The Enterprise Division has ruled that a resolution passed by the General Meeting as body of the company is a resolution passed by the company itself and for this reason it could be susceptible to the right to be consulted and the right of consent as defined in the Works Councils Act.
The matter at issue in the case between Thomas Cook and its Works Council was whether Thomas Cook was entitled to determine that a supervisory board be formed comprising only officers selected from the group itself. The Works Council wished to safeguard independence. In this decision the Works Council’s participation rights pursuant to corporate law (within the framework of the two-tier board regime) coincide with its powers under the Works Councils Act.
The two-tier board structure regulates the internal balance of power for large enterprises. Two-tier board companies must have a supervisory board that has been granted legal powers, such as the vetoing of certain executive board resolutions. For example, approval is mandatory in the event of mass dismissal. The two-tier board structure may be applied voluntarily or mandatorily in accordance with the law.
In this decision given by the Enterprise Division it concerned an obligation under the law. If the criteria for two-tier board companies are met (put succinctly: a. shareholders’ equity of EUR 16 million, b. a Works Council and c. more than 1000 employees), this must then be reported to the office of the Commercial Register within two months after adoption of the company’s financial statements. This is relevant not only to companies that do not apply the two-tier board structure at all but also to companies that voluntarily applied the two-tier board structure up to the time of filing the report with the Commercial Register. Once this report has been filed for three consecutive years, the company automatically becomes a two-tier board company even if the articles of association have not been amended accordingly.
Powers of the Works Council: Two-Tier Board Company Structure Reform Act and Works Councils Act
The Two-Tier Company Structure Reform Act (Structure Reform Act) and the Works Councils Act attributes powers to the Works Council, such as the right to recommend that certain persons are to be nominated as supervisory directors. What’s more an enhanced right of recommendation (read: in principle, mandatory) for a third of the supervisory directors applies. Moreover, the consent of the Works Council is required for derogation from the standard system of appointment as is regulated in the Structure Reform Act.
Apart from the powers for the Works Council laid down in corporate law, the Works Council also has powers pursuant to the Works Councils Act. They co-exist. If the two-tier board powers are compromised, this could lead to an important change in the division of powers within the company for which the Works Council has a right to be consulted on the basis of section 25 of the Works Councils Act.
General Meeting resolution on requirements Supervisory Board susceptible to prior consultation pursuant to section 25 of the Works Councils Act.
No company resolution is required if a two-tier board structure must be introduced on the basis of the law; the Works Council’s right to be consulted then does not apply as it would be a moot point. The right to prior consultation, however, exists for resolutions with leverage. Such leverage existed in this decision given by the Enterprise Division because there was a choice between applying the full or a mitigated two-tier board structure (the only difference being that for a full regime the Supervisory Board appoints the executive board while for a mitigated two-tier board structure, this is done by the General Meeting. And that is why Thomas Cook requested advice.
But Thomas Cook made another choice, to wit, by including the requirement in the supervisory board profile that all supervisory directors had to be employees of the group; an entirely external supervisory director would as a result not be allowed. The Works Council objected to this.
The Enterprise Division ruled that the choice of the company to accept only officers working for the group was such a fundamental choice on applying the two-tier board structure that this choice fell under the right to be consulted as defined in section 25 of the Works Councils Act.
General Meeting hauled back in line
Substantively, the Enterprise Division too made short work of the requirement set by Thomas Cook for the supervisory directors. The requirement is – certainly without further substantiation – far too inconsistent with the requirement that the supervisory Board must be sufficiently independent, also of the parent company. Furthermore the requirement set encompasses s restriction of the enhanced right of recommendation that is far too extensive for the Works Council. A supervisory board profile may not be formulated in such a way that the Works Council is, in fact, unable to exercise its powers.
Because three supervisory directors were appointed pursuant to the requirement, prohibited in the decision, that it had to concern employees of the group, the Enterprise Division ordered Thomas Cook to withdraw and nullify that resolution. With the appointment Thomas Cook ignored the suspension period stipulated in the Works Councils Act (one month) and the Works Council’s right to be consulted under company law.
Thomas Cook argued that the General Meeting resolutions fell outside its scope of influence and for this reason they were unable to undo such resolution. This defence was disregarded. The Enterprise Division ruled that the General Meeting is a body of the company and as a result it is a resolution passed by the company and the obligation to undo was not unenforceable.
Relevance in practice: shareholders take note!
Apart from the fact that this decision further clarifies the Works Council’s right to be consulted regarding the two-tier board structure, and the extent of the reach of the Works Council’s right to be consulted under the Works Councils Act, it is important in practice that General Meeting resolutions can fall directly under the scope of the right to prior consultation and right of consent as stipulated in the Works Councils Act. Complex techniques as attribution of a shareholder resolution to the executive board or joint entrepreneurship may then not even be necessary.
Source of decision: ECLI:NL:GHAMS:2016:2766