New company act reduces role of board-level employee representatives

On 1 July 2006, Act IV on Business Associations came into effect in Hungary. The act has brought about several changes concerning the setting up and running of various types of businesses. A unique aspect of the new legislation is its introduction of the option of one-tier corporate governance; the act also introduces changes to employees’ mandatory representation in supervisory boards. The amendments underline the increasing signs of deregulation that are emerging both in the one-tier system and in board-level representation.

Following lengthy negotiations involving social dialogue and professional debate, the Hungarian parliament passed the 2006 Act IV on Business Associations; this act came into effect on 1 July 2006, replacing the old Act CXLIV of 1997. The new legislation has resulted in several minor changes, effectively reducing the bureaucracy related to the setting up and running of various forms of businesses typically chosen by small and medium-sized enterprises (SMEs). It also amends numerous regulations, for example, on the legal position of executives, on the rights of minority shareholders, on filing appeals to the courts concerning the decision of shareholders’ meetings, and on the protection of creditors. The following review is limited to analysing the changes affecting board-level employee representation only.

Introduction of one-tier system

As far as shareholder companies are concerned, Section 172 of the new act distinguishes between two types of company: a public limited company (nyilvánosan muködo részvénytársaság or ‘nyrt.’) and a private limited company (zártköruen muködo részvénytársaság or ‘zrt.’). By default, the law prescribes a two-tier corporate governance system with a separate board of executive officers and a supervisory board. However, Section 21 of the act provides for the option of a one-tier corporate governance system: accordingly, the company charter of a public limited company may contain provisions to combine management and supervisory functions in a single board of directors.

Under this ‘monistic’ system, there is no supervisory board, and the law requires the members of the single board of directors to be regarded as executive officers. The legal regulation of board-level representation in line with this monistic system is limited to a single paragraph prescribing that: ‘in the case of public limited companies controlled by the one-tier system, the procedures for exercising the rights of employees to supervise the company’s management shall be laid down in an agreement between the board of directors and the works council, in accordance with the articles of association.’ Under the one-tier corporate governance system, no minimum legal standard for employee representation applies.

Employee representation in supervisory board

The new law has not resulted in changes to the main features of board-level employee representation. In companies with at least 200 full-time employees, one third of the supervisory board must consist of employee representatives. These representatives are nominated by the company’s works council from among the employees; in addition, prior to nomination, the works council is required ‘to listen to the opinions’ of company trade unions on this issue. However, Section 38 of the new law is unusually worded, stating that: ‘If the annual average number of full-time employees employed by the business association is over 200, employees shall have the right to partake in the supervision of the company, unless there is an agreement between the works council and the management of the business association which states the contrary.’

The rest of the regulations have remained basically unchanged. If an employee representative is nominated, the shareholders’ meeting is obliged to appoint the works council nominee if they meet the legal criteria defined by the law. Although the term of office of the supervisory board members is not limited by the law, the shareholders’ meeting may decide on the length of their term. Only the nominating works council is in a position to propose the replacement of a current employee representative by another person. A new nomination of the works council is deemed necessary if the representative’s employment relationship is terminated due to any reason.

A new addition introduced by the legislation stipulates that the company’s articles of association are supposed to set a deadline for such a procedure. The rights and duties of employee delegates are almost the same as those of other non-employee supervisory board members elected by the shareholders. Only one extra entitlement applies to employee representatives: should the supervisory board fail to reach a consensus, the shareholders’ meeting must be informed about the minority position of the worker representatives. In turn, it is the employee representatives’ duty to inform the ‘community of employees’ through the works council about all issues, with the exception of those restricted by business confidentiality.

The only regulation of the new act that clearly aims to strengthen the position of employee representatives stipulates that: ‘employee representatives shall be entitled to the same protection as members of the works council in accordance with the Labour Code.’ At the same time, another paragraph actually weakens the rights of both employee representatives and non-employee members of the supervisory board: the provision contained in the old law that any supervisory board member is entitled to request the convening of an extraordinary board meeting, by specifying its purpose, is missing from the new act.

While the old law provided a detailed procedural regulation, currently the supervisory board is authorised to establish its own by-law, to be approved by the shareholders’ meeting. Another widely publicised feature of the regulation on the supervisory board is that it allows the use of information and communication technologies (ICT), such as videoconferencing, instead of requiring the individual to be present in person.

Tripartite consultation

Prior to the parliamentary debate, the bill was placed on the agenda of the National Interest Reconciliation Council (Országos Érdekegyezteto Tanács, OÉT), the highest-level tripartite consultative forum. At the meeting, the trade unions opposed the permissive rule contained in Section 38 of the act, which allows the works council and the management to conclude an agreement on employee representation in the supervisory board that deviates from mandatory rules. In relation to the delegation of employee representatives, the trade unions proposed that, in cases where neither a trade union nor a works council exists in a given company, at least 50% of the employees should elect their representatives directly.

At the plenary session of OÉT, government representatives accepted the trade unions’ proposal concerning Section 38. However, they insisted that the issue of direct elections would need further discussion and could finally be settled in a separate law; in contrast to the consensus on Section 38, this passage remained unchanged in the law passed by parliament.

It is worth noting that, at the plenary session, neither the trade unions nor the employer associations had any input with regard to the stipulations concerning the one-tier system and employee representation under the monistic corporate governance structure.

Commentary

Although Hungarian company law has followed the logic of relevant German legislation since 1988, the entitlements of the Hungarian supervisory boards are rather weak. For example, they have control over managers’ actions, they act on behalf of the shareholders and they usually only hold meetings on an occasional basis. It is up to the shareholders’ meeting to decide whether, in extraordinary circumstances, it extends the authorisation of the supervisory board.

The appointment procedure and the everyday functioning of employee representatives are in line with the Hungarian dualistic system of workplace industrial relations (HU0401106F). In practice, personnel overlaps prevail, not only between trade union leadership and works councils, but also between board members and other channels of employee representation. On the other hand, if neither a union nor a works council exists in a company, this means that nobody is present to enforce the law effectively. Thus, board-level representation in Hungary is not considered the key element of Hungarian company-level industrial relations; in fact, many consider that its relevance amounts to nothing more than a source of additional income for local union leaders and works council members. At best, board-level representation can be viewed as an additional channel of representation, which may support the functioning of company trade unions and works councils.

Contrary to some of its previous drafts, the current legislation did not, in the end, make board representation voluntary; moreover, the major regulations on employee representation remained intact. However, it appears that a form of deregulation is starting to emerge both in the one-tier system and in the mandatory board-level representation. Instead of prescribing detailed procedures, the general trend in the legislation seems to be in relation to the company’s own articles of association; in other words, the shareholders’ meeting is increasingly in the position to establish – or in the case of a supervisory board, to approve – rules, deadlines and ways of implementing the law. Another sign of deregulation is visible in the fact that, instead of giving concrete regulations, the act relies on agreements in which – as in the case of the supervisory board – employee representatives may even relinquish their mandatory rights voluntarily.

In the specific case of monistic corporate governance, the wording of the act suggests that the parties may conclude an agreement which completely forecloses employee board-level representation. Indeed, the vague language of the Hungarian company law is surprisingly inadequate. By way of contrast, in line with the relevant EU rulings (Council Directive 2001/86/EC and Council Regulation 2003/1435/EC), the Hungarian legislation had produced relatively specific and detailed regulations concerning employee representation in a European company (SE) and in a European cooperative society (SCE).

Trade unions were too weak to successfully fight the abovementioned amendments to company law, and apparently were not even aware of the problems concerning the regulation of employee representation in the one-tier system.

László Neumann, Institute of Political Science, Hungarian Academy of Sciences

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