Following a long and controversial discussion the draft bill on "gender quotas", which was adopted by the Federal Government, passed the Federal Cabinet on 11 December 2014. The draft aims at an equal participation of women and men in executive positions in the private and the public sector and shall implement what is known as 'Frauenquote' (women's quota).

What impact will the quota exactly have on German companies? Starting from 1 January 2016, approximately 100 companies which are publicly listed and the supervisory boards of which are subject to parity co-determination must observe a gender quota of at least 30% at elections and delegations to the supervisory board. Further, approximately 3,500 companies which employ more than 500 employees and the supervisory boards of which are therefore subject to at least a one-third co-determination or which are publicly listed will have to – starting from 30 June 2015 – determine target quota for women's participation in the supervisory board, the management board and in the first and second tier management levels. In detail:

I. Fixed 30% Gender Quota for Supervisory Boards as from 2016

The draft bill provides that with effect from 1 January 2016 women and men must be represented with a quota of at least 30% in supervisory boards of publicly listed stock corporations (Aktiengesellschaft, AG) and limited joint-stock partnerships (Kommandit-gesellschaft auf Aktien, KGaA) and the supervisory boards of which are at the same time subject to parity co-determination according to one of the German Parity-Co-Determination Acts (Mitbestimmungsgesetz, Montan-Mitbestimmungsgesetz or Mitbestim-mungsergänzungsgesetz). The same applies to publicly listed Societas Europaea (SE) and publicly listed companies resulting from a cross-border merger if their supervisory boards have to be composed of an equal number of shareholder and employee representatives pursuant to the Act on the Participation of Employees in a Societas Europaea (SEBG) or the Act on the Co-Determination of Employees in Cross-Border Mergers (MgVG).

Even though the gender quota shall come into effect on 1 January 2016, members of the supervisory board which are appointed until 31 December 2015 will remain in office for their whole electoral period. Only as from 1 January 2016, companies will – depending on the individual status quo – have to gradually increase the actual quota in new elections and delegations by filling vacancies in favor of the under-represented gender.

In case of a breach of the fixed 30% quota, the resolution of the general meeting on the election or the delegation are void and each seat in the supervisory board reserved for the under-represented gender remains empty (empty chair, Leerer Stuhl). In case of block elections (Blockwahl) which do not result in the fulfillment of the minimum quota, the election is void with regard to the over-represen-ted gender. In case of individual elections (Einzelwahlen), the first resolution that infringes the quota is void; the same applies to all further elections infringing the quota. However, the understaffed supervisory board – subject to any deviating provisions in the articles of association – has a quorum if at least half of the members of which the supervisory board has to consist pursuant to the articles of association or statutory law participate in the adoption of the resolution.

The gender quota relates in principle to a plenary supervisory board, i.e. both sides of the employee and shareholder representatives are to be considered together (overall fulfillment, Gesamterfüllung). It is different, however, if either the shareholder or the employee representatives' bank objects the overall fulfillment prior to the election. In case of an objection, the minimum percentage for the respective election shall apply to both, the employee as well as the shareholder representatives' side (and their substitute members). In case of post decimal positions, the respective minimum percentage to be reached has to be rounded up or down to the next integer number of persons. As from 1 January 2016, the election proposals to the supervisory board must contain a reference to the gender quota and inform on the statutory requirements resulting therefrom, on the number of seats which at least must be filled by men and women and on whether the overall fulfillment was opposed.

II. Objectives for Supervisory Boards and Management as from 30 June 2015

By 30 June 2015 at the latest, companies with the legal statute of an AG, KGaA, German limited liability company (GmbH), registered cooperative society (eG), mutual insurance society (VVaG) and SE which are either at least subject to one-third co-determination due to the employment of regularly more than 500 employees or which are publicly listed must set specific objectives for the proportion of women in the supervisory board, the management board and in the following two management levels. Pursuant to the prospective wording of the statute it remains unclear if those requirements shall also apply in case the requirements for co-determination are met, but in fact the supervisory board does not include employee representatives.

The supervisory board is responsible for determining the target figures concerning the proportion of women in the supervisory board and the management board or among the managing directors, respectively. However, no target figure for the supervisory board must be determined if already the fixed gender quota applies for the respective company (cf. sec. I. above). In addition, the management board has to determine target figures for the proportion of women in the two management levels below the management board.

No rigid minimum target figure will be prescribed by law. However, if and as long as the actual proportion of women is less than 30%, the target figure to be determined must not fall below this status quo (prohibition to deteriorate (Verschlechterungsverbot)).

At the same time, affected companies shall determine a period of five years in the maximum within which the objectives have to be implemented. Nevertheless, the first period to be determined by 30 June 2015 must not exceed two years.

No particular sanctions are provided for if the statutory requirements relating to the determination of said objectives are not fulfilled. However, pursuant to the explanatory memorandum to the draft bill, members of the corporate bodies could be held liable for damages if they breach the obligation to set specific objectives. Further, consequences for the members of the responsible corporate bodies are in discussion regarding a refusal of their discharge in case of failure to achieve the objectives, as well as a potential influence of missed objectives or objectives which are lacking in ambition on public calls for tenders.

III. Declaration on the Fixed Gender Quota and the Objectives

In their corporate governance statement in the management report, the affected companies must report upon the applicable gender quota provisions and their implementation. Otherwise the companies must explain why they failed to meet their target figures. The reporting obligation applies with regard to the fixed gender quota for supervisory boards to any financial statements with a balance sheet reporting date after 31 December 2015 and with regard to the target figures to any financial statements for fiscal years ending after 30 June 2015.

IV. Outlook

The implementation of the 'Frauenquote' (women's quota) in German companies is drawing closer. It will be exciting to see, however, whether the draft bill will already constitute the end of regulations on gender quotas. The implementation of the draft bill is considered to be certain.

At the time being, however, the situation is (still) different with respect to the proposal from Brussels regarding a "women's quota" in supervisory boards. Already in November 2013, the European Parliament voted in favor of a "women's quota" of 40% for (non-executive) supervisory board members of publicly listed companies within the European Union with effect as from 2020. Only medium and small-sized enterprises with less than 250 employees and less than EUR 50 million annual turnovers (SME) shall remain exempted. Companies which fail to implement the quota will have to explain the reasons for the failure and make proposals for the implementation to the respective national authorities. Under the draft bill sanctions may even include penalty payments and the exclusion from public tender proceedings at the utmost. Approximately 5,000 companies in the European Union would be affected. However, the proposed European directive still needs to pass the Council of the European Union. This adoption by the Council has failed so far due to the refusal by at least nine EU governments that form a blocking minority.

This is a Client Information of P+P Pöllath + Partners as of January 22, 2015.

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