A legal form that’s also for the Mittelstand!
The European company, also referred to as “SE” because of its Latin name “Societas Europaea,” is a relatively new legal form that is gaining popularity among German companies. After large Dax companies such as Allianz, BASF, Fresenius and Porsche initially discovered the legal form of the European company, a growing number of companies have now also adopted the “SE” legal form. The joint German registry already lists more than 200 operating European companies.
Characteristics of the SE
European legislature has provided a regulatory framework for the SE, the SE Regulation (SE-VO). The SE Regulation is directly applicable in all member states of the EU and the EEA. In Germany, the implementation of the European standards came into force by way of the SEAG and SEBG legislation on 22 December 2004. This legal system is complemented by the applicable subordinated national legislation, in particular the stock corporation act. The capital stock of the SE is divided into shares and must amount to at least EUR 120,000.
Internationality in Practice
The reasons for choosing the legal form of the SE are manifold. A key reason is the European image of the SE, which enables its founders to act as a modern and innovative enterprise, while at the same time allowing to document its internationality. Furthermore, for the SE as a standardised European legal form it is possible to transfer its registered office across borders without losing its legal identity.
Another reason for establishing an SE is the entrepreneurial co-determination of its employees, which is unique in its German form. The SE is not governed by German co-determination regulations due to the absence of explicit regulations providing otherwise. Rather, employee participation is subject to negotiations. Upon establishment of an SE, an agreement is to be negotiated with the employees or their representatives, which i.a. governs the SE’s operational and corporate co-determination. It is completely up to the negotiating parties to exclude co-determination or not, or in other words, to regulate by contract whether or not employee representatives shall be members of the company’s supervisory body.
The procedure for concluding a co-determination agreement is regulated by law. For a company’s operational co-determination, the participation agreement must either provide for an SE works council or a procedure for informing and consulting with employees. There are, in principle, no guidelines for corporate co-determination. However, an exception applies in case an SE is established by way of change of a company’s legal form, in which the existing level of co-determination has to be maintained.
Not only Dax companies such as Allianz, BASF or Fresenius have chosen the “SE” legal form. Small and medium-sized enterprises in particular now operate as SEs. These include i.a. Conrad, Deichmann, WILO, tesa, Escada, Zott, Vapiano, Klöckner, or Gütermann.
If the parties fail to agree on a co-determination agreement, a statutory standard solution applies: In such case, an SE works council is to be established and the existing level of co-determination of the founding company / companies must be maintained. This means that the SE does not have to appoint employee representatives to the company’s supervisory or administrative board, if the founding companies previously were not subject to co-determination.
The co-determination level established by the co-determination agreement or by the statutory standard solution remains in force, even in case of an increase in the company’s personnel, and even beyond the employee thresholds of the One-Third Participation Act (Drittelbeteiligungsgesetz) and the Co-Determination Act (Mitbestimmungsgesetz). An exception to this principle applies in case of implementation of structural changes which are likely to reduce employee rights. In this case, new co-determination negotiations must be initiated. This would be the case if, e.g., a limited liability company (GmbH) practicing co-determination would be merged into an SE not practicing co-determination, so the employees of the SE would lose their participation rights.
Dualistic or Monistic System
An SE having its seat in Germany constitutes a novelty in terms of selecting an organizational structure. The SE is the only legal form in Germany that, at the time of founding, allows the choice between the “dualistic system” with separate management and supervisory boards, or the “monistic system” with a single management and supervisory body, the administrative board.
While the dualistic SE is designed like a German stock corporation, the monistic SE resembles the Anglo-Saxon board model with the administrative board. In addition to the general assembly, the administrative board is the only corporate body of the company. It directs the company, determines the company’s fundamental guidelines of activity and monitors its implementation. Externally, the company is represented by one or more managing directors being responsible for the day-to-day business of the SE. The managing directors are appointed by the administrative board, are subject to their instructions and can be removed from office at any time. As long as the majority of the members are non-managing directors, the same persons may be both managing directors and members of the administrative board, which provides considerable options for family-owned companies. Thus, similar to the organizational structure of a limited liability company (GmbH), the management and representation powers can be concentrated in one person, if such person is a member of the administrative board and also appointed as managing director. Therefore, a personalized organizational structure can be established in a European company, which until now has been primarily reserved for the legal forms of “GmbH” and “GmbH & Co. KG” in Germany.
Possibilities of Founding an SE
Legislature provides for different ways of founding an SE. In practice, the most common type of founding is the change of legal form of a stock coporation (AG) into an SE. It is also possible to establish an SE i.a. by way of merger. All alternatives have in common that relations to other European countries must exist.
Converting a German stock corporation (AG) into an SE is, e.g., only possible if such stock corporation has held a direct or indirect subsidiary within the EU or the EEA since at least two years. In practice, the acquisition of a previously established SE has proved to be an alternative to the statutory founding options. After acquisition, it can be integrated into the existing group structure as necessary.
Taxes and Financial Reporting
The general rules on financial reporting standards for German corporations apply to the SE. There are no special tax provisions, rather the SE regulations refer to the general tax law of the state where the company has its seat.