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Germany: Piercing The Corporate Veil For Assessment Purposes When Drawing Up A Social Plan Within A Corporate Group (BAG Dated 15 March 2011 – 1 ABR 97/09)
When establishing the budget for a social plan, in corporate
groups the question is regularly raised whether one may or may not
fall back upon the wealthy "parent" or the group as a
whole when calculating such budget. The BAG has now provided
clarity in cases where no substantial assets have been removed
during a divestment of the operating company.
The company K-AG ran six rehabilitation clinics, five of which
were owned by it and one of which was only leased. The lease
agreement was transferred during the course of a divestment of all
of the clinics to a transferee. The transferee employer wanted to
discontinue the extremely loss-making clinical operations at the
end of 2006. The arbitration board set up drew up a social plan in
an overall volume of 1.3 million euro. The employer's balance
sheet at such time showed a deficit not covered by equity capital
in an amount of about 3 million euro. The arbitration board
established the overall volume by including the assets of K-AG in
the assessment of the financial situation.
The motion filed by the employer for the declaration of the
invalidity of the decision of the arbitration award was successful
before the 1st Senate of the BAG.
If an enterprise undertakes a change of business, then under
certain circumstances negotiations must be conducted on a
compromise of interests and social plan. The purpose hereof is to
compensate for the disadvantages associated with the measure,
typically by granting settlements.
The arbitration board decides in the management's and
employees' stead if they are unable to agree on the
establishment of a social plan. Pursuant to Sec. 112 V German Shop
Constitution Act (Betriebsverfassungsgesetz,
"BetrVG"), its decision must duly account for the
social welfare interests of the employees and the economic
reasonableness of the social plan for the enterprise. The financial
capacity of the enterprise is determinative of the economic
reasonableness.
Especially in case of group companies, one must consider whether
the financial capacity of the enterprise or that of the group
behind the enterprise is relevant. According to established case
law of the BAG, in principle only the economic situation of the
respective enterprise is decisive and one may not fall back on
affiliated enterprises.
The Regional Labour Court of Hesse (Landesarbeitsgericht,
"LAG") nevertheless upheld the decision of the
arbitration board in analogue application of Sec. 134 German
Mergers and Reorganisations Act (Umwandlungsgesetz,
"UmwG"). The Senate of the BAG based the success of
the appeal against the decision of the arbitration board on the
fact that no assets of substance for the continuation of the
clinical operations had been removed from the employer. The
arbitration board had denied resorting to the wealthy K-AG via Sec.
134 UmwG, as this constituted a violation of the principle of
economic reasonableness pursuant to Sec. 112 V BetrVG.
By creating clear requirements for the arbitration board, the
BAG has ensured a greater degree of legal certainty. However,
according to the decision of the BAG, it would seem that a piercing
of the corporate veil is not ruled out in cases of a withdrawal of
substantial assets prior to the divestment. It will be easier to
appraise this with greater certainty once the reasons for the
judgment have become available.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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