What is the involvement of employees in cross-border mergers? | In Principle

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What is the involvement of employees in cross-border mergers?

In a cross-border merger, the employees must have an opportunity to participate in the merger procedure and in the governance of the new company—typically by having an influence on the composition of the supervisory board.

On 20 June 2008 an amended Commercial Companies Code of 24 April 2008 entered into force, which implements Directive 2005/56/WE of the European Parliament and Council dated 26 October 2005 on cross-border merger of companies in Polish law.  Cross-border mergers of companies are increasingly common given present-day globalization.  Cross-border merger of companies is also one of the most significant forms of benefiting from commercial freedom in the European Union.  Therefore, European legislator for these reasons surely sought to adopt the Directive, which is intended to simplify and consolidate company merger procedures in the entire EU.

According to the amended law, the cross-border merger mechanism is similar to the domestic merger procedure.  One of the basic differences that has not yet undergone extensive scrutiny in jurisprudence or by practitioners is the obligation to ensure employee participation in the bodies of the company created from a cross-border merger, as regulated in art. 16 of the Directive.  Legislation selected adoption of the new Act dated 25 April 2008 on Participation of Employees in a Company Arising from a Cross-Border Merger as the manner of transposing this matter onto Polish law.  The law entered into force on 20 June 2008.  Provisions adopted in the Polish law are analogous to those accepted in ensuring employee participation in the bodies of a European company.  The Polish law, however, may entail practical problems.

In principle, employee participation in the bodies of an acquiring or newly founded company can have two models: first, employees may be granted the right to select a certain number of supervisory board members or, in the second model, recommend or oppose the appointment of certain or all members of this body.

The Directive, in turn, introduces the general principle that regulations regarding employee participation will apply in a cross-border merger of companies, as set forth in the country where the company emerging from a merger will have its registered seat, if such regulations exist.  This general principle will in practice only apply in a single case, specifically when the average number of employees does not exceed 500 in either of the merging companies within six months prior to publication of the merger plan (and no company has a system of employee participation within the meaning of art. 2k of Directive 2001/86/WE) and at the same time the law governing the company arising from merger provides for at least the same level of participation that existed in merging companies or the same rights for employees at company plants in a different country as those accorded to employees in the country of registered seat.  Such a situation can arise, for example, in the case of a Polish joint stock company that does not accord its employees participation rights in bodies, as opposed to its German counterpart, an AG whose employees have the right to select their own representatives to a management or supervisory body.  If the registered seat of the company created from a merger is Germany, employee participation provided in this country from the date of registration of the new company will apply toward all employees of this company.

In practice, the law will also not apply if employee participation did not apply at any of the merging companies prior to the date of merger registration.  In such case, the obligation to ensure employee participation in company bodies does not, in our view, at all arise.  This will be the sole exception to the principle of obligatory employee participation in the company arising from a cross-border merger.

However, the law will apply in other instances, namely when there is a system of employee participation in at least one of the merging companies and regulations set forth in Poland, the country of the newly founded or acquiring company, do not provide for at least the same level of participation.  In such a situation companies engaged in a merger can select one of two options stipulated by law.  First, they can appoint a special negotiating team in the manner and course specified in regulations.  The task of this team is to reach an agreement with relevant bodies of companies participating in a merger with regard to employee participation in the new company.  Secondly, relevant bodies of participating companies can refrain from appointing a special negotiating team and adopt a resolution on direct submission to standard participation principles, as specified in section 3 of the law.  They stipulate that a representative team is appointed, which allocates positions among employees from various member states in the supervisory board of the company arising from a cross-border merger.

Participation of employees in the merger procedure must obviously be differentiated from participation of employees in the bodies of the acquiring or newly founded company.  It takes place in each cross-border merger, irrespective of the “nationality” of merging companies, registered seat of the acquiring or newly founded company or the number of employees.  Employee rights in the merger process primarily encompass information rights.  An employer is obligated to provide a merger plan to employee representatives or, in their absence, to all employees (which will address the likely effects of the merger on employees), an expert opinion on the plan (unless such opinion is not drafted following a decision of shareholders of the merging companies), financial statement and management board reports on activity of the merging companies during the three preceding business years together with an auditor opinion and report, as well as a management board statement clarifying legal and economic aspects of the merger.  If the body drafting a report receives an opinion of employees on the merger at an appropriate time, it should also be added to the report.

Dr Szymon Kubiak, Employment Law Practice, Wardyński & Partners