantee of seat is supported by the so-called guarantee of vote: the delegates are to elect the members of the supervisory board who represent the trade unions by means of a secret ballot conducted in accordance with the principles of proportional representation. 12 The election is to be conducted based on lists of candidates put forward by the trade unions represented in the company itself or in some other company whose employees take part in the election of members of the supervisory board of the company in accordance with the Codetermination Act. 13 Contrary to the conventional employee representatives, the union representatives do not have to fulfil special requirements of eligibility. Neither do they have to be employees of the company nor members of the trade union. In practice, they usually are officials of the trade union. 14 Since one vote is sufficient for election, this right of nomination is tantamount to a right to appoint. 15 Trade unions not represented in the domestic workforce are excluded from participation. 16 At European level, the ECJ saw no infringements of the free movement of workers. The Court ruled that Article 45 TFEU does not lead to the unlawfulness of a provision which denies employees the right to vote and stand for election for the employees’ representatives on the supervisory board of the parent company, if they are employed by subsidiaries of the group located on the territory of another Member State than the parent company. 17
The Swedish model
A Swedish limited liability company is organised as a unitary structure, more resemblant of the Anglo-Saxon one-tier model. 18 The Swedish Companies Act stipulates that the company must have three decision-making bodies. The general meeting of shareholders elects the board of directors that appoints a chief executive officer. The control body is the auditor, who is appointed at the shareholders’ meeting but is independent in relation to the other bodies.
Employee involvement is based primarily on the Codetermination Act (Medbestämmandelagen, MBL) and the Act on Board Representation for Employees (BRA). If the company is bound by collective agreements, the employees are entitled to representation on the board of directors, provided that the company has at least 25 employees (two to three representatives, depending on the size of the company). 19 The decision to make use of the right of employee board representation is taken by a local trade union bound by collective agreement with the company. 20 The representatives are elected by the employees in the workplace who are members in the established union, but they are formally appointed by the union. 21 This approach is a so-called single-channel system, since the employees are represented by their unions alone. 22 It implies that employee representatives are organised so that they function cooperatively with the governing body and therefore are integrated in the company's decision-making. 23 In contrast to the German law, the Swedish model does not provide for participation of external trade union officials, since the employee's representatives should be appointed from the employees at the company. 24 On the other side, the MBL provides trade unions with significant rights within the company. In particular, every trade union that has a member in the workplace is entitled to negotiate with the employer on issues concerning the relationship between the employer and the member of the union. 25 Before an employer takes any decision regarding significant changes in its activities, it shall, on its own initiative, enter into negotiations with the trade union with which it is bound to negotiate under a collective bargaining agreement. 26 It is apparent that the union that has a collective agreement in the workplace enjoys a very privileged position. This position rests on the assumption that employees are members of the union that has the collective agreement in their workplace and on the further assumption that workplaces have collective agreements. 27
Legitimisation and economic impacts
The following section discusses several approaches to legitimise union participation in corporate codetermination, as well as the economic impacts.
Democratisation of the economy
A widely accepted justification of the corporate codetermination, as such, is the democratisation of the economy. In this respect, one can distinguish between a narrow approach which is focused on the participation of the employees of the company, and a broader approach which also includes the well-being of society, or rather the common good. The first approach concerns democracy in a narrower sense and is hereinafter referred to as internal democracy, while the latter approach concerns democracy in a wider sense and is hereinafter referred to as external democracy. We will discuss whether the participation of trade unions can be justified according to one of these approaches.
Participation of the employees (internal democracy)
A viable and undisputed legitimisation of corporate codetermination lies in the principle of participation. This involves the possibility of influencing the employer's decisions given the effect they have on the employees and thereby protecting the employees from being the object of external domination. 28 Empirical findings on the benefits for the employees diverge. According to several studies, codetermination does not appear to raise employee bargaining power in respect of wages. 29 Nor does codetermination result in effective employee participation in controlling the corporation. 30 On the other hand, findings from Sweden show that it has several benefits for employees. Since employees have more control through codetermination, this has meant a higher proportion of national productivity growth has translated into higher wages. In the period 1995 to 2013, approximately 100% of productivity growth has directly translated into wage increases. 31
The main reason for justifying corporate codetermination based on participation is that the employees have contact with management. According to Hansmann, codetermination may yield important efficiency benefits in the context of collective bargaining: corporate boards typically know more about their companies’ financial situations than the trade unions with whom they bargain. This informational asymmetry may prevent the bargaining parties from reaching an agreement, because unions may suspect that employers describe their firms’ financial prospects negatively in order to obtain lower wages. Meanwhile, employers may be unable to demonstrate their honesty in a credible way, which may lead to strikes. 32 Codetermination ensures that the employee representatives have access to the same information as other board members. 33 Hence, mandatory codetermination can mitigate or eliminate the informational asymmetry between the collective parties. 34 In due course this information can be used by the employees when bargaining with management in contexts other than decision-making at board level. These include the bargaining with unions, where shared information presumably reduces the incentive for, and hence the costs of, strategic bargaining behavior. 35
This consideration may justify the participation of trade unions in codetermination, since it allocates the relevant information directly to a party of collective agreements, reducing transaction costs. The integration of trade unions into corporate constraints also causes an objectification of collective bargaining policy. 36 However, the magnitude of the information benefit depends on the role that collective bargaining plays in a country's economy. 37 Furthermore, this approach cannot legitimise claimed seats on a board. The guarantee of seat for trade unions is considered undemocratic, since the voting workforce is deprived of the right to decide for themselves whether they want to be represented by company employees or by external trade union representatives. 38 One may compare this to a political party, which has three reserved seats in parliament and the voters are merely allowed to decide which members of that party take those seats. 39 Some authors even argue that the election of external trade union officials to company boards tends to weaken worker voices. 40 These objections will also be relevant with regard to the protection of union participation in the course of a transformation into an SE (below IV.).
Common good (external democracy)
Companies may contribute to the common good by engaging in ethically-oriented practices (so-called corporate social responsibility, CSR). Without the influence of employees, the level of CSR usually depends on the preferences of the controlling shareholder, and the various market forces and social pressures to which it is subject. 41 This means that managers will leave less room for CSR activities if they are not apparently connected to profits for shareholders, while more CSR measures will be taken if there are strong business reasons for CSR, particularly for reputational reasons. 42 If shareholders put pressure on companies to ruthlessly deliver financial gains for shareholders, the companies might begin to exploit the environment or consumers, to which employee representatives may provide a counterweight. 43 Indeed, according to a recent study, corporate codetermination seems to be positively related to CSR measures, including setting concrete goals on emission reduction. There is not a corresponding relationship with mere symbolic measures, which indicates that employee representatives have little interest in measures that do not result in direct improvements for workers. 44
Out of this consideration follows an argument in favour of the participation of trade unions: as they are not focused on the workforce of the specific company, they seem to be particularly suitable for the realisation of CSR. According to another study, for example, the level of tax avoidance is lower if unions are present in the company. 45 This approach is reinforced by the observation that mere employee participation does not ensure the realisation of CSR, since the interests of shareholders are frequently in parallel with the interests of the employees: if the company is more profitable, employees are likely to get more income, more job security and tend to have better career prospects. If the company can produce at a lower cost by polluting more, both shareholders and employees will benefit. If the reputation is damaged because the company turns out not to be sufficiently socially responsible, again both shareholders and employees are harmed. Hence, employee participation as such does not lead to companies behaving in a more—or less—socially responsible way. 46 An example of this is the recent Volkswagen (VW) emissions scandal: in 2015, it was discovered that VW—subject to corporate codetermination—had systematically manipulated their diesel cars in order to deceive regulators about the level of emissions. The scandal was very expensive for VW due to fines, lawsuits and recall actions. Although VW has extensive shop-floor codetermination, this employee participation was not linked to good CSR. 47 Some authors even blame codetermination and the strong role of labour as a contributing factor. 48 As long as VW was doing very well as a result of the emission cheating, its employees probably benefited from the misconduct just as much—or even more so—than shareholders did, resulting in high income, professional success and more secure jobs. 49 Against this background, it could be desirable not to limit corporate codetermination to the interests of the employees of the relevant company by including trade unions, even though the union participation at VW was unable to prevent the wrongdoing.
However, this approach is equally disputed. In general, it is argued that corporate codetermination cannot create or enforce a commitment to the common good on the part of the company, since the purpose of a company can only be determined by the shareholder. 50 Democracy can merely strengthen individual rights ‘from below’, but cannot create a democratically legitimate claim to exert power over third parties or the right to a general political mandate. The organisation of decision-making within the company is not democratically legitimised towards the general public. 51 Codetermination cannot be democratically legitimised as ‘functional self-government’: the company employees are not a sub-volk of the people of the state, but a group determined by specific interests. Although the authorisation by the state provides legitimacy, it remains deficient from a democratic point of view. 52 Companies are not subject to any government-imposed general clause imposing an obligation to the common good, such as more employment or greater environmental protection. Such concepts of commitment to the common good are not very plausible, as they neither define the common good nor answer the crucial question of competence: who determines what is right for the common good? Demands for the common good should be enforced only by the state, which has sole democratic legitimacy. As interest groups fail to represent the plurality of the common good and there is no supervision by the state, the responsibility must not be delegated to trade unions or codetermination bodies. Employee representatives generally pursue only their specific interests. The concept of CSR establishes an ethical, but not a legal claim, against companies. 53 Germany's Federal Constitutional Court has also emphasised that employee participation can only ever represent particular interests, which is why the state's extensive public service obligations must not be called into question. The Court has neither elevated codetermination to the realm of the principle of democracy nor has it assigned it to the principle of functional self-government, as this concerns public services. 54
With specific regard to the participation of trade unions, it is argued that they have no legitimacy in relation to the general public and the common good. Group-internal democratisation can only ever create a ‘pseudo-legitimisation’, because participation remains internal, as well as function- and interest-related. 55 Another problem is the strong decline in union membership. In Germany, for example, the member unions of the Federation of the German Trade Unions faced a decline of more than a third of their members between 1991 and 2001, leading to a mere 15% of the workers being organised those unions in 2022. 56 This reinforces the already-existing doubts concerning the democratic legitimacy of trade unions to represent macroeconomic interests. 57 Furthermore, trade unions neither represent the entirety of a nations entire workforce, nor does their commitment apply to them. They are obliged solely to their members. 58
Benefits for the company
According to the German Commission on Codetermination, the affected companies also benefit from the participation of trade unions, in particular with regard to fundamental issues of corporate policy, but also with regard to the selection of managers. 59 This assumption is supported by experiences from Sweden. According to several surveys of managing directors, a good half considered that union participation in the company supplies management with new ideas and saves time in the decision-making process. About two-thirds reported that union participation ‘makes it easier to carry out decisions on shutting down a company, going into liquidation or reducing the workforce’. Some 86% do not believe ‘that union participation contributes to conflict and slowing down of company operations’, and 75% believe that union participation is not too demanding of resources or that it obstructs the process of producing effective decisions. 60 However, one may object that if the company is really expected to benefit, shareholders themselves would elect union representatives, which they usually do not. Ultimately, potential benefits for the company cannot justify a mandatory participation of trade unions. A compulsory gratification of the company ought to be rejected. What can be legitimised is merely the state offering a range of regulations for predetermined voluntarily participation of trade unions. 61
External expertise
The participation of external union representatives is further justified as it enables external expertise to be brought into the work of the board. 62 Critics to this approach call into question whether union officers have genuinely relevant expertise. While they usually have extensive knowledge of collective bargaining, law, and politics in general, the work of the board requires, above all, knowledge of commercial and corporate policy areas. Thereby it is doubtful whether trade union representatives have greater knowledge in comparison to internal employee representatives. 63 In any case, the provision of external expertise may also legitimise the participation of trade unions on a voluntary basis, since external expertise could be gathered on demand. In this way the external expertise may be more specified and aligned with the relevant problem. However, it must be acknowledged that the voluntary consultation of external consultants by internal employee representatives can be more costly and time-consuming than if the expertise is readily available on the board.
Conflicts of interest
An important economic impact of the participation of trade unions is the creation of a conflicts of interest. This applies, in particular, to the German model, where trade unions may send their own officials. To a lesser extent, this also applies to the Swedish model, where the employee representatives are elected by the employees but are formally nominated by the trade unions.
Background and practical examples
Where a trade union representative has managerial responsibilities, there are two potential dangers. First, representatives who are closely linked to management may represent employee's interests less forcefully. Second, the participation of union members who are closely linked to management in union affairs may tend to inhibit employees in free and critical discussion. This can mean that the union is unable to formulate policies that accurately represent employee interests. 64 In a sense, trade union representatives on corporate boards serve two masters. 65 As members of the board they are obliged to serve the interests of the company, while as trade union representatives they are committed to the interests of employees or unions. 66 This may lead to a divided loyalty, for example, when union representatives participate in a transaction between the union and the company or in a unilateral decision by the company directly affecting employees. As Hopt stresses, the ‘expectations of the employees and the unions set into ‘their’ representatives are irreconcilable with […] a neutral role.’ 67
The incentive structure is not clear. On the one hand, the perspective of a trade union representative will necessarily be altered when he joins a company board. As a result, he may be more susceptible to company influence and cease to represent his members as single-mindedly as he had done in the past. 68 A union representative, in his capacity as a member of the board, may wish to take actions which are either opposed by a majority of the union's members or which seem adverse to their interests. 69 On the other hand, union representatives have incentives to represent primarily the interests of their union on the board, especially if they are dependent on the goodwill of the union in order to be able to run for another term. 70 One could also speculate that external union representatives will, on average, have different objectives than representatives who are actually employees of the firm. The former might be more interested in larger political CSR goals, while the latter might be more focused on securing opportunities for employees, possibly at the expense of CSR. 71 Overall, the expectations towards trade union representatives are in the realm of the impossible: they are expected to represent the interests of the company's employees that elected them, while simultaneously they are supposed to represent employee interests on a broader scale, as well as macroeconomic aspects. 72
Practical experience proves that tactical considerations of trade unions are not congruent with companies’ interests and can burden negotiations. 73 In the past, trade unions have been known to prioritise fundamental union interests by preventing measures which would have upheld jobs at the cost of a reduction of wages when the company was in economic crisis. 74 In contrast, works councils have been more willing to implement measures to save companies. 75 A conflict between employee interests and trade union interests is also possible. During the mutual takeover battle between Volkswagen and Porsche, the employees of Porsche were strictly opposed to the support granted by trade unions to Volkswagen in its aim to take control of the Porsche group. 76
Assessment
While the conflicts of interest are indisputable, an issue for discussion is whether it should preclude the participation of trade unions. Some authors believe that the plurality of perspectives between the different representatives can make it harder for boards to work constructively towards the same end. 77 Practical experiences cannot confirm such a bleak picture, since employee and shareholder representatives often work together relatively smoothly. 78
Germany's Federal Constitutional Court argues that the effects of the conflicts of interest are reduced by the legal obligation of board members to safeguard the interests of the company. 79 Indeed, in most jurisdictions it is recognised that company board members have a fiduciary duty to the company, as a result of which they have to operate strictly on company interests. 80 Therefore, trade union representatives are legally prohibited from giving preference to trade union policy or interests detached from the company. 81 Whether this obligation protects the company from outside influence by trade union representatives is disputed. An argument against this is the fact that the scope of the obligation is a matter of extensive debate. Company interests is a flexible and vague term, leaving a broad grey area and allowing trade union representatives to pursue outside interests at least to a certain extent. 82
However, the fact that a board member can be subject to a conflict of interest is almost unavoidable, due to the part-time nature of their mandate. Conflicts of interest occur wherever people in organisations act on behalf of third parties. Shareholder representatives are equally subject to such conflicts of interest. 83 For example, a bank representative may decide on the granting of a loan to a company on whose board he holds a seat. 84 Shareholder representatives also know that they must please the shareholders in order to get reelected. 85 But even internal employee representatives are by no means a monolithic group. As a result, the employee representatives may not represent identical interests and may not always vote in a coordinated manner anyway. 86 It has been shown that executive employees may side with management. 87
Against this background, the conflict of interest does not lead to a dismissal of corporate codetermination as such. 88 This must also apply to the participation of trade unions, even though the conflict of interest is particularly pronounced in this context. It is possible to mitigate the conflict of interests by legal regulations. In Sweden, for example, there are specific rules regarding conflicts of interest. These rules prevent employee representatives from participating when the board is dealing with matters relating to collective agreements, strikes or other matters where the union has a material interest that may conflict with the company's interest. 89 The conclusion must be that a conflict of interest is inherent to board members to a certain extent and is therefore not in itself sufficient to preclude the participation of trade unions. However, the fact that the conflict of interest is more pronounced with external trade union representatives than with other board members is again an argument for their inclusion on a mere voluntary basis.
Protection in the course of a transformation into an SE
Overview
Without a corresponding provision, firms seeking to avoid corporate codetermination could simply transform into a legal form which is not subject to corporate codetermination. The European Directive 2001/86/EC (Directive) governs issues of employee involvement—including employee board representation—in an SE. 90 Upon an SE's foundation, shareholders and employees must negotiate the terms of employee involvement, the latter represented by a special negotiating body. 91 As part of this agreement, a reduction in codetermination can be stipulated in principle. However, in the case of an SE established by means of transformation, the parties’ negotiating autonomy is considerably restricted. According to Article 4(4), the agreement shall provide for at least the same level of all elements of employee involvement as the those existing within the company to be transformed into an SE. This is intended to prevent a ‘flight from codetermintion’. 92 If these negotiations fail, the most stringent participation regime of the entities involved in forming the SE governs. 93 In Germany, this Directive has been implemented by the Act on the involvement of employees in a European company (SE Participation Act, SE-Beteiligungsgesetz). According to § 21(6) SE Participation Act, the agreement shall provide for at least the same level of all elements of employee involvement as the those existing within the company to be transformed into an SE, which corresponds to Article 4(4) of the Directive. The provision became practically relevant through the transformation of SAP into an SE. This case involved a submission to the EJC. The key question is whether the guarantee of seat for trade unions falls under the ‘elements of employee involvement’ referred to in Article 4(4) of the Directive.
The dispute in the main proceedings and the course of the decision
Before being transformed into an SE, SAP had the legal form of a German stock corporation. Since the transformation, the company has had an 18-member supervisory board. The relevant participation agreement allocates nine seats on the supervisory board to the employee representatives. The trade unions represented within the group to which the company belongs have an exclusive right to nominate candidates for some of the seats for representatives of the employees employed in Germany. The election of those candidates is the subject of a ballot which is separate from that on which the other employee representatives are elected. However, the agreement contains a provision which allows the supervisory board to be reduced to 12 members, six of whom must be employee representatives. In the event of such a reduction, the trade unions represented in the group can make election proposals, but they are not elected in a separate ballot. Therefore, there is no guarantee that a representative proposed by the trade unions will be elected, which means that the guarantee of seat is omitted. In the trade union's opinion, this provision violates § 21(6) SE Participation Act. After losing in the lower instances, the Federal Labour Court proved them right. Trade union representatives shall serve a function in strengthening employee codetermination, as they provide external expertise. The Court even labelled the incorporation of external expertise as a ‘defining element of codetermination’, 94 which suggests that corporate codetermination without the presence of external trade union representatives is not sufficient. According to the Court, the participation of trade unions is secured by a separate ballot and must be preserved to the same extent in case of a transformation into an SE. 95 Hence, the separate ballot is an ‘element of employee involvement’ which is to be maintained even after the transformation of the company. However, the Federal Labour Court submitted the question for a preliminary ruling to the ECJ, asking whether the requirements of this provision, interpreted thus, are compatible with Article 4(4) of the Directive. 96
The ECJ interpreted Article 4(4) in the same sense as the Federal Labour Court and ruled that ‘the agreement on arrangements for the involvement of employees applicable to an SE established by means of transformation, as referred to in that provision, must provide for a separate ballot with a view to electing, as employees’ representatives within the SE's supervisory board, a certain proportion of candidates nominated by the trade unions, where the applicable national law requires such a separate ballot as regards the composition of the supervisory board of the company to be transformed into an SE, and it is necessary to ensure that, in the context of that ballot, the employees of that SE, of its subsidiaries and of its establishments are treated equally and that the trade unions represented therein are treated equally.’ 97
As an aside, the ECJ also took a stand on another dispute, namely, on the question of whether the actual situation 98 or the legally required situation 99 is to be taken into account with respect to the protected extend of employee involvement, even though this question was not at issue. According to the ECJ, the parties to the participation agreement must examine whether the extent of employee participation provided for in the agreement is at least equivalent to the extent specified in these legal provisions with regard to all components of such participation. The decisive factor is the extent of codetermintion under the rules provided for by law, not the extent of codetermination practiced. 100
Practical implications and open questions
The ‘Europeanisation’ of participation rights will have far-reaching consequences. This is particularly evident in the case of trade union representation. The ECJ has not only strengthened the rights of the German trade unions, but also the rights of all trade unions represented in the company: although the guarantee of seat pursuant to § 7(2) MitbestG only applies to domestic trade unions, the equal treatment of the employees and the equality of the trade unions require that the right of nomination with a separate ballot must be extended to all trade unions represented in the SE. 101 In this respect, the so-called ‘before and after’ principle is too narrow. 102 The influence of the German trade unions could dwindle, as the guarantee of seat on the supervisory board is not an exclusive right of domestic trade unions thereafter. 103 While the decision strengthens the protection of participation rights, it weakens the negotiating autonomy of the parties. 104 From the companies’ point of view, the interpretation of Article 4(4) of the Directive considerably reduces the incentives for negotiation. As a result, the foundation of an SE by means of transformation is likely to become less attractive and companies are likely to switch to other formation variants, in particular, the merger. 105
The decision also leaves some questions unanswered. The usual mechanism for the allocation of seats in the supervisory body of a German SE has been turned on its head. This mechanism provides that the seats of the employee representatives are first allocated to the Member States. Of the seats allocated to Germany, some are allocated to the trade union representatives. According to the ECJ, the reverse procedure must be followed and a determination involving all employee representatives must be ensured. 106 How all employees in the Member States are to make use of the election procedure under German law, as required by the ECJ, is unclear. 107 Furthermore, apart from the now clarified separate ballot, it remains unclear to what extent the participation rights are protected. This creates a considerable legal uncertainty. 108
Legal assessment
In the context of the interpretation of the wording, the EJC has emphasised the importance of national law. This determines the persons entitled to represent the employees (Article 2(e) of the Directive) as well as the elements characterising the codetermination rights of the employees. Mandatory procedural elements under national law, which were introduced ‘with a view to strengthening employee participation in the undertaking’, must be regarded as forming part of ‘all elements of employee involvement’ within the meaning of Article 4(4) of the Directive. 109 However, this line of reasoning fails to take into account that Article 3(4)(2) of the Directive as well as Article 133(2) of Directive 2017/1132 110 define the reduction of codetermination rights more narrowly, and refer to a reduction of the proportion of employee representatives in the corporate bodies. 111
The ECJ has also emphasised that the special provisions for the participation agreement in the case of a foundation by means of transformation are not exceptional provisions to be interpretated narrowly. The enumeration of the components of a participation agreement is already subject to the provisions of Article 3(4) of the Directive. 112 In addition, the Union legislator saw a greater risk of the elimination or restriction of codetermination rights in the case of the foundation by means of transformation (Recital 10 of the Directive). 113 However, this does not justify a guarantee of seat for the trade unions. Central to the structuring of employee involvement in the SE is the negotiation autonomy, which is flanked by the before and after principle (Recitals 8 and 18 of the Directive). The interpretation of the ECJ, however, weakens the negotiation autonomy. 114 From a systematic point of view, the fact that the Directive explicitly mentions trade union representatives in connection with the special negotiating body (Retical 19, Article 3(2)(b), Article 3(5) of the Directive), but not in connection with employee participation, speaks against a guarantee of seat. 115
The main criticism is that the ECJ has overstretched the protective purpose of the Directive. This consists in the protection of the acquired rights of the employees regarding their participation in company decision-making (Recital 8 of the Directive). 116 The rights of trade unions, as such, are not protected. 117 The Directive solely aims to protect the influence of employees, but not of a certain group or of external trade union representatives. 118 Against this background, the guarantee of union seats does not constitute an acquired employee right. As already stated, the function of corporate codetermination is primarily to democratise the economy. 119 For this purpose, the scope of the right of codetermination is decisive, not the concrete composition of employee representation. On the contrary, the guarantee of seat is considered undemocratic, since the employees cannot decide for themselves whether they want to be represented by company employees or by external trade union representatives. 120 Concerning the scope of codetermination, the involvement of trade unions is just as irrelevant as the absolute number of employee representatives. 121 The obligation to elect union representatives does not secure any codetermination rights of employees. The subject of the legal dispute is not the unions’ separate right of nomination, which certainly strengthens employee rights through the possibility of also nominating external representatives, but exclusively the separate ballot. Although the employees choose from among the candidates proposed by the unions, the separate ballot restricts the freedom of choice. 122 Legitimation by the employees does not seem to be equally guaranteed. Almost 50 years ago, the German legislator may have assumed that the guarantee of seat would strengthen employee participation. 123 However, this is unlikely to apply without restriction, not least because the regulatory significance of the union may have diminished. 124 In any case, it remains unclear why the obligation to vote according to the union's proposals instead of freely electing the employees should constitute an acquired employee right, even though this restricts the freedom of choice. 125
Also not convincing is the view that the legally required situation, and not the accrual situation, is decisive. The ECJ did not give reasons for this view. Article 4(4) of the Directive refers explicitly to the level ‘existing within the company’. The same applies to the French (‘qui existe’) and German (‘besteht’) versions. 126 In contrast, the standard rules of Article 7(2)(a) of the Directive shall apply only ‘if the rules of a Member State relating to employee participation […] applied to a company transformed into an SE’. Insofar as the legally required situation should be taken into account, the actual situation should be taken into account with regard to Art. 4(4) of the Directive. 127
Conclusion
Corporate codetermination is one of the most controversial parts of labour law. This applies, in particular, to the participation of trade unions, which is notably provided for in Germany and Sweden. The election of external union officials is a special feature of the German model. The greatest benefit of trade union involvement is the reduction of informational asymmetry, which may prevent the bargaining parties from reaching a collective agreement. This finding supports the participation of trade unions, since the relevant information reaches a party of collective agreements directly, reducing transaction costs and causing an objectification of collective bargaining policy. However, this approach may only justify the participation of external union representatives on a voluntary basis. The same applies to the inclusion of external expertise and possible benefits for the company. The pursuit of the common good, in particular through CSR measures, is not a feasible approach to the participation of trade unions, since they have no authority to represent all employees within the country, let alone the society as a whole. Union representatives are subject to conflicts of interest, since they are obliged to promote the interests of the company as well as the interests of the employees and the trade union. However, these conflicts of interest do not preclude the participation of trade unions, but in part justify the restriction to a voluntary participation of external union representatives. Furthermore, they can be mitigated by adequate regulation, like in Sweden. Against this background, an appropriate codetermination model should be one in which the workforce itself can decide whether and, if so, which union representative it wishes to elect to the board. 128
In the course of a transformation into an SE, the agreement on arrangements shall provide for at least the same level of all elements of employee involvement as those existing within the company to be transformed into an SE. According to the controversial decision of the ECJ, ‘all elements of employee involvement’ include a separate ballot if the applicable national law requires such a separate ballot. This decision strengthens the rights of trade unions, but weakens the rights of the employees and negotiation autonomy. From a legal point of view, the decision is not convincing, especially because it overstretches protective purpose of the Directive. Also not convincing is the view that the legally required situation, and not the actual situation, is decisive. Further developments remain to be seen.
Footnotes
Declaration of conflicting interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article
