The "Act on Employee Participation in Cross-Border Conversions and Cross-Border Divisions (MgFSG)", which came into force on January 31, 2023 as the German implementation law of the European Transformation Directive (EU) 2019/2121, and the "Act on Employee Participation in Cross-Border Mergers (MgVG)" regulate the participation rights of employees in cross-border demergers, conversions (changes of legal form) and mergers as well as the subsequent co-determination rights in the supervisory or administrative body ("board-level participation rights"). Board-Level Co-Determination) of the company resulting from the conversion.
According to the MgVG and the MgFSG, under certain conditions, a so-called Employee Participation Procedure to be conducted. The aim of the Employee Participation Procedure is to permanently secure board-level participation rights to which employees are entitled in a supervisory or administrative body of a company involved in a transformation in a uniform Europe-wide procedure.
Employee Participation Procedure - Phases and Timeline
The Employee Participation Procedure regulated in the MgFSG and the MgVG consists of
- the election of a - usually international - special negotiating body of the employees ("SNB") of the companies involved in the conversion and their subsidiaries (duration: up to ten weeks) and
- Negotiations between the company managements and the SNB on the conclusion of a participation agreement on board-leval participation rights after the conversion (duration: generally up to six months).
The outcome of the negotiations is regularly based on the status quo under co-determination law prior to the conversion.
Requirements for an Employee Participation Procedure under the MgFSG and MgVG
The rules of the MgFSG and the MgVG on the Employee Participation Procedure apply to companies in Germany that result from cross-border conversions (changes of legal form), divisions, or mergers into Germany. However, mirror provisions for transformation cases originating from Germany are found in the laws of other EU/EEA member states.
The co-determination of employee representatives in the supervisory or administrative body of a company is generally determined by the principle of the country of domicile in a company resulting from a cross-border transformation. If a German GmbH splits off a part of the company that becomes a Luxembourg SA, Luxembourg law therefore applies in principle. However, to protect against an "escape from co-determination", companies are obliged to carry out an employee participation procedure and to negotiate co-determination with a SNB of the employees under the following conditions:
- if the existing board-level participation rights were reduced,
- if the applicable domestic participation law were to disadvantage foreign employees,
- if a company involved in the transformation had an average number of employees of at least four-fifths of the threshold for board-level participation rights in the six months prior to the disclosure of the transformation plan ("4/5 rule").
The transformation project may only be registered in these cases if the management bodies of the companies involved and the SNB have either reached an agreement on future board-level participation rights or if, after the unsuccessful expiration of the negotiation period, statutory fallback rules apply that maintain the level of employee participation existing prior to the transformation. ("Before and after principle").
Result of the Employee Participation Procedure: Board-Level Participation in accordance with MgFSG and MgVG
In the case of cross-border conversions and divisions, the board-level participation regime applicable prior to the transformation is strictly protected in all its components—negotiating a reduction in participation rights is not possible. In contrast, in the case of cross-border mergers, the previous participation rights can be mutually reduced or negotiated away. For cross-border divisions, the strict protection of participation even leads to a multiplication of board-level paticipation rights—even if the relevant thresholds are no longer met in the spun-off company parts. Regardless of whether the employee threshold is reached, the previous board-level participation regime continues to apply to the transferring legal entity for five years after the division takes effect, unless the number of employees falls below one-quarter of the minimum threshold.
In the case of cross-border mergers, company managements can still decide to apply the statutory default rules directly without prior negotiations if a system of board-level participation applies to at least one of the companies involved. In this case, the existing board-level participation regime (e.g., one-third participation) is permanently "frozen".
If a company was not subject to board-level participation prior to the conversion or division due to the 4/5 rule, it will also not be subject to board-level participation after the transformation. If the employee participation procedure is completed in this case, the absence of board-level participation can likewise be "frozen." This does not apply if the SNB decides not to initiate negotiations or to terminate them – in such cases, the law of the country where the transformed company is registered will apply.
Due Diligence: Employee Participation Procedures for Subsequent Domestic Transformations
Within four years of a cross-border transformation taking effect, existing board-level participation in the company resulting from the transformation is protected in such a way that a new Employee Participation Procedure must be conducted in the event of subsequent domestic transformations. The applicable law for this procedure – whether the MgFSG with its strict protection of existing rights or the less stringent MgVG – is determined by the original cross-border transformation measure. This regulation must be carefully considered in transformation processes and factored into the timing of subsequent domestic transformations. It should be included in the list of labor law due diligence considerations for transformation projects.