8.2 Companies limited by shares

Since the concept underlying the Work Councils Act is “enterprise” (the labour organisation), it is not dependent on any specific legal form. For the purposes of the law it is irrelevant whether the entrepreneur runs his enterprise in the legal form of a one-man business or as a listed public limited liability company. However, the control structure is entirely different in these two legal forms. In a one-man business one natural person is regarded as the entrepreneur, while in the case of a company limited by shares the legal entity runs the enterprise. In the latter case the decisions are made by the legal entity’s bodies. That applies not only to decisions within the enterprise, which are regulated by the Works Councils Act, but also to decisions under corporate law, such as amendments to the articles of association, winding up, the appointment, removal from office and remuneration of managing directors, and profit appropriation. Strictly speaking, those decisions do not fall within the scope of Section 25 of the Works Councils Act, but they may nevertheless have serious consequences for the enterprise with which the works council is affiliated. An amendment to the articles of association or a change of the legal structure may affect the works council’s powers, for instance, and winding up of the company will often result in termination of the enterprise.

Moreover, these are decisions that are usually made by the general meeting of shareholders, whereas the Works Councils Act is based on the assumption that the obligations under the Works Councils Act are performed by the managing director within the meaning of the Works Councils Act. Does the works council’s right to be consulted extend to decisions of the shareholders’ meeting? The (ultimate) right of shareholders to organise the company in accordance with their own wishes and to decide on its continued existence is at odds with the employees’ co-determination right.

During the parliamentary discussion of the amendments to the Works Councils Act in 1998, the Minister took the position that corporate law (and insolvency law) and employees’ co-determination rights are strictly separate. The debate related to the question whether works councils should be given the right to be consulted regarding the profit appropriation. Such a strict approach would mean that the works council does not have the right to be consulted regarding decisions related to the company. However, the Enterprise Section has devised an “artifice” in its case law that nevertheless gives works councils the right to be consulted in the event of a decision related to the corporate organisation. In the Intergas judgment the Enterprise Section ruled that a separation between co-determination law and corporate law must be considered artificial. If a decision of a body of the company has a direct impact on the enterprise, such a decision (the Intergas case involved an amendments to the articles of association) is a decision in which the works council’s advice must be sought.

This pragmatic approach of the Enterprise Section does justice to the interest of co-determination, but is not necessarily in keeping with the system of the Works Councils Act. It is unclear, for instance, who must request advice in such a case: the company’s management board or the body that proposes or adopts the resolution, in many cases the shareholders’ meeting? Although Section 25 of the Works Councils Act does not preclude that the advice must be requested by the shareholders’ meeting (since the entrepreneur must seek the works council’s advice and the shareholders’ meeting can be deemed to represent the entrepreneur (in the case of a private limited liability company) in respect of resolutions concerning the company), the works council’s right to be consulted in respect of shareholders’ resolutions is at odds with the system of the Works Councils Act. At the consultation meeting, for instance, it is the managing director who addresses the meeting on behalf of the entrepreneur. Moreover, the measures that the Enterprise Section can impose under Section 26(5) of the Works Councils Act are inappropriate in the case of shareholders’ resolution, since the management board cannot have a resolution to amend the articles of association withdrawn; that requires a new shareholders’ resolution. Or could a measure under Section 26(5) of the Works Councils Act mean that the shareholders’ meeting must adopt a new resolution, which would mean that the majority of the shareholders must vote in a certain manner? In my opinion that is not the case. It is possible in inquiry proceedings, for instance, but in that case mismanagement must be involved, which is a stricter test than that under Section 26 of the Works Councils Act. Moreover, the right to institute an inquiry expressly provides what measures can be taken in relation to the shareholders’ meeting, in any event in respect of the final arrangements. Another relevant difference with inquiry proceedings is that shareholders can join such proceedings and can independently claim remedies. My conclusion is therefore that the measures under Section 26 of the Works Councils Act cannot be effective in relation to the shareholders’ meeting. As the resolutions cannot be altered by measures imposed by the Enterprise Section, the right to be consulted is ineffective with regard to corporate law decisions.

In addition to the general right to be consulted, the works council also has a number of specific powers related to corporate law decision-making, both under the Works Councils Act and under corporate law. For instance, the works council of a legal entity has the right to be informed with regard to the financial statements under Section 31a(2) of the Works Councils Act. Section 31d of the Works Councils Act furthermore provides that the works council has the right to be informed of the remuneration (and the amounts involved) of the legal entity’s management board and supervisory body. Unlike the rest of the Works Councils Act, both of those sections are dependent on the legal form and relate to resolutions that concern the legal entity, not the enterprise. Section 30 of the Works Councils Act differs slightly from the rights to be informed referred to above, since it relates expressly to the managing director of the enterprise, but in many cases the managing director of the enterprise is also the managing director of the legal entity. The problems described above regarding the system of the Works Councils Act and shareholders’ resolutions also apply to these powers. Since only rights to be informed and a right to be consulted without appeal are involved, these problems are not very relevant in practice.

Other co-determination powers regarding corporate law decision-making can be found in Book 2 of the Civil Code. The works council’s role in respect of resolutions concerning the company is twofold: under the Works Councils Act and under Book 2 of the Civil Code. Co-determination under corporate law arose in the 1970s. The reason was that employees, as important stakeholders, must be able to influence the composition of the company’s bodies. That influence detracts from the shareholders’ powers. The introduction of co-determination under corporate law gave employees formal powers, as well as embedding their interest in the corporate interest. The works council of a large (two-tier board) company has the right, for instance, to recommend supervisory directors; the works council of a public limited liability company is given the opportunity to inform the shareholders’ meeting of its views on the appointment and removal from office of managing directors and supervisory directors, the remuneration of managing directors and important decisions.

The right to institute an inquiry allows employees to request the Enterprise Section to rule on the decision-making in the company if in their opinion there is valid reason to doubt a correct policy. These powers of employees are closely in keeping with the manner in which co-determination has been designed. In other words, co-determination under the Works Councils Act puts pressure on the principle of “co-determination follows decision-making”, but co-determination under corporate law does not. The right to be heard, for instance, creates a dialogue between the works council and the shareholders’ meeting, the body that is also authorised to adopt the resolutions in question.

Co-determination under corporate law is therefore in keeping with the balance of control in a company limited by shares, but also in this case potentially conflicts with shareholders’ rights. Any influence of employees limits the shareholders’ powers. The co-determination regime in the two-tier board regime, for instance, limits the shareholders’ right to appoint the supervisory directors. In the 1970s the idea was that the labour factor and the capital factor should have equal powers regarding the composition of the supervisory board. The equality between labour and capital can also be found in the right to institute an inquiry, since both the capital factor (shareholders) and the labour factor (trade unions) have the right to request the Enterprise Section to rule on the company’s policy and course of business.

In 2004, however, the equality was removed from the structure regime. The aim in doing so was to further strengthen the position of shareholders in the company. Although the works council’s position did not deteriorate as a result of the change in 2004, the significant strengthening of the shareholders’ position put an end to the equality between the parties. Six years ago the position of employees was strengthened again in relation to the shareholders’ meeting by the introduction of the right to be heard. The works council is also playing an increasingly important role with regard to the right to institute an inquiry, which is restoring the balance between shareholders and employees in practice.

Debate occasionally flares up on the question whether the co-determination regime in Book 2 of the Civil Code should be abolished, so that all the works council’s co-determination rights are regulated under the Works Councils Act. In my opinion the validity of co-determination under corporate law is not in dispute. I have already concluded above that co-determination under corporate law is systematically much better in keeping with decision-making under corporate law than the right to be consulted under Section 25 of the Works Councils Act. Moreover, this form of co-determination is an important aspect of the actual (stakeholder) system. The interest of employees is embedded in the corporate interest that the management board and the supervisory board must take into account in the decision-making process. Employees furthermore have specific powers that strengthen their position (as important stakeholders). Those co-determination powers guarantee that the employees’ interest is actually taken into account in the decision-making process. The Works Councils Act and co-determination under corporate law are communicating vessels. The question is also whether the legislature could even abolish co-determination under corporate law, in light of Section 19 of the Constitution, which protects employees against the withdrawal of co-determination.

An expansion of co-determination powers under corporate law would seem the more obvious approach, since, as stated above, that would be in keeping with the balance of control. I have proposed expanding the works council’s right to be heard to also include other resolutions of the shareholders’ meeting, such as amendments to the articles of association, winding up, profit appropriation and adoption of the financial statements. In that case it is important that the sanction of annulment can be imposed on violation of the right to be heard, as in the case of violation of the right to be heard under Sections 2:161a/271a of the Civil Code. Expansion of the right to be heard to include private limited liability companies is also desirable, since there is no reason whatsoever in this regard to distinguish between private and public limited liability companies.

I have also argued in favour of a statutory right for the works council to institute an inquiry, in addition to the trade unions’ right to do so. A combination of the right to be heard at the front of the decision-making process and the possibility of having the policy repressively assessed if there are valid reasons for doubt constitutes a balanced system of co-determination. These powers do justice to the balance of control at companies limited by shares, without detracting too greatly from shareholders’ powers, since the right to be heard is aimed at consultation only, while the right to institute an inquiry can be exercised only if there is valid reason to doubt the policy. If Book 2 of the Civil Code offers the works council sufficient possibilities to influence the decisions of the shareholders’ meeting, “artifices” of the Enterprise Section are no longer necessary.

In addition to the influence that can be exercised by means of the right to be heard under the Works Councils Act and the corporate law co-determination under Book 2 of the Civil Code, a number of other proceedings are also available to staff representatives that allow them to influence corporate law decision-making. They are proceedings that were not drawn up specifically for staff representatives, but that may be instituted by all the stakeholders. For instance, the works council can use the proceedings under Sections 2:14-2:16 of the Civil Code to annul a decision of a body of the legal entity and in certain circumstances the works council is a stakeholder in financial statements proceedings. As I have noted above, the works council can use the right to institute an inquiry (although there is no statutory basis for that right) by joining a legal action as an interested party under Section 282 of the Dutch Code of Civil Procedure, for instance, or may agree with the management board that it has the right to institute an inquiry. Attention can also be drawn to the possibility for employees to purchase shares in a public limited liability company. That gives them the right to address the shareholders’ meeting regarding all resolutions that fall within its competence. That right is similar to the right to be heard and offers the additional advantages that it applies to all decisions of the shareholders’ meeting and that voting rights are also attached to share ownership.