68	2  Stock Corporation (AG)

council and ‘regular’employees. The works council, in return, must duly and properly exercise its functions and is not allowed to disturb the operation or compromise the peace of the workplace. Strikes and other means of industrial disputes are not allowed on the works-council level but are limited to trade unions.

The general functions of the works council are enumerated in Sec. 80 BetrVG. According to this provision, the works council, inter alia, shall ensure that the employer observes provisions set forth by statutes, regulations, collective bargaining agreements and works agreements, shall propose measures that benefit the business unit and the workforce and shall mediate between employers and employees.

To this purpose, the works council is vested with specific participation rights. Depending on the subject matter concerned, the works council may have:

•the right to obtain timely, complete and correct information from the employer and to inspect corresponding documents;

•the right to be consulted regarding a specific topic with the employer, e.g. prior to dismissals and new employments;

•the right to veto a decision made by the management until either an agreement is reached or a labor court overrules the veto;

•the right of co-determination, i.e. the employer cannot validly make a specific decision without the consent of the works council.

Co-determination rights arise in particular in connection with social matters and specific questions regarding working conditions. For example, according to Sec. 87 para. 1 no. 2 BetrVG, a direction or measure of the employer pertaining to the commencement and termination of the daily working hours, including breaks and the distribution of working hours among the days of the week, is invalid, unless an amicable agreement with the works council is reached. This provision, however, does not extend to the duration of daily or weekly working hours; these are subject to the individual working contracts and the collective bargaining agreements in place.

2.5.3  Board-Level Co-determination

With regard to corporate governance, board-level co-determination, the third pillar of employee participation, is the most relevant. It also is perhaps the most irritating feature of German corporate law for foreign entrepreneurs, in particular those with anAnglo-American background.

The term ‘corporate governance’ is used broadly to describe various issues of a company’s structure, such as the relationship between a company’s management, its shareholders and other stakeholders. Questions relating to how companies should be governed also include the roles, composition and duties of the company’s statutory bodies (Organe). Depending on the relevant social and economic function, one can make a distinction between a shareholder-controlled corporation model (as is the case in many common law countries) and a model also recognizing the interests of non-shareholder constituencies of the company, especially the interests

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of employees. Germany is a good example of the latter model, with its detailed legislation on board-level employee co-determination.

Board-level co-determination (unternehmerische Mitbestimmung) refers to employee participation on corporate boards, i.e. participation in the company-wide entrepreneurial decision-making process. In the German two-tier board system, distinguishing between the management board and supervisory board, such representation on a board-level pertains to the latter. German law also provides for three regimes of board-level co-determination, which differ as to their scope of application, as well as to the extent of participation rights granted.

2.5.3.1  Coal and Steel Co-determination Act of 1951

The Coal and Steel Co-DeterminationAct (Montan-Mitbestimmungsgesetz) of 1951 applies exclusively to companies of the coal and steel industry in Germany with more than 1,000 employees. In such companies the supervisory board must consist of at least 11 members, five of which are (in effect) appointed by the employees and another five of which are appointed by the shareholders.143 These ten board members together appoint a neutral chairman. Of the five employee representatives three are appointed by the relevant labor union, while the other two are appointed by the works councils of the respective company—with the labor union having a right of objection. Altogether, this act provides for a full parity of employees in the supervisory board. However, due to the steep decline of the German coal-mining industry since the 1960s, it has lost much of its importance.

2.5.3.2  One-Third Co-determination Act of 2004

The One-Third Co-Determination Act (Drittelbeteiligungsgesetz) of 2004 applies to incorporated companies, such as the AG and the GmbH, provided that they employ more than 500 and less than 2,000 employees.144 In such corporations the employees, by way of election, shall appoint one-third of the members of the supervisory board. This also means that, although limited liability companies generally are not required to have a supervisory board under German corporate law, a GmbH employing more than 500 employees will have to establish such a board to make employee participation possible.

2.5.3.3  Co-determination Act of 1976

The Co-Determination Act (Mitbestimmungsgesetz) of 1976 applies to corporate entities outside of the coal and steel sector with more than 2,000 employees.145

143  The Coal and Steel Co-Determination Act stipulates special requirements for the size of the supervisory board deviating from the general rules of Sec. 95AktG.

144 As a general rule the statute is applicable regardless of the specific business purpose of the company. However, within the scope of its applicability (more than 1,000 employees, coal and steel) the Coal and Steel Co-DeterminationAct takes precedence over the One-Third Co-Determination Act.

145  For a more detailed review see Mertens and Schanze 1979, pp. 75 et seq.