EU Court Rules "Volkswagen Law" Illegal

The European Court of Justice (ECJ) yesterday ruled illegal a German law that shields Volkswagen (VW) from foreign takeovers, according to The Associated Press (AP). "The Volkswagen law limits the free movement of capital," a court press statement said. It overturned rules capping a shareholder's voting rights at 20% and requiring a majority of 80% for "important decisions." It has also rejected the right of the German federal government and the State of Lower Saxony to each appoint two members of the board as long as they are shareholders of the company. "The court declares that these questionable conditions could have a deterrent effect [on bids]," the statement said.

Outlook and Implications

The ruling had been eagerly anticipated on two levels—its implications for future ownership of Europe's largest auto manufacturer, and the huge boost a decision against the law would give the European Commission's (EC) crackdown on "golden shares". The VW law was introduced to guard against takeover when the present company was transferred to German control by the British after the Second World War. It prevents any one shareholder from exercising more than 20% of the voting rights and gives both the federal government and the State of Lower Saxony the right to two seats on VW's supervisory board. This virtually shields Europe's largest car manufacturer by sales from a takeover. The ruling on the decades-old VW law has been watched as a test case to establish the extent to which European Union (EU) governments can protect companies they see as vital to their economy. German politicians and labour unions claim the law is needed to protect local jobs. But the EC took Germany to court in 2005, saying it violates the EU's single-market principles. An adviser to the ECJ said in February that the VW Law hindered the free flow of capital in the 27-nation EU by capping voting rights and limiting board seats. The court typically backs its advisers in most cases.

Previously, VW has resisted calls for a change in the law, as has IG Metall, the powerful labour union, whose chairman, Jürgen Peters said: "The Volkswagen law has proved its value because it has contributed to the well-being of the company and its employees." When Porsche started to build a stake in VW in 2005, an understanding with the major shareholder, the State of Lower Saxony, seemed to guarantee that the company would stay in German hands. But now Porsche wants direct control. In an interview with The Sunday Times, Porsche CEO Wendelin Wiedeking said that Porsche was eagerly awaiting the court's decision on the law.

VW has become Europe's biggest carmaker after having emerged from the Second World War, with brands from the more affordable SEAT and Skoda to the upscale Audi and the stratospherically priced Lamborghini. The EC argued that the law goes against EU rules that guarantee the right to do business anywhere in the 27-nation bloc, and that "golden shares" allowing governments to protect companies have no place in the shared European market.