The European Public Limited

Company
Societas Europaea
FURTHER INFORMATION
If you would like further information please contact a person mentioned below or the person with whom you usually
deal.

Contact:

Düsseldorf
Dr. Christoph Louven
christoph.louven@lovells.com

Frankfurt
Dr. Philipp Grzimek
philipp.grzimek@lovells.com

Hamburg
Dr. Henning Löwe
henning.loewe@lovells.com

Munich
Ruth Zehetmeier-Müller
ruth.zehetmeier-mueller@lovells.com

This note is written as a general guide only. It should not be relied upon as a substitute for specific legal advice.
Contents

1. INTRODUCTION 1
2. HISTORICAL BACKGROUND, LEGAL BASIS 1
3. BASIC CORPORATE LAW REGIME FOR SEs 1
3.1 General provisions 2
3.2 Formation of an SE 2
(a) Formation of an SE by merger 2
(b) Formation of a holding SE 3
(c) Formation of a subsidiary SE 3
(d) Conversion of a public limited company into an SE 3
(e) Secondary formation of a subsidiary SE 4
3.3 Transfer of registered office 4
3.4 Structure of the SE 4
(a) Two-tier system 4
(b) One-tier system 4
(c) General meeting 5
3.5 Annual accounts and consolidated annual accounts 5
3.6 Winding up, liquidation, insolvency and cessation of payments 5
4. INVOLVEMENT OF EMPLOYEES IN THE SE 5
4.1 Overview of employee involvement rights 5
4.2 Primacy of negotiation 6
(a) General observations 6
(b) Special negotiating body 6
(c) Content of the agreement 6
4.3 Standard rules 7
(a) General observations 7
(b) Standard rules on the establishment of the representation body 7
(c) Standard rules on participation in the supervisory or administrative body 8
5. TAX PREMISES 8
5.1 Taxation relating to formation of an SE 8
(a) Formation by merger 8
(b) Formation of a holding SE 9
(c) Formation of a subsidiary SE 10
(d) Changes of legal form 10
5.2 Transfer of the SE's seat 10
(a) Outbound transfer 10
(b) Inbound transfer 10
5.3 Regular taxation 11
6. CROSS-BORDER MERGERS OF CORPORATIONS 11
7. CONCLUSION 11
Lovells The European Public Limited Company
The Regulation on the Statute for a
European Public Limited Company
(Societas Europaea – "SE") and the
supplementing Directive with regard to
the involvement of employees in the SE
entered into force on 8 October 2004.
Companies in all Member States of the
European Union and the European
Economic Area (EEA) are now able to
choose a uniform corporate form.
Though conceived as a European legal
form, the SE is governed by the
implementing and transposing laws as
well as national stock corporation
legislation of the Member State in which
it has its registered office. Ultimately,
there is not one uniform European SE,
but instead variations of SEs are found
in the different Member States. The
German implementing and transposing
legislation was laid down in the Act on
the Introduction of an SE, which entered
into force on 29 December 2004.
Four years after its transformation and a
cautious start, the SE nowadays finds
general approval in Europe. By the
beginning of 2008, a total of
approximately 130 SE had been
founded and Germany takes the lead
with more than 60 SE formations.
In Germany prominent examples of SEs
are Allianz SE and BASF SE, which are
listed on the DAX 30, as well as
Fresenius SE and Porsche Automobile
Holding SE. Furthermore, Interseroh
AG, GfK AG, SGL CARBON AG and
Klöckner & Co. AG have taken the first
steps in order to form an SE.
This information brochure presents the
provisions applicable for a European
public limited company registered in
Germany.
1. INTRODUCTION
The European public limited company,
officially termed "Societas Europaea",
has been created by the European
legislator to supplement the existing
legal entities in Europe. Its structure
largely mirrors that of a German stock
corporation. With the SE, companies
focused on the European market are
offered legal options they have been
denied while operating under national
legal forms. These include in particular,
the possibility of cross-border mergers
or cross-border transfers of registered
office without an abandonment of legal
personality. The SE is thus aimed at
creating the basis for a single EU legal
framework within which companies and
groups can pursue their operations.
In addition, the SE offers German
companies the possibility of adopting
what is referred to as the one-tier
system of corporate management akin
to the board system in the Anglo-Saxon
world. Under the one-tier system, there
is no separation between the executive
board and the supervisory board, but
instead a single administrative body
responsible for both managing and
monitoring the company.
2. HISTORICAL BACKGROUND,
LEGAL BASIS
Even though the idea of creating a
European public limited company was
first put forward in France in 1959, it
took numerous compromise proposals
and attempts to reconcile differences
until 1997 when an expert committee
presented its findings in the Davignon
Report. Based on that report, the final
package of legislation was adopted on
20 December 2000 at the Summit of
Nice, which has come to be referred to
placatively as the "Miracle of Nice".
On 8 October 2004, the European
regulation setting out the corporate-law
basis of the SE (SE Regulation, "the
Regulation") took effect with immediate
legal force in all Member States of the
European Union and the EEA.
However, the Regulation left certain
individual issues to the Member States,
1
making it necessary to enact national
implementing laws. The directive with
regard to the involvement of employees
in the SE (SE Directive, "the Directive")
did not take immediate effect for the
individual Member States, but had to be
transposed into national law. In
Germany, the law implementing the
Regulation and the law transposing the
Directive are contained in the Act on the
Introduction of an SE ("SEEG") which
entered into force on 29 December
2004.
In addition to the Regulation, the
Directive and any implementing and
transposing legislation, SEs are
governed by the legal provisions
applicable to public limited companies
in the Member States in which they
have their registered office. For SEs
registered in Germany, laws applicable
to German stock corporations therefore
also apply subsidiarily (AktG, HGB,
UmwG, WpHG, WpÜG, etc.).
3. BASIC CORPORATE LAW
REGIME FOR SEs
The corporate law features and
structure of the SE are codified in the
Regulation. It limits itself to defining only
an essential framework of rules. In large
parts, the Regulation refers to the
legislation of the respective Member
States. Hence, there is not "one SE",
but at least as many kinds of SE as
there are Member States in the EU (and
the EEA). But since these different
national forms all are modelled on the
basic SE form, an SE can move its
registered office from one Member
State to another without changing its
identity. It then transforms into the
national form of the SE of the Member
State to which it has moved its
registered office.
The possibility of cross-border transfers
of registered office without a change in
identity is one of the most important
characteristics of an SE, and to set it
2 The European Public Limited Company Lovells
apart from other legal forms, if a
German stock corporation (AG) or a
limited liability company (GmbH) moves
its registered office (by resolution
amending its articles) or its effective
centre of administration (for example,
by transferring its company
headquarters) abroad, this company,
according to the currently prevailing
view, is deleted from the German
commercial register ex officio. The SE
thus gives companies a whole new kind
of flexibility.
3.1 General provisions

The SE is a corporation whose
capital is divided into shares. The
capital is expressed in euros and
the subscribed capital must be no
less than EUR 120,000; however,
without prejudice to the laws of a
Member State requiring a greater
subscribed capital for companies
carrying on certain types of activity.
Moreover, the maintenance and
changes to the share capital of the
SE, as well as its shares, bonds and
other similar securities are governed
by the same provisions that govern
a public limited company with a
registered office in the Member
State in which the SE is registered.

The registered office of an SE must
be located within the European
Union or the EEA, in the same
Member State as its head office. An
SE may transfer its registered office
to another Member State without
giving up its identity, that is, without
the SE being wound up or a new
legal person being created. A
German SE must have its registered
office at the place where its head
office is located.

The name of an SE must be
preceded or followed by the
abbreviation "SE".

In the Member State in which an SE
has its registered office, it will be
entered in a register designated by
the law of that Member State.
Registration cannot take place until
employee involvement is arranged
pursuant to the provisions of the
Directive (by agreement or by expiry
of the period for negotiations).
Notice of an SE's registration and of
the deletion of such registration
must be published for information
purposes in the Official Journal of
the European Union. This notice
must state the name, number, date
and place of registration of the SE,
the date and place of publication
and the title of publication, as well
as the registered office of the SE
and its sector of activity.
3.2 Formation of an SE
The largest part of the Regulation is
devoted to the provisions on the
formation of an SE. What is referred to
as the primary formation of an SE may
take place exclusively in four different
ways:
a) by merger,
b) by formation of a holding SE,
c) by formation of a subsidiary SE, or
d) by conversion of an existing public
limited company into an SE.
A strong characteristic in each of these
incorporation forms is the notion of
transnationality, i.e. the promoting
companies must be subject to the laws
of different Member States or at least
have subsidiaries or branch offices in
different Member States.
Above and beyond this, an existing SE
may itself set up one or more subsidiary
SEs or may perform a hive down by
way of secondary formation.
(a) Formation of an SE by merger
Public limited companies have the
possibility of forming an SE by way of
merger if at least two of the participating
companies are subject to the laws of
different Member States.
A merger may take place either by
absorption or by formation of a new
company. In a merger by absorption,
the entire assets and liabilities of the
company being acquired are transferred
without liquidation to the absorbing
company which, at the same time,
adopts the legal form of an SE. By
contrast, in a merger by formation of a
new company, both constituent
companies transfer all of their assets
and liabilities to a newly formed SE and
cease to exist, also without liquidation.
A merger plan forms the basis of both
types of merger. Similar in principle to a
merger agreement under German
reorganisation law, the merger plan
must comprise, among other things, the
name and registered office of each of
the merging companies together with
those proposed for the new SE, the
share-exchange ratio and the amount of
any compensation, the terms for the
allotment of shares in the SE and in
particular, information on the
procedures by which arrangements for
employee involvement are determined
pursuant to the Directive. The merger
plan must be approved by the general
meeting of each of the merging
companies.
If the SE is to have its registered office
abroad, the merger plan must include
an offer for the payment of cash
compensation to those shareholders of
the German stock corporation
participating in the merger who do not
consent to the merger. The legislator
regards a differentiation in terms of the
country of the SE's registered office
(domestic or abroad) as advisable since
for shareholders, a change in the legal
Lovells The European Public Limited Company
regime automatically entails changes in
their rights and obligations. In the case
of an SE formed by merger and
registered domestically – so the
argument goes – the shareholders do
not require the same degree of
protection.
The reasonableness of the share-
exchange ratio and the amount of the
cash compensation offer can be
reviewed in an appraisal proceeding
(Spruchverfahren).
In Germany, the transposition of the
European Merger Directive (European
regulation 2005/56/EG) has come into
effect recently (please refer to
paragraph 6 of this note). Pursuant to
that regulation and its transformation
into German law, cross-border mergers
for corporations are allowed.
Nevertheless, the primary formation of
an SE is governed by the SE
Regulation which leaves the primary
formation of an SE to German stock
corporations.
(b) Formation of a holding SE
The formation of a holding SE may be
promoted both by public limited
companies and by private limited
companies. With the formation of a
holding SE, the participating promoting
companies submit themselves to the
management of the newly founded
holding SE. As a result, the interests in
the promoting companies are
transferred to the holding SE, with the
original shareholders of the promoting
companies becoming shareholders of
the holding SE.
The prerequisite for the formation of a
holding SE is that at least two of the
participating companies are subject to
the laws of different Member States or,
where the two companies are subject to
the laws of the same Member State, for
these two companies to have had a
subsidiary company or a branch
situated in another Member State for at
least two years. In this case, the holding
SE's country of registered office does
not have to be identical to the country of
the registered office of (any of) the
companies participating in the
formation.
The participating companies must draw
up terms of formation similar to the
terms in the merger plan and which,
under certain circumstances, must
contain an offer for cash compensation
to the shareholders of the promoting
companies who are opposed to the
formation.
After the terms of formation are drawn
up, they require approval by the general
meetings or the shareholders' meetings
of the promoting companies. For
German public limited companies, a
majority of three quarters of the share
capital represented upon resolution is
required; for German private limited
companies, a majority of three quarters
of votes cast is required.
The holding SE is only created if at
least 50% of the voting rights of each
participating promoting company are
transferred to the holding SE within a
period of three months. In this way, it is
ensured that the holding SE only holds
majority interests.
(c) Formation of a subsidiary SE
The formation of a (joint) subsidiary SE
is the only incorporation form open not
only to corporations but also to
partnerships and other legal entities
governed by public law (juristische
Personen des öffentlichen Rechts). This
formation type lends itself to the
formation of a joint venture.
The prerequisite for the formation of a
subsidiary SE is that at least two of the
promoting entities are subject to the
laws of different Member States or,
where the two entities are subject to the
3
laws of the same Member State, for
these two entities to have had a
subsidiary company or a branch
situated in another Member State for at
least two years.
A subsidiary SE may be formed by way
of cash or non-cash contributions. As in
the case of the holding SE, the
subsidiary SE's country of registered
office does not have to be identical to
the country or countries of the
registered office of the promoting
entities.
(d) Conversion of a public limited
company into an SE
An SE may also be formed by way of
converting an existing public limited
company with its registered office and
head office within the European Union
into an SE. The prerequisite for this is
that the promoting company has had a
subsidiary company subject to the laws
of another Member State for at least
two years.
In preparation for the conversion, the
management body or the administrative
body of the public limited company must
first draw up a plan of conversion
explaining and justifying the legal and
economic implications of the conversion
for the shareholders, employees and
creditors of the company. If, after
submission of this plan, the conversion
is approved by the general meeting of
the shareholders, the national public
limited company is converted into an
SE, with all obligations being
transferred to the SE by way of
universal succession which is why no
compensation offer is to be made.
However, the registered office of the SE
must, in any case, be the registered
office of the converting company.
4 The European Public Limited Company Lovells
(e) Secondary formation of a
subsidiary SE
An already existing SE may itself set up
a subsidiary SE, thus assuming the
structure of an SE group. In this case,
unlike the primary formation types
described in the foregoing, the
participation of various companies is not
required. In a secondary formation of a
subsidiary SE the element of
transnationality is also no longer
required.
Above and beyond this, the German
Transformation Act (UmwG) is
applicable to the SE. Therefore, an
existing SE may perform a hive down in
order to form a new SE, however, not in
a cross-border scenario.
3.3 Transfer of registered office
The registered office of an SE may be
transferred to another Member State
without resulting in the winding up of the
SE or the creation of a new legal
person. The transfer must be resolved
on by the SE's general meeting.
Before the transfer of registered office,
the management or administrative body
of the company must draw up terms of
transfer which must state the name and
registered office of the SE and, in
particular, any consequences the
transfer may have on employees'
involvement, the proposed transfer
timetable and any rights provided for
the protection of shareholders and/or
creditors. In addition, a report must be
drawn up explaining and justifying the
legal and economic aspects of the
transfer and stating the implications of
the transfer for shareholders, creditors
and employees. The terms of transfer
and the report must be made available
to the general meeting of the SE prior to
a resolution thereon.
For the transfer of registered office, the
SE needs to obtain an official certificate
showing that all requisite legal acts and
formalities prior to the transfer have
been completed. The company can be
entered into the appropriate register of
the new Member State of registered
office only after this certificate has been
submitted.
If its registered office is transferred to
another Member State, the SE must
offer to acquire the shares of the
shareholders wishing to withdraw from
the company for reasonable
compensation in cash. In certain
circumstances, creditors of the
company may demand provision of
security.
3.4 Structure of the SE
An SE has the following bodies:

a general meeting of shareholders;
and

either an administrative body (one-
tier system) or a supervisory body
and a management body (two-tier
system).
The establishment of the European
public limited company as a new
corporate entity marks a paradigm
change in German corporate law: for
the first time, it allows freedom of choice
for the organisational structure of a
German stock corporation. The
shareholders of an SE will be able to
choose freely between the two-tier
organisational form established in
Germany which provides for a
separation between management body
(executive board) and supervisory body
(supervisory board), and the one-tier
organisational form known in the Anglo-
Saxon world as the board system.
However, a decision made in the SE's
articles of association for one of these
organisational structures is not final and
binding. The company's general
meeting may at any time opt for the
other structure.
(a) Two-tier system
The two-tier system, in terms of its
structure, corresponds to the separation
in German stock corporation law
between the executive board (the body
having responsibility for management)
and the supervisory board. The
members of the management body are
appointed and removed by the
supervisory body and are responsible
for conducting the business of the SE.
Members of the management body may
not at the same time be members of the
supervisory body.
The members of the supervisory body
for their part – with the exception of the
employee representatives in a co-
determined SE – are appointed by the
general meeting. The task of the
supervisory body is to supervise the
work of the management body, but it
may not itself exercise the power to
manage the SE. Member States whose
legislation has, to date, made no
provision for a two-tier management
system may adopt the appropriate
measures in relation to SEs.
(b) One-tier system
If an SE's articles of association adopt
the one-tier system, the SE is managed
by an administrative body referred to as
the administrative board
(Verwaltungsrat). The members of the
administrative board – with the
exception of the employee
representatives in a co-determined SE
– are appointed by the general meeting.
A managing director or managing
directors (geschäftsführende
Direktoren) are responsible for the day-
to-day management under the
conditions approved by the articles of
association, the supervisory board or
the general meeting. The managing
directors represent the company in and
out of court. The administrative board is
responsible for appointing the managing
Lovells The European Public Limited Company
directors. Unless otherwise stipulated
by the company’s articles of
association, the managing directors
may be removed at any time by
resolution of the administrative board.
Members of the administrative board
may also be appointed as managing
directors provided this does not result in
the majority of the members of the
administrative board being managing
directors.
The administrative board administers
the company, defines the main purpose
of its business activity and ensures that
this purpose is realised. It must ensure
by means of suitable measures, notably
the establishment of a monitoring
system, that developments posing a risk
to the company are identified by the
company in advance. The
administrative board is also responsible
for adopting the annual financial
statements of the company.
(c) General meeting
The general meeting of an SE decides
on matters for which it is given sole
responsibility by the Regulation or by
the legislation adopted in transposing
the Directive by the Member State in
which the SE's registered office is
situated. Furthermore, the general
meeting decides on matters for which
responsibility is given to it either
pursuant to the laws of the Member
State in which the SE's registered office
is situated or by the SE's articles of
association. These are, in particular, the
cross-border transfer of the registered
office, the appointment of the
supervisory board (two-tier system) or
the appointment of the administrative
board (one-tier system) as well as
shareholder resolutions. The general
meeting is to be convened at least once
yearly within six months of the end of
the SE's financial year at the latest. The
organisation and conduct of the general
meeting (convening, majority
requirements, voting procedures, etc.)
is to be governed by the law applicable
to public limited companies in the
Member State in which the SE's
registered office is situated (in Germany
the relevant provisions of the SEAG and
the German Stock Corporation Act).
3.5 Annual accounts and
consolidated annual accounts
An SE is subject to the rules applicable
to public limited companies under the
laws of the Member State in which its
registered office is situated as regards
the preparation of its annual and, where
appropriate, consolidated accounts
including the accompanying annual
report and the auditing and publication
of those accounts. Special provisions
apply for credit or financial institutions
as well as insurance companies.
3.6 Winding up, liquidation,
insolvency and cessation of
payments
As regards winding up, liquidation,
insolvency, cessation of payments and
similar procedures, an SE is subject to
the legal provisions which would apply
to a public limited company formed in
accordance with the laws of the
Member State in which its registered
office is situated. The Regulation grants
the respective Member State in which
an SE has its registered office, the right
to take coercive measures if an SE no
longer complies with its obligations
under the Regulation (requirement to
maintain the registered office of the SE
in the same Member State as its head
office; and, to the extent prescribed by
the Member State, as in the case of
Germany, requirement to have the
registered office and the head office of
the SE in the same place). In this case,
the registry court will request the SE to
regularise this position within a
prescribed period. In the event of failure
to comply with this request within the
prescribed period, the registration court
will declare the SE's articles of
5
association to be defective, resulting in
the winding up of the company.
4. INVOLVEMENT OF
EMPLOYEES IN THE SE
In addition to the provisions
implementing the corporate structure of
an SE, the rules governing the SE also
contain a frameset for employee
involvement. The significant change is
that the scope of the involvement is
negotiable.
Basically, the Directive provides for
involvement of employees both at the
operational and corporate level. The
stated aim of this was to secure
employees' acquired rights by what is
referred to as the "before and after"
principle. The promoting companies’
existing employee participation rights in
principle are to be preserved in the SE.
4.1 Overview of employee
involvement rights
The provisions distinguish between two
different areas:

involvement of employees at the
operational level; and

involvement of employees at the
corporate level.
At the operational level, in addition to a
national employee representation body
(works council), an SE must set up an
"SE works council" ("representative
body" as it is referred to in the
Directive). Comparable to the European
works council, this body is to ensure
information and consultation of
employees of the SE and its
subsidiaries and businesses at the
cross-border level.
At the corporate level, involvement of
an SE's employees takes place by way
of participation in the supervisory body
(two-tier system) or, as the case may
6 The European Public Limited Company Lovells
be, in the administrative body (one-tier
system).
4.2 Primacy of negotiation
(a) General observations
The newly formed SE can be entered in
the competent commercial register only
if it has been established whether and
in what form the involvement rights at
the operational level (rights and
obligations of the SE works council) and
at the corporate level (participation of
employees in the supervisory body or in
the administrative body) will be realised
in the newly formed SE. This is to be
achieved primarily by an agreement
reached by negotiation between the
management bodies of the promoting
companies and a "special negotiating
body" (SNB) of employee
representatives set up specially for this
purpose. That negotiation governs the
cross-border employee involvement in
detail and moreover, if applicable, the
employee involvement at corporate
level. The promoters of the SE should
take the initiative to commence
negotiations with employee
representatives early on, since these
can last up to six months, and in the
case of a decision by joint agreement to
extend the negotiation period, up to one
year in total.
(b) Special negotiating body
If one or more companies are planning
to set up an SE, an SNB, made up of
employee representatives, is to be
formed at the written request of the
promoting companies’ management
bodies. The SNB and the companies'
management bodies must enter into a
written agreement on the involvement of
employees in the SE. For the
composition of the SNB, the SEBG
provides as follows:

the employee representatives of
those employees who are employed
in each of the Member States with
the companies promoting the SE
and with the subsidiaries and
businesses concerned are to be
involved; since the Directive
refrained from giving a binding
definition of the concept of
employees, the SEBG was based
on the concept of employees as
defined under German employment
law. Accordingly, this covers blue-
collar and white-collar employees
including those employed in
professional training as well as
executive employees;

for every share of employees
employed in a Member State equal
to 10% of the total number of
employees employed in all Member
States or a fraction thereof, one
member is to be appointed to the
SNB from this Member State;

trade union representatives and
executive employees are to be
considered separately for the
composition of the SNB: every third
German member on the SNB must
be a trade union representative, and
in case of an SNB with more than
six German members, every
seventh German member must be
an executive employee;

for the members of the SNB
attributable to Germany, an election
body must be formed along the lines
of any existing representation
structures (group-level central works
council, company-level central
works council, local works council).
The members of the SNB enjoy the
same protection (dismissal protection,
right to participate in meetings,
continued payment of remuneration) as
employee representatives subject to the
legal provisions of the Member State in
which they are employed. This provision
is supplemented by the protection of
establishment and activity under the
German Works Council Constitution Act
and the European Works Councils Act:
no one may obstruct the establishment
or activity of an SNB nor personally
disadvantage or favour an individual
member. This protection covers all
stages in the establishment and activity
of this body and is addressed to
everyone. The requisite expenses for
the establishment and activity of the
SNB arising in connection with the
negotiations must, as a rule, be borne in
their entirety by the companies
promoting the SE and the SE itself
(once established) as joint and several
debtors.
(c) Content of the agreement
The negotiating parties have extensive
freedom when it comes to drafting the
terms of the agreement, which in
practice is concluded uniformly for
employee representation at the
operational level and participation at the
corporate level. The SEBG only
contains certain minimum requirements
which must be incorporated in the
agreement:

the scope of the agreement,
including the companies and
businesses situated outside the
territory of the Member States to the
extent these are included in such
scope;

the composition of the SE works
council, number of its members and
allocation of seats, including the
impact of material changes in the
number of employees employed in
the SE;

the functions and the procedure for
information and consultation of the
SE works council;

the frequency of meetings of the SE
works council;
Lovells The European Public Limited Company

the financial and material resources
to be allocated to the SE works
council;

the agreement’s date of entry into
force and its term; and the
circumstances in which the
agreement is to be renegotiated and
the procedure for its renegotiation.
As a rule, a double majority is required
for a resolution by the SNB: a majority
"by headcount" of voting members as
well as a majority of the employees
represented by them. If the result of the
negotiation reduces the participation
standard of one of the promoting
companies, additional requirements
may have to be observed in certain
cases: the resolution must be adopted
by a two-thirds majority of the members
of the SNB who in turn represent two
thirds of the employees in at least two
Member States. A reduction in the
participation rights is deemed to occur if
either the proportion of employee
representatives in the supervisory or
administrative body of the SE is lower
than the proportion existing in the
promoting companies, or the right to
elect, appoint, recommend or reject
members of the supervisory or
administrative body of the company is
abolished or diminished. Where an SE
is formed by way of transformation, no
resolution may be adopted that reduces
the standard of participation.
By a majority of two thirds of its
members representing at least two
thirds of the employees in at least two
Member States, the SNB may also
decide not to start negotiations in the
first place or to call off negotiations
already under way, thus, resulting in the
non-applicability of the provisions of the
SEBG. Instead, national legislation on
information and consultation applies,
notably the regulations of the European
Works Councils Act. In this case,
employees will be represented at the
operational level (besides the national
representation bodies) only by the
European works council. That said, in
practice it is rather unlikely that the
SNB will make the decision to call off or
refrain from negotiations since this
would have the effect of the SE being
deprived of employee representation at
the corporate level.
4.3 Standard rules
(a) General observations
If the parties fail to jointly agree a
solution on the involvement of
employees in the SE by the negotiation
deadline, the standard rules laid out in
the SEBG will apply only when the
negotiations fail and additionally the
following conditions are met:

the participating companies agree to
continue the registration of the SE,

the SNB has not taken any decision
to not commence or to call off the
negotiations, and

the SE was not formed by way of
conversion of a company in which
there was no employee
participation.
The parties can, however, agree on the
application of the standard rules in
advance to expedite the negotiation
process and save costs.
(b) Standard rules on the
establishment of the
representation body
In respect of employee representation
at the operational level, the standard
rules govern the composition as well as
the competence and powers of the SE
works council. The SE works council, as
a rule, is made up of employees of the
SE and its subsidiaries and
establishments reflecting the
composition of the negotiating body.
Consequently, in Germany the
7
members will be elected by a
corresponding election body.
The competencies of the SE works
council, which in some cases are more
comprehensive than the information
rights of a European works council,
extend to all matters of the SE, its
subsidiaries or its establishments in
another Member State, as well as to all
matters beyond the competencies of the
relevant bodies at the level of the
individual Member State. In addition,
the competencies of the works council
under the German Works Council
Constitution Act are maintained. The
rights and obligations of the SE works
council include the following:

at least once a year, the
management of the SE must inform
and consult the SE works council on
the progress of the SE's business
and its prospects (notably the
economic and financial situation,
development with regard to
business, production, sales and
employment), submit the required
documentation (annual reports,
agenda for all meetings of the
management body and the
supervisory or administrative body,
copies of all documents submitted to
the general meeting of
shareholders) in due time.
Moreover, the management has a
special information undertaking in
the event of exceptional
circumstances;

the SE works council has an
obligation to inform the employee
representatives of the SE, its
subsidiaries and establishments of
the content and outcome of the
information and consultation
procedures.
8 The European Public Limited Company Lovells
(c) Standard rules on
participation in the
supervisory or administrative
body
The employees participate at the
corporate level in the SE through their
representatives in the supervisory or
administrative body who have the same
rights and obligations (including voting
rights) as the members representing
shareholders. The provisions on
participation in the supervisory body
(two-tier system) or, as the case may
be, the administrative body (one-tier
system) are characterised by a "before-
and-after view" and the idea of
protection of acquired rights.
Whereas in line with the standard rules,
an SE works council is to be
established in every SE, the following
applies to the participation of
employees at the corporate level of the
SE:

if the SE is formed by way of
conversion, the participation regime
of the converted company is
continued in the SE; as a result, all
participation rights existing prior to
the conversion are maintained (such
as the parity or equal co-
determination of a German
company);

if an SE is formed by way of merger,
the regulations on company
participation apply only if, prior to
the registration of the SE, at least
25% of all employees had rights of
participation;

if a subsidiary SE or holding SE is
formed, the regulations on company
participation apply only if, prior to
the registration of the SE, at least
50% of all employees had rights of
participation.
Consequently, in cases where an SE is
formed by way of merger, establishment
of a subsidiary SE or a holding SE, the
following applies:

if no right of company participation
existed in any of the participating
companies under national legislation
prior to the formation of the SE,
there is no obligation on the part of
the SE to admit employee
representatives;

in all other cases, the employees
are entitled to representation in the
supervisory or, as the case may be,
administrative body. The scope of
such participation (meaning the
proportion of employees delegated
to the body) is determined by the
highest proportion of employee
representatives at the participating
companies prior to the SE's
registration, regardless of how the
SE's management is structured.
Conclusion: Though rules governing
employee participation at the corporate
level seem to present a de facto
obstacle to participation in the formation
of an SE for companies subject to a
high national standard of employee
participation, it is possible to achieve a
system of employee participation
tailored to the individual SE by way of
negotiation.
5. TAX PREMISES
The attractiveness of an SE depends to
a considerable extent on tax issues.
The Regulation itself does not contain
any provisions on taxation, but refers to
the respective national law of the
Member State in which the SE has its
registered office. The SEEG does not
provide for any specific tax-law
provisions either. Under German tax
law, basically the same rules apply to
an SE in Germany as to (national)
public limited companies. Previous
insufficiencies of the German tax law
with regard to cross-border
transformations, which also interfered
with the formation of SEs, have been
overcome by the Act on accompanying
tax measures for the introduction of the
European Public Limited Company and
for the amendment of further tax
provisions ("SEStEG") that came into
effect on 13 December 2006. Pursuant
to the SEStEG, cross-border
transformations may be performed tax-
neutrally within the European Union or
the EEA under certain conditions.
Therefore, the SEStEG makes the
formation of an SE and the cross-border
transfer of the registered office easier.
5.1 Taxation relating to formation
of an SE
The opportunity of a tax-neutral cross-
border transformation is of essential
importance to the formation of an SE
which requires the participation of
companies that are resident in at least
two different Member States. Thus, the
question arises whether the formation
will result in the disclosure and taxation
of hidden reserves of the promoting
companies or of the contributed assets.
(a) Formation by merger
The German Transformation Taxation
Act (Umwandlungssteuergesetz,
"UmwStG") stipulates certain
advantages for mergers with regard to
taxation. Without these rules, a merger
would result in the disclosure of hidden
reserves of the promoting company and
the taxation of that company and its
shareholders. With regard to the
promoting shareholder, the transfer of
shares in a company (in this case:
exchange of shares) would regularly be
subject to taxation, based on the fair
market value (gemeiner Wert). Thus,
any existing hidden reserves would be
disclosed and would be subject to
taxation. That issue would also arise in
respect of the promoting company,
when valuating the transferred assets.
Lovells The European Public Limited Company
The SEStEG has fundamentally
changed the rules of the UmwStG on
the tax treatment of transformations.
Moreover, it has extended these new
rules to cross-border mergers within the
European Union or the EEA. In the
following section, the new rules will be
explained with regard to the various
possibilities of forming an SE by
merger.

Outbound Merger
In the case of an outbound merger, the
promoting German stock corporation is
merged with a stock corporation whose
registered office is in the European
Union or in the EEA. This merger leads
to the formation of an SE whereas the
Germany stock corporation dissolves
and its unrestricted tax liability ceases.
The German stock corporation has to
prepare a final balance sheet for tax
purposes. In that balance sheet, the
assets of the German stock corporation
which are transferred to the newly
formed SE have generally to be
reported with their fair market value,
possibly resulting in the disclosure and
taxation of hidden reserves. On
application, though, the book value can
be rolled over or an arbitrary interim
value (in-between the book value and
the fair market value) can be chosen,
provided (besides other conditions) that
Germany's right to tax with regard to the
assets transferred to the absorbing
company is neither restricted nor
suspended.
By this prerequisite, it is assured that
Germany maintains its tax take if the
absorbing company sells the assets in
the future. Thus, the taxation is only
postponed. Whether Germany's right to
tax is restricted or suspended depends
on whether the SE will keep a domestic
permanent establishment to which the
transferred assets will be attributed.
Permanent establishments play a
decisive role for the allocation of the
taxing rights between the respective
states under international taxation law,
which is in particular influenced by
double taxation agreements. The
German Federal Ministry of Finance
has issued rules for determining
whether the transferred assets are to be
attributed to the domestic permanent
establishment or to the head office in its
Decree on Permanent Establishments
(Betriebsstättenerlass) which was
issued in 1999.
With regard to the shareholders of the
promoting German stock corporation,
the following applies: on application, the
shares of the absorbing non-domestic
company may be valued at the fair
market value of the shares of the
promoting company, provided (besides
other conditions) that Germany's right to
tax with regard to the assets transferred
to the absorbing stock corporation is
neither restricted nor suspended.

Inbound Merger
In the case of an inbound merger, the
promoting stock corporation is based
abroad, while the absorbing stock
corporation that is transformed into an
SE is based in Germany. In that
scenario, the disclosure and taxation of
hidden reserves in connection with a
future restriction or suspension of the
German right to tax (Entstrickung) is not
a major concern to the German taxation
authority, but for the non-domestic
taxation authority. With regard to the
German tax law, the valuation of assets
that become subject to Germany's right
to tax for the first time is the primary
concern. The assets of the newly
formed SE have to be valued at the fair
market value. If the non-domestic
promoting stock corporation has already
maintained a permanent establishment
in Germany, the question arises as to
which values should be reported for the
assets that are transferred to the
absorbing SE in the promoting stock
corporation's final balance sheet. The
book value may be applied under the
9
same conditions as pointed out above
with regard to the outbound merger
(Germany's right to tax is neither
restricted nor suspended), which
regularly should be the case.
On shareholder-level, there should not
be any tax consequences. If the merger
results in a German tax for the
promoting stock corporation's
shareholders (i.e. if the shareholders
are resident in Germany), the shares of
the promoting stock corporation may be
valued at book value upon application.

Non-domestic mergers with German
tax consequences
In this scenario, both the promoting
stock corporation and the absorbing SE
are based abroad. If the promoting
stock corporation maintains a
permanent establishment within
Germany to which assets are to be
allocated, a German tax may ensue.
Here the question arises as well
whether Germany's right to tax with
regard to the assets transferred to the
absorbing stock corporation is either
restricted or suspended. In such case,
the merger would be regarded as a
taxable transfer of assets, valuing the
transferred assets at their fair market
value. If Germany's right to tax is
neither restricted nor suspended, the
assets of the promoting stock
corporation can be valued at book value
(or at interim value) upon application.
This value is also binding for the newly
formed SE.
(b) Formation of a holding SE
The formation of a holding SE is
considered to be similar to a
contribution from a tax perspective. A
holding SE that is resident in Germany
has to value the promoted shares at
their fair market value. Upon
application, the book value or an interim
value may be assigned if the holding SE
has a majority of voting rights in the
10
promoting companies (qualified
exchange of shares). In principle, the
shareholders of the promoting company
which are tax resident in Germany are
bound by that valuation. Upon
application, they may however assign
the book value or the interim value to
the shares irrespective of the valuation
by the holding SE if certain conditions
are fulfilled.
If the promoting shareholder assigned a
value below the fair market value, the
subsequent sale of the promoted
shares by the holding SE could result in
negative consequences for the
shareholder. Such subsequent sale
may give rise to a subsequent taxation
of the shares' hidden reserves if those
shares are sold by the holding SE within
seven years, whereas the tax burden is
reduced by a seventh part for each
year. In order to prevent the subsequent
taxation, the contributing shareholder
must, on a yearly basis, demonstrate
that there has been no subsequent sale
of the shares. If the shareholder is
constituted in the legal form of a
corporation, the subsequent taxation
will not be applied, provided that certain
conditions are fulfilled.
(c) Formation of a subsidiary SE
In principle, the formation of a
subsidiary SE by non-cash contributions
results in the disclosure and taxation of
hidden reserves of the transferred
assets. Pursuant to the SEStEG, the
subsidiary SE may apply for the assets
to be valued at book or interim value if
the following conditions are
cumulatively fulfilled:

contribution of an enterprise, a
division of an enterprise or a
partnership interest;

shares in the newly formed
subsidiary SE are granted to the
contributing person;
The European Public Limited Company Lovells

the contributed assets are subject to
corporation income tax at the
subsidiary SE in the future;

the contributed business capital is
not of a negative amount and

Germany's right to tax with regard to
the transferred assets is neither
restricted nor suspended.
The value assigned by the subsidiary
SE is generally binding for the
contributing shareholder. Nevertheless,
the contributing shareholder may on
application assign the book or interim
value if certain conditions are fulfilled.
However, in this scenario a subsequent
taxation with regard to the hidden
reserves of the contributed assets may
ensue too. This will be the case if the
contributing shareholder sells the newly
granted shares in the subsidiary SE
within seven years, albeit the taxation
liability is reduced by a seventh part for
each year. Under certain conditions, the
sales profits are subject to the half-
income tax regime
(Halbeinkünftebesteuerung), under
which only half of the profits are subject
to taxation (as of 2009 only 40 % will be
tax free). If the shareholder is
constituted in the legal form of a
corporation, the sales are 95 % tax free
under certain conditions. In order to
prevent the subsequent taxation the
contributing shareholder must, on a
yearly basis, demonstrate that there has
been no subsequent sale of the shares.
(d) Changes of legal form
A change of the legal form will not result
in a taxation liability as the identity of
the company remains the same for tax
purposes.
5.2 Transfer of the SE's seat
The transfer of the SE's seat is not
regarded as a change of the legal form
within the meaning of the UmwStG,
regardless whether it is a transfer into
or out of Germany. Apart from the
UmwStG, the Income Tax Act
(Einkommensteuergesetz) and the
Corporate Income Tax Act
(Körperschaftsteuergesetz) contain
specific rules for a cross-border transfer
of the SE's seat:
(a) Outbound transfer
If the SE transfers its seat to a
European Union or EEA Member State
and Germany's right to tax with regard
to the transferred assets is either
restricted or suspended, the transfer will
be regarded as a sale of the assets,
leading to the disclosure and taxation of
hidden reserves (Entstrickung). Here
again, the event of taxation depends on
whether the SE's assets are to be
attributed to the head office or to the
permanent establishment and whether
there is a German right to tax them. As
regards the SE itself, the transfer will
result in a winding-up and in taxation on
liquidation similar to the treatment of a
German stock corporation. At the level
of shareholders resident in Germany,
the transfer is only regarded as a
taxable sale of shares (leading to a
taxation based on the fair market value)
if Germany's right to tax with regard to
the shares is either restricted or
suspended. Mostly that should not be
the case since most double taxation
agreements concluded by Germany
unrestrictedly assign the right to tax
profits from the sale of shares of non-
resident companies by resident
shareholders to Germany.
(b) Inbound transfer
In the case of an inbound transfer, the
non-domestic SE transfers its seat to
Germany. Similar to an inbound-
merger, the assets that are subject to
German taxation for the first time (if not
already attributable to a domestic
permanent establishment) are valued at
the fair market value. However, assets
which have already been attributable to
Lovells The European Public Limited Company
a domestic permanent establishment
may continue to be valued at their book
value.
5.3 Regular taxation
Basically, there are no differences
between the regular taxation of SEs and
that of domestic stock corporations. An
SE based in Germany is subject to
unlimited tax liability, which means it is
liable to German trade and corporation
tax as well as solidarity surcharge on its
worldwide income.
6. CROSS-BORDER MERGERS
OF CORPORATIONS
Simultaneously to the installation of the
SE as an instrument to form a common
legal entity out of several companies
which are subject to the laws of different
Member States, there has been a
fundamental development in the
legislation with regard to cross-border
mergers of corporations due to the
European freedom of establishment.
The "SEVIC"-decision by the European
Court of Justice dating from 2005 is to
be seen as a starting point of that
development. In that decision, the
European Court of Justice basically
approved the merger of a corporation
based in another Member State with a
German stock corporation though it left
many questions unanswered, in
particular the application of the
respective corporate law.
At that time, the European regulation on
cross-border mergers setting out the
corporate-law basis for cross-border
mergers of corporation took effect. In
Germany the law implementing the
regulation entered into force on 25 April
2007. In line with this law, it is possible
to perform cross-border mergers with
corporations (in particular stock
corporations, limited liability companies
and SEs).
11
The transformation of the European
regulation, however, has not taken
place in all Member States yet.
Moreover, there has been no extensive
experience with cross-border mergers
in the countries which have already
transformed the regulation.
The German rules for cross-border
mergers have been created in close
agreement to the European regulations
for the merging of the SE. This is in
particular the case for the employee
involvement in the supervisory board of
the absorbing company.
7. CONCLUSION
The European public limited company
offers companies based in the
European Union the possibilities:

the possibility of cross-border
transfers of registered office without
a change in identity which enhances
the mobility of companies;

the formation of an SE can be useful
to companies in the course of a
transaction as they can perform a
"merger-of-equals" in order to
overcome psychological and cultural
barriers and to form a common
Corporate Identity;

the choice between a one-tier and a
two-tier system enhances the
flexibility and eases the integration
into existing Anglo-Saxon corporate
structures;

the negotiation of the employee
involvement creates flexible
solutions and legal certainty for
cross-border corporate activities.
Therefore, we expect the SE to be an
alternative for restructuring on corporate
group level as well as a new instrument
for M&A transactions.
 www.lovells.de

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