Stock
Options for Works Council Members in Germany
Dr.
Walter Ahrens | Partner,
Frankfurt
A
recent judgment of the federal labor court underlines again how important
it is that the right legal entity within a group of companies grants
stock options and that no misleading representations are made to the
employees in this context. As
the following case demonstrates, failure to sufficiently take these
requirements into account can lead to unexpected financial consequences
that can be substantial.
The plaintiff started employment in 1999 with a German company that was
owned by a U.S. corporation. In 2000 and 2001 he received a total
of 5,000 stock options from the U.S. parent corporation. In 2001
he became a member of the company’s works council. He was subsequently
elected chairman of the works council and released from his obligation
to work. German statutory law provides that in operations that regularly
employ at least 200 employees, a certain number of works council
members have to be released to enable them to fully engage in works
council activities. These works council members are nevertheless
entitled to the same pay and benefits as comparable employees and
even take part in pay increases. This is intended to ensure that
they suffer neither financially nor with respect to their professional
development from their works council membership.
It probably does not come as a surprise that the plaintiff in this case
did not receive any stock options from 2002 to 2005, while an employee
whom the parties had agreed was comparable to the plaintiff did receive
such options. The employee claimed the options from the German subsidiary
in court, but lost in the first two instances.
The federal labor court set the appeal court judgment aside and remanded
the case to the appeal court for further investigation. It held that
the pay and benefits that works council members are entitled to may also
include stock options. The court also made clear that payments and benefits
that are provided by a third party and not by the employer, for example
by another group company, are not to be taken into account in this context.
In principle, only pay and benefits provided by the employer on the basis
of the employment contract count. This applies even if the third-party
payment or benefit is motivated by the employment contract, as is typically
the case with stock options granted by a parent entity. However, the
court acknowledged that the employer and the employee can agree that
a third party provides pay and/or benefits instead of or in addition
to the employer’s pay and benefits, and in doing so, the third-party
pay and/or benefits become part of the employment contract between the
employer and the employee. In this event the employer may be held liable
if the third party does not deliver.
In this case, the U.S. parent corporation had gotten nearly everything
right. The stock options had been granted by the parent corporation,
and the employment contract between the German subsidiary and the employee
did not include any stock options. Such clear distinction is also helpful
from a conflict-of-laws point of view. While a choice of law with respect
to employment contracts is possible only to a limited extent and employment
contracts, as a minimum, are subject to the mandatory provisions of the
laws of the country in which the employee usually works, there is no
such limitation with respect to other types of agreements. Therefore,
a choice of law in a stock option agreement in favor of U.S. state law,
e.g., Delaware law, is usually enforceable.
The reason, however, why the federal labor court nevertheless set aside
the appeal court judgment was that the appeal court had not sufficiently
taken into account the plaintiff’s submission that in his job interview,
the German subsidiary had presented the stock options as an additional
pay component. According to the court, this could mean that the U.S.
parent entity’s stock options were benefits in addition to the regular
remuneration agreed upon between the parties that could establish the
employer’s secondary liability in accordance with the terms and conditions
of the stock option agreements. What exactly had been said in the job
interview and how it has to be construed will now have to be determined
by the appeal court.
The judgment underlines that it is not sufficient to have the right paperwork
in place in order to ensure that the employment relationship and the
grant of stock options remain separate legal relationships and are not
mingled. It is also necessary to clearly distinguish, in any oral communication
to the employees, between employer pay and benefits on the one hand and
any third-party benefits such as stock options that are to be granted
by another group company on the other. Any misrepresentation in this
respect may have the effect that third-party benefits become part of
the employment contract and are thereby subject to German employment
law, with unforeseen legal and financial consequences as in this case.
Outlook
Future issues of this newsletter will deal with new federal labor court
judgments on age and gender discrimination and on the codetermination rights
of works councils in connection with Sarbanes-Oxley ethics guidelines.
Simeon
Spencer
Condor House
5-10 St Paul's Churchyard
London • EC4M 8AL
Ph: +44 (0) 20 3201 5520
Fx: +44 (0) 20 3201 5600
simeon.spencer@
morganlewis.com
Dr.
Walter Ahrens
Guiollettstraße 54
60325 Frankfurt am Main
Ph: +49 69 714 007 34
Fx: +49 69 714 007 10
wahrens@morganlewis.com
François
Vergne
68 rue du Faubourg
Saint-Honoré
75008 Paris
Ph: 33 (0) 1 53 30 43 00
Fx: 33 (0) 1 53 30 43 01
fvergne@morganlewis.com