Stock Options for Works Council Members in Germany: The Role of Oral Communications

Excerpt from EuroWatch
published by WorldTrade Executive

By Dr. Walter Ahrens (Morgan Lewis & Bockius LLP)

A recent judgment of the federal labor court underlines how important it is that the right legal entity within a group of companies grants stock options and that no misleading representations are made to the employees in this context. As the following case demonstrates, failure to sufficiently take these requirements into account can lead to unexpected financial consequences that can be substantial.

The plaintiff started employment in 1999 with a German company that was owned by a U.S. corporation. In 2000 and 2001 he received a total of 5,000 stock options from the U.S. parent corporation. In 2001 he became a member of the company’s works council. He was subsequently elected chairman of the works council and released from his obligation to work. German statutory law provides that in operations that regularly employ at least 200 employees, a certain number of works council members have to be released to enable them to fully engage in works council activities. These works council members are nevertheless entitled to the same pay and benefits as comparable employees and even take part in pay increases. This is intended to ensure that they suffer neither financially nor with respect to their professional development from their works council membership.

It probably does not come as a surprise that the plaintiff in this case did not receive any stock options from 2002 to 2005, while an employee whom the parties had agreed was comparable to the plaintiff did receive such options. The employee claimed the options from the German subsidiary in court, but lost in the first two instances.

The federal labor court set the appeal court judgment aside and remanded the case to the appeal court for further investigation. It held that the pay and benefits that works council members are entitled to may also include stock options. The court also made clear that payments and benefits that are provided by a third party and not by the employer, for example by another group company, are not to be taken into account in this context.

In this case, the U.S. parent corporation had gotten nearly everything right. The stock options had been granted by the parent corporation, and the employment contract between the German subsidiary and the employee did not include any stock options. Such clear distinction is also helpful from a conflict-of-laws point of view.

The reason, however, why the federal labor court nevertheless set aside the appeal court judgment was that the appeal court had not sufficiently taken into account the plaintiff’s submission that in his job interview, the German subsidiary had presented the stock options as an additional pay component. According to the court, this could mean that the U.S. parent entity’s stock options were benefits in addition to the regular remuneration agreed upon between the parties that could establish the employer’s secondary liability in accordance with the terms and conditions of the stock option agreements. What exactly had been said in the job interview and how it has to be construed will now have to be determined by the appeal court.

To subscribe to EuroWatch.

Managing Shop Committee Consultation in French Business Transfers

Excerpt from EuroWatch
published by WorldTrade Executive, Inc.

By Eric Cafritz, Frédérique Jaïs and Olivier Genicot (Fried, Frank, Harris, Shriver & Jacobson LLP)

French law requires employers to share information and consult with the shop committee in cases of M&A, and there are EU requirements as well.

There is controversy as to the appropriate time for management to disclose a transaction with potentially exposive labor consequences if the timing is wrong. It can also be surprising as to when the shop committee rules apply such as in cases where the transction is negotiated and managed entirely outside of France.

General Scope of Obligation to Consult with Shop
Committees with Respect to Business Combinations
Companies on both ends of acquisition transactions are required to inform and consult with their shop committees. Under Article L. 2323-19 of the Labor Code, an employer must inform and consult with the shop committee “regarding any modification in the economic or legal organization of the company, notably in the event of a merger, sale, (...), or acquisition or sale of a subsidiary within the meaning of Article L. 233-1 of the French Commercial Code.” The employer must consult with committee members regarding the effects that the contemplated transaction may have on employees.

Furthermore, where there are “exceptional circumstances affecting the employees’ interests to a considerable extent, particularly in the event of relocations, the closure of establishments or undertakings or collective redundancies,” the European shop committee (or, if applicable, the select committee),8 has the right to request a meeting with the employer so as to be informed and consulted regarding the contemplated transaction. It has the right to meet, at its request, the central management, or any other more appropriate level of management within the EU-wide company or group of companies having its own powers of decision, so as to be informed and consulted on measures significantly affecting employees’ interests.

Direct Changes of Control
The nature of the information and consultation duty differs as between the acquirer, the seller, and the target company.

With respect to the acquiring company, its shop committee must be informed and consulted prior to acquiring a stake in another entity. Although the acquisition of a stake is separately defined by Article L. 233-2 of the French Commercial Code as the acquisition of 10% to 50% of the share capital of another entity, the French Supreme Court has held that in the absence of a specific cross-reference to the Commercial Code in Article L. 2323-19 of the Labor Code, the acquisition of less than 10% of the equity of a target company triggers the obligation to inform and consult with the shop committee.

With respect to the seller, its shop committee must also be informed and consulted if it sells a subsidiary in which it holds more than 50% of the equity. According to case law, the seller’s shop committee must be informed and consulted no matter how insignificant the subsidiary may be to the seller.

For more information on EuroWatch

To sign up for the free International Corporate Counsel Briefing

Working Time Directive Agreement Reached

From EuroWatch.
published by WorldTrade Executive, Inc.
By Daniel Kelly
McDermott Will & Emery

The Employment and Social Affairs Council, following a meeting in Luxembourg on 10 June 2008, has adopted a Common Position on both the Working Time Directive and the Temporary Agency Workers Directive.

The agreement on the Working Time Directive only became possible after Spain and other countries overcame objections to an opt-out that allows an increase in the weekly cap to 60 working hours. A distinction was also drawn between “active” and “inactive” on-call time, allowing greater flexibility for doctors struggling to keep average weekly working hours below the agreed limit. Agreement on the Temporary Agency Workers Directive was reached after, Member States were given the option of derogating from the requirement of equal treatment as of day one for temporary agency workers in terms of pay, maternity leave and annual leave.

The Council Common Positions will now be sent to the European Parliament for a second opinion. If they are passed, they will return to the Council of Ministers for a second round of approvals, at which stage they will become EU Law.

To find out more about EuroWatch

To receive your free International Corporate Counsel electronic briefing