VW Law May Face Axe
February 13, 2007
Advocate General Damaso Ruiz-Jarabo at the European Court of Justice in Luxembourg said Tuesday that the 47-year-old law should be struck down because it "restricts the free movement of capital."
Ruiz-Jarabo added that "the German legislation strengthens the position of the federal government and the state of Lower Saxony, preventing any intervention in the management of the firm."
VW law under fire
The European Commission, the EU's executive arm, took Germany to the European Court of Justice in March 2005 by claiming that the "Volkswagen Law" broke EU rules on the free movement of capital.
The Commission criticized, among other rules, the right of the federal government, which has sold all its VW holding, and the state of Lower Saxony, as long as it remains a shareholder, each to appoint two members to the board of Europe's biggest automaker.
Among its other targets, is a rule preventing any shareholder from enjoying more than 20 percent of the carmaker's voting rights,
no matter how many shares they own.
The European Commission wants to end the practice of governments holding "golden shares," which allow veto power in privitized companies.
"The commission believes that golden shares have no place in the internal market and if you look at the recent case law of the court of justice you see that it seems that the court is sharing this line," commission spokesman Oliver Drewe said in Brussels. "It is refining and restricting the use of golden shares at each and every occasion."
The German government created the Volkswagen Law in 1960, when the carmaker was privatized, to prevent a takeover. The federal government and Lower Saxony kept a 40 percent stake, and the remaining 60 percent was sold to private shareholders. The federal government has since sold its holding.
Move could benefit Porsche
In his opinion, which is not binding but is followed in eight out of 10 court decisions, Ruiz-Jarabo said when a country, through its public sector, influences a company it should respect ownership rules as enshrined in EU laws.
In the Volkswagen case he found that this requirement was not respected.
"The provisions of the German law tend to keep property in the hands of those who own it in the face of a hostile take-over bid," he said.
If the European Court of Justice were to follow Ruiz-Jarabo's advice, it would give Porsche AG, the largest shareholder, more control over Europe's largest carmaker.
Porsche, which holds a 27.4 percent stake, currently has the same voting rights as the state of Lower Saxony, the second-largest stakeholder with 20.5 percent.
"Porsche is now in pole position to engineer full control over VW,'' Stephen Pope, head of equity research at Cantor Fitzgerald in London told the Bloomberg news service. "Lower Saxony has to realize that it can only harm German jobs in the long run if it continues to try and obstruct corporate reform.''
But the ruling was criticized by a trade union spokesman as jeopardizing German jobs.
"It is astonishing that the Advocate General rates the interest of anonymous investors above the interest in preserving employees' jobs," said trade union head Jürgen Peters.