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Transposition of the SE legislation in the UK (Report: March 2004)

The UK is relatively well advanced in transposing the directive and making the necessary changes to domestic company law to allow the regulation to take effect. The official period of consultation on the issue is now over. The government’s aim is to give companies maximum flexibility and make as few changes as possible to existing company legislation, while limiting the employee participation provisions to those set out in the directive.

Responses from the employers and the unions suggest only limited changes to the government’s plans and final legislation, probably little changed from the initial proposals, is expected by summer 2004. The main question is how many companies will decide to make use of it. So far there is no evidence that the number of European Companies in the UK will be large.

Current progress

The UK government produced a consultative document setting out its proposals on how the European Company Statute legislation should apply to the UK on 6 October 2003 (Implementation of the European Company Statute - the European Public Limited Liability Company Regulations 2004 – A Consultative Document). The consultation closed on 9 January 2004 with around a dozen organisations submitting comments. The government states that it hopes to publish its response and the final text of the implementing legislation before the summer. As elsewhere in the EU the regulation will come into force on 8 October 2004 and the directive should be incorporated into national law by the same date.

There is no intention that the domestic legislation necessary to introduce the European Company Statute should be the subject of negotiations between the unions and employers’ associations. Indeed such an intention would be entirely foreign to UK national practice, where collective agreements are not legally binding.

The contents of the proposed legislation

The bulk of the consultative document sets out the requirements of the regulation and the directive. However, it also indicates how the British government proposes to introduce them into UK law. The general aim on company law aspects is to give companies maximum flexibility and to make as few changes as possible to existing company law, while on employee participation the approach has been to follow the terms of the directive but do no more.

The government also makes it clear that it does not intend to make use of the effective opt-out from the European Company process contained in Article 7, paragraph 3 of the directive.

The government’s aim of making as few changes as possible to existing company law is indicated by its approach to the setting up two-tier boards. Despite the fact that the UK is generally taken to have a single-tier system, the British government believes that is no need to change the law to allow a two-tier management structure in the UK. It considers that there is no legal bar to companies setting up a two-tier structure if they wish to. In the view of the government, they only need to change their articles of association, the rules that they themselves agree.

The decision to allow a two-tier structure to be introduced through changes to a company’s own rules is in line with the UK government’s general approach of leaving as much as possible to companies themselves to determine. As the consultation document states the legislative framework should “provide for maximum flexibility in the way in which SEs are structured”.
Three examples make this clear.

The first deals with authorisation. In a two-tier SE structure the regulation provides that an SE's statutes should list the categories of transactions which require authorisation by the supervisory board. But it allows member states to influence how this works, either by permitting the supervisory board to decide which issues must be referred to it, or by the government itself listing the categories to be included in the statutes.

However, in SEs based in the UK there this will not occur. As the consultative document states: “It is not proposed that either of these options be adopted, as it is appropriate that the competence of the two organs to take decisions should be a matter for the company’s constitution as set out in its statutes”.

The second example deals with information, where the consultative document rejects the option that allows member states to give rights to each individual member of the supervisory board to require information necessary to carry out his or her duties. The document argues that this option is not necessary, that the supervisory board should take this decision collectively and that “provision could be made where appropriate, in the statutes”.

Finally on the size of the boards, supervisory, management or single-tier, the British government does not intend to move away from the current situation which gives almost a free rein to companies. (The exception is an SE with employee participation on a single-tier board, where the document accepts that the regulation requires that, the board must have at least three members.) Otherwise the current rules apply, which mean that the only requirement in terms of size will be that an SE should have at least two directors. In a two-tier board structure an SE could be set up where each board had only one member.

On the directive covering employee participation, the basic approach is to reproduce the what has been already agreed at EU level. However, the UK government has to decide on a number of practical issues to take account of the specifics of the UK’s industrial relations system.

On the formation of the SNB, the government favours election by employees or, where such a body exists, appointment by a representative body, described as a “consultative committee”. To be able to choose the SNB members the consultative committee must, in the words of the draft regulations, be a body,

  • “whose normal functions include or comprise the carrying out of an information and consultation function;
  • which is able to carry out its information and consultation function without interference from the management of the participating company;
  • which, in carrying out its information and consultation function, represents all the employees of the participating company; and
  • which consists wholly of persons who are employees of the participating company, its concerned subsidiaries or establishments.”

This arrangement is broadly similar to the arrangement for the selection of UK members of the SNB of European Works Councils. However, there is a significant difference on the question of elections. While the SE proposals simply say that the consultative committee must be made up of employees, the EWC legislation in the UK says that the consultative committee must consist “wholly of persons who were elected by a ballot (which may have consisted of a number of separate ballots) in which all the employees who, at the time, were UK employees were entitled to vote”. In other words the absolute requirement to have been elected is not present in the SE proposals.

On membership of the SNB, the draft regulations specifically propose that, as well as employees, full-time trade union officials will be entitled to be members, although this is subject to management agreement. The wording is “if the management of that participating company so permits”.

On experts, the draft regulations state that the SNB may be assisted by “experts of its choice” but that the company is only required to pay expenses for one expert.

On confidentiality, the draft regulations require those who are given material in confidence to keep it confidential. The employer could bring an action in the civil courts where he or she considered that confidential information had been disclosed. However, it is possible to ask the Central Arbitration Committee (CAC), the government appointed body that currently deals with issues like union recognition and information disclosure, to rule on whether this requirement is justified. If the CAC is satisfied that disclosure would not “prejudice or cause serious harm” to the company, it can allow it to be disclosed.
On renegotiations following significant changes to the SE after it has been set up, the government, while recognising that it could “specify the conditions under which employee involvement agreements must be renegotiated”, intends not to do so. It prefers a voluntary approach, in which the initial agreement itself specifies what should happen where there are significant changes after an SE has been set up and “what those significant changes may be”.

On compliance and enforcement, the draft regulations state that the CAC is the body to which complaints should be taken. The maximum penalty that can be imposed on companies which fail to comply with the rulings of the CAC is £75,000 (approximately €110,000), imposed by a higher court, the Employment Appeals Tribunal.

Responses from unions and employers

Both the TUC, the British union confederation and the CBI, the main employers association have responded to the consultation, although the CBI’s response was a letter rather than a formal document.
The main TUC concern is with the minimalist approach taken by the government in the planned changes to existing company law to accommodate a two-tier board structure. The TUC response states that the lack of specific provisions for a two-tier system “may … deter UK companies from becoming SEs” and that “this could put UK companies at a disadvantage in relation to their European competitors, who may find it more straightforward to set up as an SE”. In particular the TUC is concerned about the failure of the directive to be more prescriptive on the rights of supervisory boards, on the numbers of members of such boards, and on rights of individual supervisory board members to receive information.

In other areas the TUC is concerned about: the ability of employers to block the selection of a trade union official as a member of the Special Negotiating Body; the need for SNB members to have adequate resources; the limited penalties proposed in the draft regulations; and the failure of the draft regulations to require consultation with employee representatives before a company could convert into an SE.

The bulk of the CBI’s more limited comments are taken up with the concern that the employee participation rules proposed for SEs could be taken up in EU proposals on cross-border mergers and the transfer of company seats [head offices]. The CBI considers that these rules are “extremely onerous and overly complicated”.

The CBI reminds that government that it was “initially opposed to the adoption of the ECS”, but it points out that the measure is voluntary and it welcomes the government’s “avoidance of goldplating [adding additional requirements] in implementation of the directive”.

The CBI is also unhappy that enforcement of the employee involvement aspects of the legislation is left to the CAC. It would prefer enforcement in the first instance to be in the hands of Employment Tribunals.

The next steps

The government hopes to publish its response and final legislation by the summer, in good time for implementation on 8 October. After that the crucial question is how many companies will choose to make use of the legislation.

The CBI believes that the employee involvement rules will make setting up an SE “profoundly unattractive” for UK companies. The government too appears to consider that the numbers of UK companies setting up as SEs are likely to be “very small”. This is because of a lack of tax advantages and the future availability of other mechanisms for achieving a similar result, such as cross-border mergers and the transfer of seats. Peter Reid an HR consultant writing in the People Management, produced by the main UK HR body, the CIPD, backs this view. He said in February 2004 “a European company involving UK employees seems far off”.

It remains to be seen whether this forecast proves to be correct. The one thing that is clear is that so far no UK company has been identified as wishing to set up an SE.

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