European Company Statute adopted

After more than 30 years of debate, the European Company Statute was finally adopted in October 2001. It provides for the establishment of a new type of company incorporated at European level, within which employee involvement arrangements are generally obligatory.

On 8 October 2001, the EU Employment and Social Policy Council adopted the Regulation establishing the European Company Statute (ECS), and the accompanying Directive on the involvement of employees in the European Company (European Company Statute adopted). The ECS was first proposed in 1970 and then proceeded through some 30 years of revisions, impasses and revivals before the Council of Ministers succeeded in reaching a political agreement on the Directive and Regulation in December 2000 (EC: European Company Statute close to adoption). Following approval by the European Parliament in September 2001 - with a number of amendments which were not subsequently taken up by the Commission and Council - the Council was able to adopt the two instruments in October 2001.

The ECS Regulation gives companies the option of forming a European Company (also known as a Societas Europaea, or SE) which can operate on a Europe-wide basis and be governed by Community law directly applicable in all member states (rather than national law). The Directive lays down the employee involvement provisions to apply to SEs - providing for negotiations between management and employee representatives in each SE on the arrangements to apply, with a set of back-up statutory "standard rules" where no agreement is reached (a similar approach to that taken by the European Works Councils (EWCs) Directive). Involvement constitutes the information and consultation of employees and, in some cases, board-level participation.

The ECS Directive is the second item of EU legislation to provide for transnational employee involvement arrangements, following the 1994 EWCs Directive. Quite apart from the company law implications of the ECS, it is thus also a significant development in EU social legislation.

The EWCs Directive governs information and consultation in "normal" multinationals operating in Europe, while the ECS Directive regulates information, consultation and board-level participation in those firms which opt for the new SE form, which, the Commission hopes, will allow them to exploit fully the potential of the EU internal market.

At national level, a framework for general and continuing information and consultation will be provided by the forthcoming Directive on this issue, on which a conciliated text has now been reached (Agreement on information and consultation text), with final adoption likely in early 2002. The Directive will add to existing EU provisions on information and consultation in specific circumstances (ie collective redundancies, business transfers and health and safety).

A further potentially significant aspect of the ECS involvement Directive is the way it differs from the EWCs Directive. The former's information and consultation provisions are broadly similar to the latter's, but with some notable variations (many of these are highlighted below). These differences may provide a pointer towards the changes which the Commission is planning to propose to the EWCs Directive during 2002.

The ECS is an extremely lengthy and complicated piece of legislation, with the 70-article Regulation (which essentially governs the company law aspects of the SE) and the 17-article Directive (on the employee involvement aspects) interrelating in a complex way. Below, we provide a summary of the key involvement provisions. Given constraints of space, we do not go into detail on some of the more recondite points or outline the full complexities of some situations (readers are referred for further detail to future issues of our associated publication, European Works Councils Bulletin). The full text of the Directive was reproduced in Employee involvement in a European company.

Setting up an SE

Under the Regulation, an SE may be set up by two or more EU-based companies (of various forms) from different member states (or with operations in another member state, in some cases) by merger, or by creation of a joint holding company or subsidiary. A single EU-based company may transform itself into an SE, if for at least two years it has had a subsidiary governed by the law of another member state. A company based outside the EU may (if individual member states so decide) participate in the formation of an SE, provided that it is formed under the law of a member state, has its registered office in that member state and has "a real and continuous link" with a member state's economy.

Each of the four types of SE is governed by somewhat differing rules, including in the area of employee involvement (see below), but no SE may be registered unless the arrangements for employee involvement have been resolved in line with the provisions of the involvement Directive. Member states have the option of not applying the Directive's fall-back "standard rules" on board-level participation (see below) to SEs formed by merger that are registered on their territory. In this case, the Regulation provides that, for registration to take place, an agreement on employee involvement, including board-level participation, must have been concluded in line with the Directive, unless none of the participating companies were governed by board-level participation rules prior to registration of the SE.

Employee involvement in the SE

The Directive requires that arrangements for the involvement of employees in the company's affairs be established in every SE in accordance with a negotiating procedure or, under certain circumstances, in accordance with the statutory provisions set out in the Directive's annex.

The Directive defines the various aspects of employee involvement as follows:

• Information. The informing of the body representative of the employees and/or employees' representatives by the "competent organ" of the SE on questions which concern the SE itself and any of its subsidiaries or establishments situated in another EU member state, or which exceed the powers of the decision-making organs in a single member state, at a time, in a manner and with a content which allows the employees' representatives to undertake an in-depth assessment of the possible impact and, where appropriate, prepare consultations with the SE's competent organ. This is a departure from the EWCs Directive, which does not define information.
• Consultation. The establishment of dialogue and exchange of views between the body representative of the employees and/or the employees' representatives and the SE's competent organ, at a time, in a manner and with a content which allows the employees' representatives, on the basis of information provided, to express an opinion on measures envisaged by the competent organ, which may be taken into account in the decision-making process within the SE. This is rather stronger than the EWCs Directive's definition of consultation as "the exchange of views and establishment of dialogue".
• Participation. The influence of the body representative of the employees and/or the employees' representatives in the affairs of a company by way of the right to elect or appoint some of the members of the company's supervisory or administrative organ, or the right to recommend and/or oppose the appointment of some or all of the members of such organs.

The SNB procedure

Where the management or administrative organs of the participating companies draw up a plan to establish an SE, they must - as soon as possible after publishing the draft terms or plan - take the necessary steps to start negotiations ("in a spirit of cooperation" with a view to reaching an agreement) with the representatives of the companies' employees on employee involvement arrangements. For the purposes of negotiations, a special negotiating body (SNB) must be established. The onus is thus on management to open talks, while under the EWCs Directive management is required to negotiate only at the employees' request.

Allocation of seats

The SNB is composed of elected or appointed members, with seats allocated in proportion to the number of workers employed in each member state by the participating companies. Member states have one seat for every 10%, or fraction thereof, of the total EU workforce of the participating companies employed there. Greater weight is thus given to workforce size than in SNBs under the EWCs Directive, which specifies only that there should be one representative from each country concerned, with member states left to decide the formula for allocation of further seats in line with workforce size.

In SEs formed by merger, there should be additional SNB members from each member state as necessary to ensure that the SNB includes at least one member representing each company participating in the SE which is registered and has employees in that member state, and which will cease to exist as a separate legal entity following the SE's registration.

SNB members

Member states will determine the election or appointment methods for SNB members in their territories. They must ensure that, as far as possible, members include at least one representing each participating company with employees in the member state concerned. Such measures must not increase the overall size of the SNB.

Member states may provide that SNB members can include representatives of trade unions - whether or not they are employees of a participating company. This is another departure from the EWCs Directive, which does not mention trade unions.

Experts and expenses

For the purpose of the negotiations, the SNB may request experts of its choice - for example, representatives of "appropriate Community-level trade union organisations" (again, unions are not mentioned specifically in the EWCs Directive) - to assist it with its work. Such experts may attend negotiating meetings "in an advisory capacity" at the SNB's request, "where appropriate to promote coherence and consistency at Community level".

Any expenses relating to the SNB's functioning and, in general, to the negotiations, are borne by the participating companies, to enable the SNB to "carry out its task in an appropriate manner". Member states may lay down budgetary rules regarding the SNB's operation, in particular limiting funding to cover one expert only.

Decision-making

In general, the SNB takes decisions by an absolute majority of members, provided that this majority also represents an absolute majority of the total workforce, with each member having one vote. However, should the result of the negotiations with management lead to a reduction of board-level participation rights, approval of such an agreement requires the votes of two-thirds of the SNB members representing at least two-thirds of the total workforce, and including the votes of members representing employees in at least two member states. This applies in the case of SEs established by merger, if board-level participation already covers at least 25% of the total workforce of the participating companies. In the case of SEs established by creating a holding company or subsidiary, the special majority vote is required if participation already covers at least 50% of the total workforce. A reduction of participation rights means that employees will be able to elect, appoint, recommend and/or oppose a lower proportion of members of the SE's supervisory or administrative organ than the highest proportion applying within the participating companies (SEs may have either a two-tier board structure, with a supervisory organ overseeing a management organ, or a one-tier structure, with a single administrative organ).

Duration of negotiations

Negotiations must commence as soon as the SNB is established and may continue for six months thereafter (compared with three years under the EWCs Directive). The parties may decide jointly to extend the negotiations up to a total of one year.

Decision not to negotiate

The SNB may decide not to open negotiations or to terminate negotiations already opened, and instead to rely on national employee information and consultation rules in the member states where the SE has employees. Furthermore, if an SE meets the definition for companies covered by the EWCs Directive, this Directive applies to the SE if the SNB decides not to open negotiations, or to terminate negotiations in progress (see below). In order to take the decision not to open negotiations, or to terminate negotiations in progress, the special two-thirds majority of SNB members is required (see above).

Such a decision would stop the SNB procedure, and none of the "standard rules" on employee involvement (see below) would apply. However, this option not to open negotiations, or to terminate negotiations that are in progress, is not available in SEs formed by transformation of a single company, if that company already has board-level participation arrangements.

The SNB can be reconvened on the written request of at least 10% of the SE's employees, or their representatives, no sooner than two years after a decision not to open negotiations or to terminate them (or earlier by agreement). However, if the reconvened SNB reopens negotiations with management but no agreement is then reached, none of the standard rules will apply.

Outcome of negotiations

If the SNB does not decide not to open negotiations or to terminate negotiations already opened, negotiations between the SNB and the competent organs of the participating companies may result in:

• a written agreement on employee involvement arrangements;
• an agreement to apply the Directive's statutory standard rules on employee involvement; or
• failure to reach agreement within the six-month deadline (or one year, if the parties have agreed to an extension), in which case the standard rules apply.

Agreement

The agreement on employee involvement must cover a number of basic elements. All agreements must specify their scope, the date of entry into force and duration, and the circumstances of and procedure for renegotiation. The agreement's basic content relates to information and consultation, through either an EWC-like "representative body" (RB) or one or more information and consultation procedures. An agreement establishing an RB must specify:

• the composition, number of members and allocation of seats;
• the RB's functions and the procedure for its information and consultation;
• the frequency of meetings; and
• the financial and material resources to be allocated.

If the parties decide to establish one or more information and consultation procedures instead of an RB, the agreement must specify the arrangements for implementing those procedures.

If, in addition to information and consultation, the parties decide to provide for board-level participation arrangements, the agreement must specify the substance of these arrangements, including (if applicable):

• the number of members of the SE's administrative or supervisory body which the employees will be entitled to elect, appoint, recommend or oppose;
• the procedures as to how these members may be elected, appointed, recommended or opposed by the employees; and
• the rights of the members.

The inclusion of board-level participation arrangements is essentially optional. However, in SEs established by transformation, the agreement must provide for at least the same level of all elements of employee involvement as existing within the company to be transformed. Furthermore, as noted above, in cases where the agreement reduces board-level participation rights below the highest level applying in the participating companies, this must be approved by a two-thirds majority of SNB members.

Agreement to apply standard rules

The parties may agree that the Directive's standard rules on employee involvement, as implemented in the legislation of the member state in which the registered office of the SE is to be situated, will apply.

Failure to agree

If the parties fail to reach an agreement within the six-month deadline (or one year, if the parties have agreed to an extension) - and the SNB has not decided not to open talks, or to terminate negotiations in progress - the Directive's standard rules on employee involvement, as implemented in the legislation of the member state in which the registered office of the SE is to be situated, apply from the registration of the SE. In such cases, acceptance of the application of the standard rules by the competent organs of the participating companies is required if they want to continue with registration of the SE.

Standard rules

An annex to the Directive sets out the standard rules on employee involvement in SEs which are to apply in the event of the management and SNB failing to agree (or if they so decide). The standard rules provide for information and consultation through an RB, plus board-level participation in some circumstance - see boxes below.

The rules on the application of the standard rules on board-level participation are complex:

• in an SE of any type where none of the participating companies was governed by board-level participation rules before registration, the SE is not required to establish provisions on such participation;
• in SEs established by transformation, if a member state's rules on board-level participation applied to the company concerned before transformation, the standard rules in this area apply. All aspects of existing board-level participation must continue to apply to the SE;
• in SEs established by merger, the standard rules apply automatically if one or more forms of board-level participation applied in one or more of the participating companies covering at least 25% of the total workforce of all the participating companies. Furthermore, if there was board-level participation affecting a lower proportion of the total workforce, the standard rules apply if the SNB so decides. However, the Directive gives member states the option of not applying the standard rules on board-level participation to SEs formed by merger; and
• in SEs established by setting up a joint holding company or subsidiary, the standard rules apply automatically if one or more forms of board-level participation previously applied in one or more of the participating companies covering at least 50% of the total workforce of all the participating companies. Furthermore, if there was board-level participation affecting a lower proportion of the total workforce, the standard rules apply if the SNB so decides. If there was more than one form of participation within the participating companies, the SNB decides which of those forms is to apply in the SE.

Confidentiality

Member states must provide that members of the SNB and RB (and employees' representatives in the context of an information and consultation procedure), and experts who assist them, cannot reveal any information which has been given to them in confidence. This obligation continues to apply after their terms of office. Member states must provide, "in specific cases and under the conditions and limits laid down by national legislation", that the supervisory or administrative organ of an SE or of a participating company established on its territory is not obliged to transmit information where its nature is such that, "according to objective criteria, to do so would seriously harm the functioning of the SE (or, as the case may be, the participating company) or its subsidiaries and establishments or would be prejudicial to them". Member states may make this dispensation subject to prior administrative or judicial authorisation.

Cooperation

The competent organ of the SE and the RB must "work together in a spirit of cooperation with due regard for their reciprocal rights and obligations." The same applies to cooperation between the supervisory or administrative organ of the SE and the employees' representatives in the context of an alternative information and consultation procedure.

Protection of representatives

The same protection and guarantees provided for employees' representatives by the national legislation and/or practice in their country of employment apply, in the exercise of their functions, to: SNB members; RB members; any employees' representatives exercising functions under an information and consultation procedure; and any employees' representatives on the supervisory or administrative organ of an SE who are employees of the SE, its subsidiaries or establishments or of a participating company. This protection applies in particular to attendance at relevant meetings of the SNB or RB and the payment of wages (for relevant employees) during absence necessary for the performance of duties.

Compliance

Member states must ensure that the management of SEs' establishments and the supervisory or administrative organs of subsidiaries and of participating companies situated within their territory abide by the obligations laid down by the Directive; this applies whether or not the SE's registered office is located in that member state. The same applies to the employees' representatives or, where relevant, the employees themselves. Member states must provide for appropriate measures in the event of failure to comply with the Directive; in particular, they must ensure that administrative or legal procedures are available to en-able the enforcement of obligations deriving from the Directive.

The Directive also obliges member states to take "appropriate measures in conformity with Community law with a view to preventing the misuse of an SE for the purpose of depriving employees of rights to employee involvement or withholding such rights".

Relationship with other provisions

Where an SE meets the definition of an undertaking or group set out in the 1994 EWCs Directive or the 1997 Directive extending the EWCs Directive to the UK, the provisions of these Directives and the provisions transposing them into national legislation do not apply to the SE or its subsidiaries. However, where the SNB decides not to open negotiations over employee involvement in an SE, or to terminate negotiations already opened, the EWCs Directive(s) and the national implementing provisions apply.

Rules on board-level participation provided for by national legislation and/or practice, other than those implementing the ECS involvement Directive, do not apply to SEs. However, the Directive must not prejudice: existing employee involvement rights of SEs' employees provided for by national legislation and/or practice, other than board-level participation in the bodies of the SE; and the provisions on board-level participation laid down by national legislation and/or practice applicable to the subsidiaries of the SE.

Final provisions

The Directive entered into force on the day of its publication in the Official Journal - that is, 10 November 2001. Member states must adopt the laws, regulations and administrative provisions necessary to comply with the Directive no later than 8 October 2004 (the date that the ECS Regulation, which is directly applicable in the member states, comes into force), or ensure by then that management and labour introduce the required provisions by agreement.

No later than 8 October 2007, the European Commission must, in consultation with the member states and with "management and labour at Community level", review the procedures for applying the Directive, with a view to proposing suitable amendments to the Council where necessary.

Standard rules on board-level participation

The standard rules on board-level employee participation do not apply in all cases. If none of the participating companies were governed by board-level participation rules before registration of the SE, the latter is not required to establish such participation. In SEs established by merger or the setting up of a joint holding company or subsidiary, the standard rules apply only in certain circumstances or where the SNB so decides. However, in SEs established by transformation of an existing company, if a member state's rules on board-level participation applied to this company before registration, all aspects of such participation continue to apply to the SE.

In SEs established by merger or the setting up of a joint holding company or subsidiary, where the standard rules on board-level participation do apply, they are as follows:

• The SE's employees and/or their representative body (RB) have the right to elect, appoint, recommend or oppose the appointment of a number of members of the SE's administrative or supervisory body equal to the highest proportion in force in the participating companies before registration of the SE.
• The RB decides on the allocation of seats on the administrative or supervisory body among its members representing employees in the various member states, or on the way in which the SE's employees may recommend or oppose the appointment of the members of these bodies, according to the proportion of the SE's workforce employed in each member state. If the employees of one or more member states are not covered by the application of this proportional criterion, the RB shall appoint a member from one of those member states, in particular the member state where the SE's registered office is located, where appropriate. Each member state may determine the allocation of the seats it is given.
• Every member of the SE's administrative body or supervisory body who has been elected, appointed or recommended by the RB or by the employees is a full member with the same rights and obligations as the members representing the shareholders, including the right to vote.

Standard rules on composition of the representative body

• The representative body (RB) is composed of employees of the SE, elected or appointed - in accordance with national legislation and/ or practice - from among their number by existing employees' representatives or, in their absence, by the entire body of employees.
• The number of members of, and allocation of seats on, the RB must be adapted to take account of changes occurring within the SE.
• Where its size warrants, the RB shall elect a select committee with up to three members from among its members.
• RB members are elected or appointed in proportion to the number of employees employed in each member state by the participating companies. Member states have one seat for every 10%, or fraction thereof, of the SE's total EU workforce employed there.
• Four years after the RB is established, it shall examine whether to open negotiations over an agreement on employee involvement, or to continue to apply the standard rules.

Standard rules on information and consultation

• The RB's competence is limited to questions which concern the SE itself and any of its subsidiaries or establishments situated in another member state, or questions which exceed the powers of decision-making organs in a single member state.
• The RB has the right to be informed and consulted and, for that purpose, to meet the SE's competent organ at least once a year, on the basis of regular reports drawn up by the competent organ, on the progress of the SE's business and its prospects. The SE's competent organ must provide the RB with the agenda for meetings of the SE's administrative, or, where appropriate, management and supervisory organ, and with copies of all documents submitted to the shareholders' general meeting (this exceeds the rights of statutory EWCs based on the EWCs Directive's subsidiary requirements).
• The annual information and consultation meeting shall relate in particular to: the structure, economic and financial situation; the probable development of the business, production and sales; the situation and probable trend of employment; investments; and substantial changes concerning organisation, introduction of new working methods or production processes, transfers of production, mergers, cutbacks or closures of undertakings, establishments or important parts thereof, and collective redundancies.
• Where there are "exceptional circumstances affecting the employees' interests to a considerable extent" - particularly in the event of relocations, transfers, the closure of establishments or undertakings or collective redundancies - the RB has the right to be informed. The RB or, where it so decides, the select committee, has the right to meet at its request the competent organ of the SE - or any more appropriate level of management within the SE - to be informed and consulted on "measures significantly affecting employees' interests".
• In such exceptional circumstances, where the SE's competent organ decides not to act in accordance with the opinion on the issue expressed by the RB, the RB has the right to a further meeting with the competent organ "with a view to seeking agreement" (an advance on the rights of statutory EWCs).
• Before any meeting with the SE's competent organ, the RB or select committee are entitled to meet without management being present.
• RB members must inform the representatives of the SE's employees of the content and outcome of the information and consultation procedures.
• The RB or select committee may be assisted by experts of its choice.
• In so far as necessary for the fulfilment of their tasks, RB members are entitled to time off for training without loss of wages.
• The costs of the RB must be borne by the SE, which must provide RB members with the financial and material resources needed to enable them to perform their duties in an "appropriate manner". In particular, the SE must, unless otherwise agreed, bear the cost of organising meetings and providing interpreting services, and the accommodation and travelling expenses of RB members. Member states may lay down budgetary rules regarding the RB's operation, in particular limiting funding to cover one expert only.