28.04.2015Gender Equality in German Management through Mandatory Quorum?
Compared to many other European nations, the gender equality in management positions in German companies is not the status quo, even after years of non-binding agreements on economic and political objectives. However, this condition will now be solved by new applicable law.
I. Background:
On March 6, 2015, the German Bundestag passed the Act for Equal Participation of Men and Women in Management Positions for both the private and the public sector. The new Act provides for two models to increase the share of women at management level: (i) mandatory quorum of 30 % for stock corporations listed on a stock exchange and with employee involvement on the basis of parity and (ii) introduction of self-determined targets. This article briefly summarizes the main stipulations of the new Act:
1. Mandatory Quorum for Large German Companies
This new mandatory quorum affects approximately 110 of the largest German companies, as role models for the entire private sector. Pursuant to § 96 Subsection 2 Sentence 1 of the amended Stock Corporations Act (Aktiengesetz neue Fassung – AktnF) this mandatory quorum shall be binding for companies listed on a stock exchange and with employee involvement on the basis of parity, i.e. companies, to which the Involvement of Employees Act (Mitbestimmungsgesetz) is applicable. Therefore, stock corporations and limited partnerships by shares which generally employ more than 2000 employees have to observe the mandatory quorum in the future. The new Act does not apply to listed companies which are subject to the German One-Third Involvement Act (Drittelbeteiligungsgesetz) or are non-listed stock corporations.
a. Allocation Among Shareholder and Employee Representatives
Pursuant to the new Act the 30 % quorum shall generally apply to the entire supervisory board, i.e. shareholder and employee representatives (§ 96 Subsection 2 Sentence 2 AktGnF). Only in case an objection is raised, the two different sides, i.e. shareholder or employee representatives, shall be considered separately (§ 96 Subsection 2 Sentence 3 AktGnF). However, such objection must be raised with the chairperson of the supervisory board before the vote is taken, thus at a time when it is still unclear if the quorum will be reached by one side. It is therefore likely, that such objection right will be used in companies where the quorum is already fulfilled at the side of the employees’ representatives.
b. Legal Consequences if the Quorum is not Fulfilled
In case the election of a member of the supervisory board leads to the statutory quorum not being fulfilled, the election is null and void and the supervisory board position remains vacant, a so called “empty chair”.
2. Self-determined Targets
In addition to the mandatory quorum, the new Act provides for a model of self-determined targets for the board of management and the two subordinated management levels in companies listed on a stock exchange and with employee involvement on the basis of parity. For companies which are only listed on a stock exchange or subject to employee involvement this also applies to the supervisory board. Unlike the mandatory quorum this regulation also applies to companies which are subject to the One-Third Involvement Act. According to the new Act, companies are obliged to specify a certain number of women for the corporate bodies of the company. In case such self-determined quorum is not fulfilled, the Act does not provide for certain sanctions like in the case of the mandatory quorum; but only triggers reporting duties. Pursuant to the new § 289a Subsection 2 No. 5 German Commercial Code (HGBnF) the companies are obliged to report and publish the targets set and their achievement as part of the management report. According to § 96 and § 111 AktGnF the supervisory board is responsible to determine the target for the supervisory board and board of management. If a target is also to be specified for the management levels below the board of management, the board of management is responsible to determine such targets. Due to the various corporate organization schemes, the definition of the management levels are to be defined on a case-by-case basis since the Act does not stipulate such definition. Pursuant to the new Act the self-determined targets shall be specified by June 30, 2015, for the first time whereby the current status shall apply as a minimum target and may not fall below such minimum if it is under 30 %.
3. Mandatory Quorum for the Public Sector
In order to set a good example, the federal government shall also be obliged to observe a 30% quorum for bodies where at least three seats are to be elected by the federal government for new announcement from 2016 onwards. From 2018 such quorum shall be raised to 50%. Further, to raise women’s participation, the Federal Equality Act (Bundesgleichstellungsgesetz) is also to be amended and the federal administration shall be obliged to determine targets and to set them out in the respective equality plan.
4. International Companies and Cross-Border Mergers
Pursuant to the new Act the mandatory quorum shall also apply to the European Stock Cooperation (Societas Europaea or SE) and cross-border mergers accordingly. Therefore, the 30 % quorum shall apply to listed SEs with employee involvement, of course taking into consideration the organizational specifics with respect to the composition and election of their corporate bodies. Since the European stipulations do not conclusively regulate the composition of the corporate bodies of an SE, national legislation is able to supplement the stipulations. However, the mandatory quorum will have to be applied in a modified way to the one-tier administrative body since its function corresponds more to that of a board of management. Further, the mandatory quorum shall apply to companies which are listed on a stock exchange and which result from a cross-border merger as the corporate law to which the absorbing company is subject to will be applicable. Thus the advantages and disadvantages of the respective legal systems need to be considered before such a merger.
II. Practical Effects and Criticism
In view of the strict sanction provided by the new Act if the mandatory 30 % quorum is not reached, it should be decided whether individual votes or a block vote is preferable when electing supervisory board members. In the case of individual votes, only the election of the supervisory board member which would breach the statutory quorum for the first time would be null and void. By contrast, all the appointments of the over-represented gender would be null and void in the case of a block vote. It is therefore advisable that the chairperson of the general meeting ensures individual votes are taken when electing supervisory board members and generally observes that the mandatory quorum is reached. Since no obligation exits to propose unsuitable persons, compensation claims against the company which is not able to fulfill the quorum required by the new Act seem to be unlikely. To fulfill their obligation to set up a supervisory board observing the mandatory quorum, in particular if the management is not able to find a suitable candidate, the board of management may initiate formal procedures for the appointment of the board member by court (§ 104 AktG). However, in accordance with the new Act the court will also be bound by § 96 Subsection 2 Sentences 1-5 AktGnF for such appointments, and shall therefore ensure that the supervisory board reaches the statutory quorum beyond other corporate interests. Pursuant to the new Act the mandatory quorum shall apply from January 1, 2016, for new elections and appointments. If the quorum cannot be reached with the new appointment, all further vacant seats of the supervisory board shall be filled with the under represented gender. Therefore it is most likely that most of the new supervisory board positions will be occupied by women in the near future. The new Act has been strongly criticized because it does not provide for an exemption in case no suitable female candidates are available. However, this fear seems to be unfounded, since more and more women are being well educated and are willing to accept such position.
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