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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 email@example.com Frankfurt Dr. Philipp Grzimek firstname.lastname@example.org Hamburg Dr. Henning Löwe email@example.com Munich Ruth Zehetmeier-Müller firstname.lastname@example.org This note is written as a general guide only. It should not be relied upon as a substitute for specific legal advice.
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INTRODUCTION HISTORICAL BACKGROUND, LEGAL BASIS BASIC CORPORATE LAW REGIME FOR SEs 3.1 General provisions 3.2 Formation of an SE (a) Formation of an SE by merger (b) Formation of a holding SE (c) Formation of a subsidiary SE (d) Conversion of a public limited company into an SE (e) Secondary formation of a subsidiary SE 3.3 Transfer of registered office 3.4 Structure of the SE (a) Two-tier system (b) One-tier system (c) General meeting 3.5 Annual accounts and consolidated annual accounts 3.6 Winding up, liquidation, insolvency and cessation of payments INVOLVEMENT OF EMPLOYEES IN THE SE 4.1 Overview of employee involvement rights 4.2 Primacy of negotiation (a) General observations (b) Special negotiating body (c) Content of the agreement 4.3 Standard rules (a) General observations (b) Standard rules on the establishment of the representation body (c) Standard rules on participation in the supervisory or administrative body TAX PREMISES 5.1 Taxation relating to formation of an SE (a) Formation by merger (b) Formation of a holding SE (c) Formation of a subsidiary SE (d) Changes of legal form 5.2 Transfer of the SE's seat (a) Outbound transfer (b) Inbound transfer 5.3 Regular taxation CROSS-BORDER MERGERS OF CORPORATIONS CONCLUSION
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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
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
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
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,
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
The European public limited company, officially termed "Societas Europaea", has been created by the European
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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
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
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.
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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 shareexchange 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
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
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.
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
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
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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
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
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 codetermined 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
An SE has the following bodies: a general meeting of shareholders; and either an administrative body (onetier 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 AngloSaxon 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.
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
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 dayto-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
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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
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
association to be defective, resulting in the winding up of the company. 4. INVOLVEMENT OF EMPLOYEES IN THE SE
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
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 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.)
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
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
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be, in the administrative body (one-tier system). 4.2 (a) Primacy of negotiation 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
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 bluecollar 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;
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
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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 (a) Standard rules General observations
members will be elected corresponding election body.
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
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.
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
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Standard rules on participation in the supervisory or administrative body
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 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 "beforeand-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 codetermination 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
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 taxneutrally 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 crossborder 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 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
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.
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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
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
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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
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 halfincome 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
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
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;
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 nonresident companies by resident shareholders to Germany. (b) Inbound transfer
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
In the case of an inbound transfer, the non-domestic SE transfers its seat to Germany. Similar to an inboundmerger, 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
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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
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
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).
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.
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