Global Insight Perspective | |
Significance | The state of Lower Saxony, VW's second-largest shareholder, has accepted Porsche's proposition to allow the re-election of Ferdinand Piëch as chairman of the supervisory board. |
Implications | Piëch would become Porsche's third representative on the board of VW, and the state of Lower Saxony would keep its two seats. |
Outlook | Since Piëch has the unconditional backing of the 10 labour representatives, his re-election as chairman of the board would guarantee that Porsche meets no resistance at board level. This could also signal an end to the ongoing board dispute between Porsche and the state of Lower Saxony. |
The pieces are falling into place to allow Porsche to take effective control of the Volkswagen (VW) Group. The German sports-car manufacturer has already accumulated a 27.5% stake in Europe's largest carmaker, and is seeking to obtain a third seat on the company's influential supervisory board. According to various media reports, the state of Lower Saxony, VW's second-largest shareholder, has accepted Porsche's proposition to allow the re-election of Ferdinand Piëch as chairman of the supervisory board. Piëch would become Porsche's third representative on the board of VW, and the state of Lower Saxony would keep its two seats, as guaranteed by the “VW law”.
Earlier this year, amid growing concerns over a possible conflict of interests arising from Ferdinand Piëch's dual role as chairman of the supervisory board of the VW Group and a large shareholder at Porsche, VW's two largest shareholders agreed that Piëch should leave the board when his contract runs out in 2007, to be replaced by a director from outside Porsche and Lower Saxony's pool of influence. In the meantime, Porsche has increased its stake in VW to 27.5%, received permission to raise its holding to 29.9% (just below the 30% level that would force it to make a full takeover offer under German law), and proposed to expand its share capital by 50% to raise about 9 billion euro (US$11.8 billion). On the other hand, a preliminary statement from the European Court of Justice’s (ECJ) advocate-general confirmed that the so-called “VW law” was against the European Union’s (EU) regulations and should therefore be abolished. Although the court is not bound by recommendations made by the advocate-general, his opinion generally forms the basis for the final ruling, which could be issued in the next four to six months.
At the heart of the problem is a 40-year-old German law that stipulates that shareholders’ voting rights are limited to 20%, regardless of the number of shares an investor owns, and that an 80% majority is required for key decisions. In practice, this grants a blocking minority vote to leading shareholders such as Porsche and the state of Lower Saxony, and also guarantees them several seats on VW's supervisory board.
Outlook and Implications
In the very likely event that the “VW law” is abolished, Porsche will gain effective control of the VW Group without having to make a full takeover offer. The state of Lower Saxony will not oppose the sports-car manufacturer's plan to gain a dominant position on VW's supervisory board, in exchange for being allowed to maintain its two-seat representation. Since Piëch has the unconditional backing of the 10 labour representatives, his re-election as chairman of the board would guarantee that Porsche meets no resistance at the board level. This could also signal an end to the ongoing board dispute between Porsche and the state of Lower Saxony.