CN European Public Limited Company

8/8/2019 CN European Public Limited Company

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The European Public LimitedCompanySocietas Europaea


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FURTHER INFORMATIONIf you would like further information please contact a person mentioned below or the person with whom you usuallydeal.Contact:

Dsseldorf

Dr. Christoph [email protected]

Frankfurt

Dr. Philipp [email protected]

Hamburg

Dr. Henning [email protected]

MunichRuth [email protected] 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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1. INTRODUCTION 12. HISTORICAL BACKGROUND, LEGAL BASIS 13. BASIC CORPORATE LAW REGIME FOR SEs 1

3.1 General provisions 23.2 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 43.4 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 53.6 Winding up, liquidation, insolvency and cessation of payments 5

4. INVOLVEMENT OF EMPLOYEES IN THE SE 54.1 Overview of employee involvement rights 54.2 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. TAXPREMISES 85.1 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 116. CROSS-BORDER MERGERS OF CORPORATIONS 117. CONCLUSION 11

Contents


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Lovells The European Public Limited Company 1

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 theEuropean 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.TheGerman 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

Klckner & 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 existinglegal entities in Europe.Its structurelargely mirrors that of a German stockcorporation.With the SE, companiesfocused on the European market areoffered legal options they have been

denied while operating under nationallegal forms.These include in particular,the possibility of cross-border mergersor cross-border transfers of registeredoffice without an abandonment of legalpersonality.The SE is thus aimed atcreating the basis for a single EU legalframework within which companies andgroups can pursue their operations.

In addition, the SE offers Germancompanies the possibility of adoptingwhat is referred to as the one-tier

system of corporate management akinto the board system in the Anglo-Saxonworld.Under the one-tier system, thereis no separation between the executiveboard and the supervisory board, butinstead a single administrative bodyresponsible for both managing andmonitoring the company.

2. HISTORICAL BACKGROUND,LEGAL BASIS

Even though the idea of creating aEuropean public limited company wasfirst put forward in France in 1959, ittook numerous compromise proposalsand attempts to reconcile differencesuntil 1997 when an expert committeepresented its findings in the DavignonReport. Based on that report, the finalpackage of legislation was adopted on20 December 2000 at the Summit ofNice, which has come to be referred toplacatively as the "Miracle of Nice".

On 8 October 2004, the Europeanregulation setting out the corporate-law

basis of the SE (SE Regulation, "theRegulation") took effect with immediatelegal force in all Member States of theEuropean Union and the EEA.However, the Regulation left certainindividual issues to the Member States,

making it necessary to enact nationalimplementing laws.The directive withregard to the involvement of employeesin the SE (SE Directive, "the Directive")did not take immediate effect for theindividual Member States, but had to be

transposed into national law. InGermany, the law implementing theRegulation and the law transposing theDirective are contained in the Act on theIntroduction of an SE ("SEEG") whichentered into force on 29 December2004.

In addition to the Regulation, theDirective and any implementing andtransposing legislation, SEs aregoverned by the legal provisionsapplicable to public limited companies

in the Member States in which theyhave their registered office.For SEsregistered in Germany, laws applicableto German stock corporations thereforealso apply subsidiarily (AktG, HGB,UmwG, WpHG, WpG, etc.).

3. BASIC CORPORATE LAWREGIME FOR SEs

The corporate law features andstructure of the SE are codified in theRegulation. It limits itself to defining onlyan essential framework of rules.In largeparts, the Regulation refers to thelegislation of the respective MemberStates.Hence, there is not "one SE",but at least as many kinds of SE asthere are Member States in the EU (andthe EEA).But since these differentnational forms all are modelled on thebasic SE form, an SE can move itsregistered office from one MemberState to another without changing itsidentity.It then transforms into thenational form of the SE of the MemberState to which it has moved itsregistered office.

The possibility of cross-border transfersof registered office without a change inidentity is one of the most importantcharacteristics of an SE,and to set it


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2 The European Public Limited Company Lovells

apart from other legal forms,if aGerman stock corporation (AG) or alimited liability company (GmbH) movesits registered office (by resolutionamending its articles) or its effectivecentre of administration (for example,

by transferring its companyheadquarters) abroad, this company,according to the currently prevailingview, is deleted from the Germancommercial register ex officio.The SEthus gives companies a whole new kindof flexibility.

3.1 General provisions

The SE is a corporation whosecapital is divided into shares.Thecapital is expressed in euros and

the subscribed capital must be noless than EUR 120,000; however,without prejudice to the laws of aMember State requiring a greatersubscribed capital for companiescarrying on certain types of activity.Moreover, the maintenance andchanges to the share capital of theSE, as well as its shares, bonds andother similar securities are governedby the same provisions that governa public limited company with aregistered office in the Member

State in which the SE is registered.

The registered office of an SE mustbe located within the EuropeanUnion or the EEA, in the sameMember State as its head office. AnSE may transfer its registered officeto another Member State withoutgiving up its identity, that is, withoutthe SE being wound up or a newlegal person being created.AGerman SE must have its registeredoffice at the place where its headoffice is located.

The name of an SE must bepreceded or followed by theabbreviation "SE".

In the Member State in which an SEhas its registered office, it will beentered in a register designated bythe law of that Member State.Registration cannot take place untilemployee involvement is arranged

pursuant to the provisions of theDirective (by agreement or by expiryof the period for negotiations).Notice of an SE's registration and ofthe deletion of such registrationmust be published for informationpurposes in the Official Journal ofthe European Union.This noticemust state the name, number, dateand place of registration of the SE,the date and place of publicationand the title of publication, as wellas the registered office of the SE

and its sector of activity.

3.2 Formation of an SE

The largest part of the Regulation isdevoted to the provisions on theformation of an SE.What is referred toas the primary formation of an SE maytake place exclusively in four differentways:

a) by merger,

b) by formation of a holding SE,

c) by formation of a subsidiary SE, or

d) by conversion of an existing publiclimited company into an SE.

A strong characteristic in each of theseincorporation forms is the notion oftransnationality, i.e. the promotingcompanies must be subject to the lawsof different Member States or at leasthave subsidiaries or branch offices indifferent Member States.

Above and beyond this, an existing SEmay itself set up one or more subsidiarySEs or may perform a hive down byway of secondary formation.

(a) Formation of an SE by merger

Public limited companies have thepossibility of forming an SE by way ofmerger if at least two of the participatingcompanies are subject to the laws of

different Member States.

A merger may take place either byabsorption or by formation of a newcompany. In a merger by absorption,the entire assets and liabilities of thecompany being acquired are transferredwithout liquidation to the absorbingcompany which, at the same time,adopts the legal form of an SE.Bycontrast, in a merger by formation of anew company, both constituentcompanies transfer all of their assets

and liabilities to a newly formed SE andcease to exist, also without liquidation.

A merger plan forms the basis of bothtypes of merger. Similar in principle to amerger agreement under Germanreorganisation law, the merger planmust comprise, among other things, thename and registered office of each ofthe merging companies together withthose proposed for the new SE, theshare-exchange ratio and the amount ofany compensation, the terms for the

allotment of shares in the SE and inparticular, information on theprocedures by which arrangements foremployee involvement are determinedpursuant to the Directive. The mergerplan must be approved by the generalmeeting of each of the mergingcompanies.

If the SE is to have its registered officeabroad, the merger plan must includean offer for the payment of cashcompensation to those shareholders ofthe German stock corporationparticipating in the merger who do notconsent to the merger.The legislatorregards a differentiation in terms of thecountry of the SE's registered office(domestic or abroad) as advisable sincefor shareholders, a change in the legal


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regime automatically entails changes intheir rights and obligations.In the caseof an SE formed by merger andregistered domestically so theargument goes the shareholders donot require the same degree of

protection.

The reasonableness of the share-exchange ratio and the amount of thecash compensation offer can bereviewed in an appraisal proceeding(Spruchverfahren).

In Germany, the transposition of theEuropean Merger Directive (Europeanregulation 2005/56/EG) has come intoeffect recently (please refer toparagraph 6 of this note). Pursuant to

that regulation and its transformationinto German law, cross-border mergersfor corporations are allowed.Nevertheless, the primary formation ofan SE is governed by the SERegulation which leaves the primaryformation of an SE to German stockcorporations.

(b) Formation of a holding SE

The formation of a holding SE may bepromoted both by public limitedcompanies and by private limitedcompanies.With the formation of aholding SE, the participating promotingcompanies submit themselves to themanagement of the newly foundedholding SE.As a result, the interests inthe promoting companies aretransferred to the holding SE,with theoriginal shareholders of the promotingcompanies becoming shareholders ofthe holding SE.

The prerequisite for the formation of aholding SE is that at least two of the

participating companies are subject tothe laws of different Member States or,where the two companies are subject tothe laws of the same Member State, forthese two companies to have had asubsidiary company or a branch

situated in another Member State for atleast two years.In this case, the holdingSE's country of registered office doesnot have to be identical to the country ofthe registered office of (any of) thecompanies participating in the

formation.

The participating companies must drawup terms of formation similar to theterms in the merger plan and which,under certain circumstances, mustcontain an offer for cash compensationto the shareholders of the promotingcompanies who are opposed to theformation.

After the terms of formation are drawnup, they require approval by the general

meetings or the shareholders' meetingsof the promoting companies.ForGerman public limited companies, amajority of three quarters of the sharecapital represented upon resolution isrequired; for German private limitedcompanies, a majority of three quartersof votes cast is required.

The holding SE is only created if atleast 50% of the voting rights of eachparticipating promoting company aretransferred to the holding SE within aperiod of three months.In this way, it isensured that the holding SE only holdsmajority interests.

(c) Formation of a subsidiary SE

The formation of a (joint) subsidiary SEis the only incorporation form open notonly to corporations but also topartnerships and other legal entitiesgoverned by public law (juristischePersonen des ffentlichen Rechts).Thisformation type lends itself to theformation of a joint venture.

The prerequisite for the formation of asubsidiary SE is that at least two of thepromoting entities are subject to thelaws of different Member States or,where the two entities are subject to the

laws of the same Member State, forthese two entities to have had asubsidiary company or a branchsituated in another Member State for atleast two years.

A subsidiary SE may be formed by wayof cash or non-cash contributions.As inthe case of the holding SE, thesubsidiary SE's country of registeredoffice does not have to be identical tothe country or countries of theregistered office of the promotingentities.

(d) Conversion of a public limitedcompany into an SE

An SE may also be formed by way ofconverting an existing public limitedcompany with its registered office andhead office within the European Unioninto an SE.The prerequisite for this isthat the promoting company has had asubsidiary company subject to the lawsof another Member State for at leasttwo years.

In preparation for the conversion, themanagement body or the administrativebody of the public limited company mustfirst draw up a plan of conversionexplaining and justifying the legal and

economic implications of the conversionfor the shareholders, employees andcreditors of the company.If, aftersubmission of this plan, the conversionis approved by the general meeting ofthe shareholders, the national publiclimited company is converted into anSE, with all obligations beingtransferred to the SE by way ofuniversal succession which is why nocompensation offer is to be made.However, the registered office of the SEmust, in any case, be the registered

office of the converting company.


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(e) Secondary formation of asubsidiary SE

An already existing SE may itself set upa subsidiary SE, thus assuming thestructure of an SE group.In this case,

unlike the primary formation typesdescribed in the foregoing, theparticipation of various companies is notrequired.In a secondary formation of asubsidiary SE the element oftransnationality is also no longerrequired.

Above and beyond this, the GermanTransformation Act (UmwG) isapplicable to the SE. Therefore, anexisting SE may perform a hive down inorder 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 betransferred to another Member Statewithout resulting in the winding up of theSE or the creation of a new legalperson.The transfer must be resolvedon by the SE's general meeting.

Before the transfer of registered office,the management or administrative bodyof the company must draw up terms of

transfer which must state the name andregistered office of the SE and, inparticular, any consequences thetransfer may have on employees'involvement, the proposed transfertimetable and any rights provided forthe protection of shareholders and/orcreditors.In addition, a report must bedrawn up explaining and justifying thelegal and economic aspects of thetransfer and stating the implications ofthe transfer for shareholders, creditorsand employees.The terms of transfer

and the report must be made availableto the general meeting of the SE prior toa resolution thereon.

For the transfer of registered office, theSE needs to obtain an official certificate

showing that all requisite legal acts andformalities prior to the transfer havebeen completed. The company can beentered into the appropriate register ofthe new Member State of registeredoffice only after this certificate has been

submitted.

If its registered office is transferred toanother Member State, the SE mustoffer to acquire the shares of theshareholders wishing to withdraw fromthe company for reasonablecompensation in cash.In certaincircumstances, creditors of thecompany may demand provision ofsecurity.

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 bodyand a management body (two-tiersystem).

The establishment of the Europeanpublic limited company as a newcorporate entity marks a paradigm

change in German corporate law: forthe first time, it allows freedom of choicefor the organisational structure of aGerman stock corporation. Theshareholders of an SE will be able tochoose freely between the two-tierorganisational form established inGermany which provides for aseparation between management body(executive board) and supervisory body(supervisory board), and the one-tierorganisational form known in the Anglo-Saxon world as the board system.

However, a decision made in the SE'sarticles of association for one of theseorganisational structures is not final andbinding. The company's generalmeeting may at any time opt for theother structure.

(a) Two-tier system

The two-tier system, in terms of itsstructure, corresponds to the separationin German stock corporation lawbetween the executive board (the body

having responsibility for management)and the supervisory board.Themembers of the management body areappointed and removed by thesupervisory body and are responsiblefor conducting the business of the SE.Members of the management body maynot at the same time be members of thesupervisory body.

The members of the supervisory bodyfor their part with the exception of theemployee representatives in a co-

determined SE are appointed by thegeneral meeting.The task of thesupervisory body is to supervise thework of the management body, but itmay not itself exercise the power tomanage the SE.Member States whoselegislation has, to date, made noprovision for a two-tier managementsystem may adopt the appropriatemeasures in relation to SEs.

(b) One-tier system

If an SE's articles of association adoptthe one-tier system, the SE is managedby an administrative body referred to asthe administrative board(Verwaltungsrat).The members of theadministrative board with theexception of the employeerepresentatives in a co-determined SE are appointed by the general meeting.

A managing director or managingdirectors (geschftsfhrendeDirektoren) are responsible for the day-to-day management under the

conditions approved by the articles ofassociation, the supervisory board orthe general meeting.The managingdirectors represent the company in andout of court.The administrative board isresponsible for appointing the managing


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directors.Unless otherwise stipulatedby the companys articles ofassociation, the managing directorsmay be removed at any time byresolution of the administrative board.Members of the administrative board

may also be appointed as managingdirectors provided this does not result inthe majority of the members of theadministrative board being managingdirectors.

The administrative board administersthe company, defines the main purposeof its business activity and ensures thatthis purpose is realised.It must ensureby means of suitable measures, notablythe establishment of a monitoringsystem, that developments posing a risk

to the company are identified by thecompany in advance. Theadministrative board is also responsiblefor adopting the annual financialstatements of the company.

(c) General meeting

The general meeting of an SE decideson matters for which it is given soleresponsibility by the Regulation or bythe legislation adopted in transposingthe Directive by the Member State in

which the SE's registered office issituated. Furthermore, the generalmeeting decides on matters for whichresponsibility is given to it eitherpursuant to the laws of the MemberState in which the SE's registered officeis situated or by the SE's articles ofassociation. These are, in particular, thecross-border transfer of the registeredoffice, the appointment of thesupervisory board (two-tier system) orthe appointment of the administrativeboard (one-tier system) as well asshareholder resolutions. The generalmeeting is to be convened at least onceyearly within six months of the end ofthe SE's financial year at the latest. Theorganisation and conduct of the generalmeeting (convening, majorityrequirements, voting procedures, etc.)

is to be governed by the law applicableto public limited companies in theMember State in which the SE'sregistered office is situated (in Germanythe relevant provisions of the SEAG andthe German Stock Corporation Act).

3.5 Annual accounts andconsolidated annual accounts

An SE is subject to the rules applicableto public limited companies under thelaws of the Member State in which itsregistered office is situated as regardsthe preparation of its annual and, whereappropriate, consolidated accountsincluding the accompanying annualreport and the auditing and publicationof those accounts.Special provisions

apply for credit or financial institutionsas well as insurance companies.

3.6 Winding up, liquidation,insolvency and cessation ofpayments

As regards winding up, liquidation,insolvency, cessation of payments andsimilar procedures, an SE is subject tothe legal provisions which would applyto a public limited company formed inaccordance with the laws of theMember State in which its registered

office is situated.The Regulation grantsthe respective Member State in whichan SE has its registered office, the rightto take coercive measures if an SE nolonger complies with its obligationsunder the Regulation (requirement tomaintain the registered office of the SEin the same Member State as its headoffice; and, to the extent prescribed bythe Member State, as in the case ofGermany, requirement to have theregistered office and the head office ofthe SE in the same place). In this case,

the registry court will request the SE toregularise this position within aprescribed period. In the event of failureto comply with this request within theprescribed period, the registration courtwill declare the SE's articles of

association to be defective, resulting inthe winding up of the company.

4. INVOLVEMENT OFEMPLOYEES IN THE SE

In addition to the provisionsimplementing the corporate structure ofan SE, the rules governing the SE alsocontain a frameset for employeeinvolvement. The significant change isthat the scope of the involvement isnegotiable.

Basically, the Directive provides forinvolvement of employees both at theoperational and corporate level.Thestated aim of this was to secureemployees' acquired rights by what isreferred to as the "before and after"principle.The promoting companiesexisting employee participation rights inprinciple are to be preserved in the SE.

4.1 Overview of employeeinvolvement rights

The provisions distinguish between twodifferent areas:

involvement of employees at theoperational level; and

involvement of employees at thecorporate level.

At the operational level, in addition to anational employee representation body(works council), an SE must set up an"SE works council" ("representativebody" as it is referred to in theDirective).Comparable to the Europeanworks council, this body is to ensureinformation and consultation ofemployees of the SE and itssubsidiaries and businesses at thecross-border level.

At the corporate level, involvement ofan SE's employees takes place by wayof participation in the supervisory body(two-tier system) or, as the case may


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be, in the administrative body (one-tiersystem).

4.2 Primacy of negotiation

(a) General observations

The newly formed SE can be entered inthe competent commercial register onlyif it has been established whether andin what form the involvement rights atthe operational level (rights andobligations of the SE works council) andat the corporate level (participation ofemployees in the supervisory body or inthe administrative body) will be realisedin the newly formed SE.This is to beachieved primarily by an agreementreached by negotiation between the

management bodies of the promotingcompanies and a "special negotiatingbody" (SNB) of employeerepresentatives set up specially for thispurpose.That negotiation governs thecross-border employee involvement indetail and moreover, if applicable, theemployee involvement at corporatelevel. The promoters of the SE shouldtake the initiative to commencenegotiations with employeerepresentatives early on, since thesecan last up to six months, and in the

case of a decision by joint agreement toextend the negotiation period, up to oneyear in total.

(b) Special negotiating body

If one or more companies are planningto set up an SE, an SNB, made up ofemployee representatives, is to beformed at the written request of thepromoting companies managementbodies. The SNB and the companies'management bodies must enter into awritten agreement on the involvement of

employees in the SE.For thecomposition of the SNB, the SEBGprovides as follows:

the employee representatives ofthose employees who are employed

in each of the Member States withthe companies promoting the SEand with the subsidiaries andbusinesses concerned are to beinvolved; since the Directiverefrained from giving a binding

definition of the concept ofemployees, the SEBG was basedon the concept of employees asdefined under German employmentlaw.Accordingly, this covers blue-collar and white-collar employeesincluding those employed inprofessional training as well asexecutive employees;

for every share of employeesemployed in a Member State equalto 10% of the total number of

employees employed in all MemberStates or a fraction thereof, onemember is to be appointed to theSNB from this Member State;

trade union representatives andexecutive employees are to beconsidered separately for thecomposition of the SNB:every thirdGerman member on the SNB mustbe a trade union representative, andin case of an SNB with more thansix German members, every

seventh German member must bean executive employee;

for the members of the SNBattributable to Germany, an electionbody must be formed along the linesof any existing representationstructures (group-level central workscouncil, company-level centralworks council, local works council).

The members of the SNB enjoy thesame protection (dismissal protection,right to participate in meetings,

continued payment of remuneration) asemployee representatives subject to thelegal provisions of the Member State inwhich they are employed.This provisionis supplemented by the protection ofestablishment and activity under the

German Works Council Constitution Actand the European Works Councils Act:no one may obstruct the establishmentor activity of an SNB nor personallydisadvantage or favour an individualmember.This protection covers all

stages in the establishment and activityof this body and is addressed toeveryone.The requisite expenses forthe establishment and activity of theSNB arising in connection with thenegotiations must, as a rule, be borne intheir entirety by the companiespromoting the SE and the SE itself(once established) as joint and severaldebtors.

(c) Content of the agreement

The negotiating parties have extensivefreedom when it comes to drafting theterms of the agreement, which inpractice is concluded uniformly foremployee representation at theoperational level and participation at thecorporate level.The SEBG onlycontains certain minimum requirementswhich must be incorporated in theagreement:

the scope of the agreement,including the companies and

businesses situated outside theterritory of the Member States to theextent these are included in suchscope;

the composition of the SE workscouncil, number of its members andallocation of seats, including theimpact of material changes in thenumber of employees employed inthe SE;

the functions and the procedure forinformation and consultation of the

SE works council;

the frequency of meetings of the SEworks council;


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the financial and material resourcesto be allocated to the SE workscouncil;

the agreements date of entry intoforce and its term; and the

circumstances in which theagreement is to be renegotiated andthe procedure for its renegotiation.

As a rule, a double majority is requiredfor a resolution by the SNB:a majority"by headcount" of voting members aswell as a majority of the employeesrepresented by them.If the result of thenegotiation reduces the participationstandard of one of the promotingcompanies, additional requirementsmay have to be observed in certain

cases:the resolution must be adoptedby a two-thirds majority of the membersof the SNB who in turn represent twothirds of the employees in at least twoMember States.A reduction in theparticipation rights is deemed to occur ifeither the proportion of employeerepresentatives in the supervisory oradministrative body of the SE is lowerthan the proportion existing in thepromoting companies, or the right toelect, appoint, recommend or rejectmembers of the supervisory or

administrative body of the company isabolished or diminished.Where an SEis formed by way of transformation, noresolution may be adopted that reducesthe standard of participation.

By a majority of two thirds of itsmembers representing at least twothirds of the employees in at least twoMember States, the SNB may alsodecide not to start negotiations in thefirst place or to call off negotiationsalready under way, thus, resulting in thenon-applicability of the provisions of theSEBG.Instead, national legislation oninformation and consultation applies,notably the regulations of the EuropeanWorks Councils Act.In this case,employees will be represented at theoperational level (besides the national

representation bodies) only by theEuropean works council.That said, inpractice it is rather unlikely that theSNB will make the decision to call off orrefrain from negotiations since thiswould have the effect of the SE being

deprived of employee representation atthe corporate level.

4.3 Standard rules

(a) General observations

If the parties fail to jointly agree asolution on the involvement ofemployees in the SE by the negotiationdeadline, the standard rules laid out inthe SEBG will apply only when thenegotiations 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 decisionto not commence or to call off thenegotiations, and

the SE was not formed by way ofconversion of a company in whichthere was no employeeparticipation.

The parties can, however, agree on theapplication of the standard rules inadvance to expedite the negotiationprocess and save costs.

(b) Standard rules on theestablishment of therepresentation body

In respect of employee representationat the operational level, the standardrules govern the composition as well asthe competence and powers of the SEworks council.The SE works council, as

a rule, is made up of employees of theSE and its subsidiaries andestablishments reflecting thecomposition of the negotiating body.Consequently, in Germany the

members will be elected by acorresponding election body.

The competencies of the SE workscouncil, which in some cases are morecomprehensive than the information

rights of a European works council,extend to all matters of the SE, itssubsidiaries or its establishments inanother Member State, as well as to allmatters beyond the competencies of therelevant bodies at the level of theindividual Member State.In addition,the competencies of the works councilunder the German Works CouncilConstitution Act are maintained.Therights and obligations of the SE workscouncil include the following:

at least once a year, themanagement of the SE must informand consult the SE works council onthe progress of the SE's businessand its prospects (notably theeconomic and financial situation,development with regard tobusiness, production, sales andemployment), submit the requireddocumentation (annual reports,agenda for all meetings of themanagement body and thesupervisory or administrative body,

copies of all documents submitted tothe general meeting ofshareholders) in due time.Moreover, the management has aspecial information undertaking inthe event of exceptionalcircumstances;

the SE works council has anobligation to inform the employeerepresentatives of the SE, itssubsidiaries and establishments ofthe content and outcome of theinformation and consultationprocedures.


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(c) Standard rules onparticipation in thesupervisory or administrativebody

The employees participate at the

corporate level in the SE through theirrepresentatives in the supervisory oradministrative body who have the samerights and obligations (including votingrights) as the members representingshareholders. The provisions onparticipation in the supervisory body(two-tier system) or, as the case maybe, the administrative body (one-tiersystem) are characterised by a "before-and-after view" and the idea ofprotection of acquired rights.

Whereas in line with the standard rules,an SE works council is to beestablished in every SE, the followingapplies to the participation ofemployees at the corporate level of theSE:

if the SE is formed by way ofconversion, the participation regimeof the converted company iscontinued in the SE; as a result, allparticipation rights existing prior tothe conversion are maintained (suchas the parity or equal co-

determination of a Germancompany);

if an SE is formed by way of merger,the regulations on companyparticipation apply only if, prior tothe registration of the SE, at least25% of all employees had rights ofparticipation;

if a subsidiary SE or holding SE isformed, the regulations on companyparticipation apply only if, prior to

the registration of the SE, at least50% of all employees had rights ofparticipation.

Consequently, in cases where an SE isformed by way of merger, establishment

of a subsidiary SE or a holding SE, thefollowing applies:

if no right of company participationexisted in any of the participatingcompanies under national legislation

prior to the formation of the SE,there is no obligation on the part ofthe SE to admit employeerepresentatives;

in all other cases, the employeesare entitled to representation in thesupervisory or, as the case may be,administrative body. The scope ofsuch participation (meaning theproportion of employees delegatedto the body) is determined by thehighest proportion of employee

representatives at the participatingcompanies prior to the SE'sregistration, regardless of how theSE's management is structured.

Conclusion:Though rules governingemployee participation at the corporatelevel seem to present a de factoobstacle to participation in the formationof an SE for companies subject to ahigh national standard of employeeparticipation,it is possible to achieve asystem of employee participationtailored to the individual SE by way ofnegotiation.

5. TAXPREMISES

The attractiveness of an SE depends toa considerable extent on tax issues.The Regulation itself does not containany provisions on taxation, but refers tothe respective national law of theMember State in which the SE has itsregistered office. The SEEG does notprovide for any specific tax-lawprovisions either. Under German tax

law, basically the same rules apply toan SE in Germany as to (national)public limited companies. Previousinsufficiencies of the German tax lawwith regard to cross-bordertransformations, which also interfered

with the formation of SEs, have beenovercome by the Act on accompanyingtax measures for the introduction of theEuropean Public Limited Company andfor the amendment of further taxprovisions ("SEStEG") that came into

effect on 13 December 2006. Pursuantto the SEStEG, cross-bordertransformations may be performed tax-neutrally within the European Union orthe EEA under certain conditions.Therefore, the SEStEG makes theformation of an SE and the cross-bordertransfer of the registered office easier.

5.1 Taxation relating to formationof an SE

The opportunity of a tax-neutral cross-

border transformation is of essentialimportance to the formation of an SEwhich requires the participation ofcompanies that are resident in at leasttwo different Member States. Thus, thequestion arises whether the formationwill result in the disclosure and taxationof hidden reserves of the promotingcompanies or of the contributed assets.

(a) Formation by merger

The German Transformation TaxationAct (Umwandlungssteuergesetz,"UmwStG") stipulates certainadvantages for mergers with regard totaxation. Without these rules, a mergerwould result in the disclosure of hiddenreserves of the promoting company andthe taxation of that company and itsshareholders. With regard to thepromoting shareholder, the transfer ofshares in a company (in this case:exchange of shares) would regularly besubject to taxation, based on the fairmarket value (gemeiner Wert). Thus,any existing hidden reserves would be

disclosed and would be subject totaxation. That issue would also arise inrespect of the promoting company,when valuating the transferred assets.


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The SEStEG has fundamentallychanged the rules of the UmwStG onthe tax treatment of transformations.Moreover, it has extended these newrules to cross-border mergers within theEuropean Union or the EEA. In the

following section, the new rules will beexplained with regard to the variouspossibilities of forming an SE bymerger.

Outbound Merger

In the case of an outbound merger, thepromoting German stock corporation ismerged with a stock corporation whoseregistered office is in the EuropeanUnion or in the EEA. This merger leadsto the formation of an SE whereas the

Germany stock corporation dissolvesand its unrestricted tax liability ceases.The German stock corporation has toprepare a final balance sheet for taxpurposes. In that balance sheet, theassets of the German stock corporationwhich are transferred to the newlyformed SE have generally to bereported with their fair market value,possibly resulting in the disclosure andtaxation of hidden reserves. Onapplication, though, the book value canbe rolled over or an arbitrary interim

value (in-between the book value andthe fair market value) can be chosen,provided (besides other conditions) thatGermany's right to tax with regard to theassets transferred to the absorbingcompany is neither restricted norsuspended.

By this prerequisite, it is assured thatGermany maintains its tax take if theabsorbing company sells the assets inthe future. Thus, the taxation is onlypostponed. Whether Germany's right totax is restricted or suspended dependson whether the SE will keep a domesticpermanent establishment to which thetransferred assets will be attributed.Permanent establishments play adecisive role for the allocation of thetaxing rights between the respective

states under international taxation law,which is in particular influenced bydouble taxation agreements. TheGerman Federal Ministry of Financehas issued rules for determiningwhether the transferred assets are to be

attributed to the domestic permanentestablishment or to the head office in itsDecree on Permanent Establishments(Betriebsstttenerlass) which wasissued in 1999.

With regard to the shareholders of thepromoting German stock corporation,the following applies: on application, theshares of the absorbing non-domesticcompany may be valued at the fairmarket value of the shares of thepromoting company, provided (besides

other conditions) that Germany's right totax with regard to the assets transferredto the absorbing stock corporation isneither restricted nor suspended.

Inbound Merger

In the case of an inbound merger, thepromoting stock corporation is basedabroad, while the absorbing stockcorporation that is transformed into anSE is based in Germany. In thatscenario, the disclosure and taxation ofhidden reserves in connection with afuture restriction or suspension of theGerman right to tax (Entstrickung) is nota major concern to the German taxationauthority, but for the non-domestictaxation authority. With regard to theGerman tax law, the valuation of assetsthat become subject to Germany's rightto tax for the first time is the primaryconcern. The assets of the newlyformed SE have to be valued at the fairmarket value. If the non-domesticpromoting stock corporation has alreadymaintained a permanent establishmentin Germany, the question arises as towhich values should be reported for theassets that are transferred to theabsorbing SE in the promoting stockcorporation's final balance sheet. Thebook value may be applied under the

same conditions as pointed out abovewith regard to the outbound merger(Germany's right to tax is neitherrestricted nor suspended), whichregularly should be the case.

On shareholder-level, there should notbe any tax consequences. If the mergerresults in a German tax for thepromoting stock corporation'sshareholders (i.e. if the shareholdersare resident in Germany), the shares ofthe promoting stock corporation may bevalued at book value upon application.

Non-domestic mergers with Germantax consequences

In this scenario, both the promoting

stock corporation and the absorbing SEare based abroad. If the promotingstock corporation maintains apermanent establishment withinGermany to which assets are to beallocated, a German tax may ensue.Here the question arises as wellwhether Germany's right to tax withregard to the assets transferred to theabsorbing stock corporation is eitherrestricted or suspended. In such case,the merger would be regarded as ataxable transfer of assets, valuing thetransferred assets at their fair marketvalue. If Germany's right to tax isneither restricted nor suspended, theassets of the promoting stockcorporation can be valued at book value(or at interim value) upon application.This value is also binding for the newlyformed SE.

(b) Formation of a holding SE

The formation of a holding SE isconsidered to be similar to acontribution from a tax perspective. A

holding SE that is resident in Germanyhas to value the promoted shares attheir fair market value. Uponapplication, the book value or an interimvalue may be assigned if the holding SEhas a majority of voting rights in the


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promoting companies (qualifiedexchange of shares). In principle, theshareholders of the promoting companywhich are tax resident in Germany arebound by that valuation. Uponapplication, they may however assign

the book value or the interim value tothe shares irrespective of the valuationby the holding SE if certain conditionsare fulfilled.

If the promoting shareholder assigned avalue below the fair market value, thesubsequent sale of the promotedshares by the holding SE could result innegative consequences for theshareholder. Such subsequent salemay give rise to a subsequent taxationof the shares' hidden reserves if those

shares are sold by the holding SE withinseven years, whereas the tax burden isreduced by a seventh part for eachyear. In order to prevent the subsequenttaxation, the contributing shareholdermust, on a yearly basis, demonstratethat there has been no subsequent saleof the shares. If the shareholder isconstituted in the legal form of acorporation, the subsequent taxationwill not be applied, provided that certainconditions are fulfilled.

(c) Formation of a subsidiary SE

In principle, the formation of asubsidiary SE by non-cash contributionsresults in the disclosure and taxation ofhidden reserves of the transferredassets. Pursuant to the SEStEG, thesubsidiary SE may apply for the assetsto be valued at book or interim value ifthe following conditions arecumulatively fulfilled:

contribution of an enterprise, adivision of an enterprise or apartnership interest;

shares in the newly formedsubsidiary SE are granted to thecontributing person;

the contributed assets are subject tocorporation income tax at thesubsidiary SE in the future;

the contributed business capital isnot of a negative amount and

Germany's right to tax with regard tothe transferred assets is neitherrestricted nor suspended.

The value assigned by the subsidiarySE is generally binding for thecontributing shareholder. Nevertheless,the contributing shareholder may onapplication assign the book or interimvalue if certain conditions are fulfilled.However, in this scenario a subsequenttaxation with regard to the hidden

reserves of the contributed assets mayensue too. This will be the case if thecontributing shareholder sells the newlygranted shares in the subsidiary SEwithin seven years, albeit the taxationliability is reduced by a seventh part foreach year. Under certain conditions, thesales profits are subject to the half-income tax regime(Halbeinknftebesteuerung), underwhich only half of the profits are subjectto taxation (as of 2009 only 40 % will betax free). If the shareholder isconstituted in the legal form of acorporation, the sales are 95 % tax freeunder certain conditions. In order toprevent the subsequent taxation thecontributing shareholder must, on ayearly basis, demonstrate that there hasbeen no subsequent sale of the shares.

(d) Changes of legal form

A change of the legal form will not resultin a taxation liability as the identity ofthe company remains the same for taxpurposes.

5.2 Transfer of the SE's seat

The transfer of the SE's seat is notregarded as a change of the legal formwithin the meaning of the UmwStG,regardless whether it is a transfer into

or out of Germany. Apart from theUmwStG, the Income Tax Act(Einkommensteuergesetz) and theCorporate Income Tax Act(Krperschaftsteuergesetz) containspecific rules for a cross-border transfer

of the SE's seat:

(a) Outbound transfer

If the SE transfers its seat to aEuropean Union or EEA Member Stateand Germany's right to tax with regardto the transferred assets is eitherrestricted or suspended, the transfer willbe regarded as a sale of the assets,leading to the disclosure and taxation ofhidden reserves (Entstrickung). Hereagain, the event of taxation depends on

whether the SE's assets are to beattributed to the head office or to thepermanent establishment and whetherthere is a German right to tax them. Asregards the SE itself, the transfer willresult in a winding-up and in taxation onliquidation similar to the treatment of aGerman stock corporation. At the levelof shareholders resident in Germany,the transfer is only regarded as ataxable sale of shares (leading to ataxation based on the fair market value)if Germany's right to tax with regard to

the shares is either restricted orsuspended. Mostly that should not bethe case since most double taxationagreements concluded by Germanyunrestrictedly assign the right to taxprofits from the sale of shares of non-resident companies by residentshareholders to Germany.

(b) Inbound transfer

In the case of an inbound transfer, thenon-domestic SE transfers its seat toGermany. Similar to an inbound-merger, the assets that are subject toGerman taxation for the first time (if notalready attributable to a domesticpermanent establishment) are valued atthe fair market value. However, assetswhich have already been attributable to


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a domestic permanent establishmentmay continue to be valued at their bookvalue.

5.3 Regular taxation

Basically, there are no differencesbetween the regular taxation of SEs andthat of domestic stock corporations. AnSE based in Germany is subject tounlimited tax liability, which means it isliable to German trade and corporationtax as well as solidarity surcharge on itsworldwide income.

6. CROSS-BORDER MERGERSOF CORPORATIONS

Simultaneously to the installation of theSE as an instrument to form a commonlegal entity out of several companieswhich are subject to the laws of differentMember States, there has been afundamental development in thelegislation with regard to cross-bordermergers of corporations due to theEuropean freedom of establishment.The "SEVIC"-decision by the EuropeanCourt of Justice dating from 2005 is tobe seen as a starting point of thatdevelopment. In that decision, theEuropean Court of Justice basicallyapproved the merger of a corporationbased in another Member State with aGerman stock corporation though it leftmany questions unanswered, inparticular the application of therespective corporate law.

At that time, the European regulation oncross-border mergers setting out thecorporate-law basis for cross-bordermergers of corporation took effect. InGermany the law implementing theregulation entered into force on 25 April2007. In line with this law, it is possible

to perform cross-border mergers withcorporations (in particular stockcorporations, limited liability companiesand SEs).

The transformation of the Europeanregulation, however, has not takenplace in all Member States yet.Moreover, there has been no extensiveexperience with cross-border mergersin the countries which have already

transformed the regulation.

The German rules for cross-bordermergers have been created in closeagreement to the European regulationsfor the merging of the SE. This is inparticular the case for the employeeinvolvement in the supervisory board ofthe absorbing company.

7. CONCLUSION

The European public limited company

offers companies based in theEuropean Union the possibilities:

the possibility of cross-bordertransfers of registered office withouta change in identity which enhancesthe mobility of companies;

the formation of an SE can be usefulto companies in the course of atransaction as they can perform a"merger-of-equals" in order toovercome psychological and culturalbarriers and to form a common

Corporate Identity;

the choice between a one-tier and atwo-tier system enhances theflexibility and eases the integrationinto existing Anglo-Saxon corporatestructures;

the negotiation of the employeeinvolvement creates flexiblesolutions and legal certainty forcross-border corporate activities.

Therefore, we expect the SE to be analternative for restructuring on corporategroup level as well as a new instrumentfor M&A transactions.


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