Global Insight Perspective | |
Significance | In the view of the Advocate General, the VW Law violates the EU principle of the free flow of capital and should be abolished. |
Implications | Although the court is not bound by recommendations made by the Advocate General, his opinion generally forms the basis for the final ruling which can be issued in the next four to six months. |
Outlook | A final decision on the matter can be expected in the second half of 2007, and in the very likely event that Europe's highest court eventually rules that the legislation has to be abolished, Porsche would gain considerable influence over Europe's largest carmaker, which is also a key and traditional industrial partner. |
The legal action taken by the European Commission (EC) against Germany's "Golden Share" law has taken a decisive turn after Ruiz-Jarabo Colomer, the Advocate General for the European Court of Justice (ECJ), said in a non-binding preliminary statement that the so-called Volkswagen (VW) Law was clearly shielding the automaker from hostile takeovers and as such was a clear violation of the right to a free flow of capital. In this context the Advocate General proposes that the German law 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 can be issued in the next four to six months.
The Commission's endeavour to overturn the German law shielding VW from hostile takeovers culminated in October 2004 when it finally decided to take the matter to the ECJ, continuing its long fight against trade barriers and other protective measures within the European Union (EU). Under the influence of former European internal market commissioner Frits Bolkestein, the Commission has challenged the German law several times in the past as, in his view, it infringes the EU's fundamental principle of free circulation of capital. In Brussels' view, the law hinders investment in the German carmaker from other EU member states and gives the German government and the State of Lower Saxony the right to appoint members of the company's supervisory board.
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
Although the VW Law has benefited from the continued support of the German government and State of Lower Saxony, Porsche chief executive Wendelin Wiedeking has often said that the legislation is superfluous, while VW's former chief executive Bernd Pischetsrieder repeatedly said that in practice the VW Law was obsolete since it could not prevent anyone from taking over the company. In the view of the State of Lower Saxony and German government, the VW Law was meant to protect minority shareholders, such as workers, and was not a government-imposed measure. The position of the Advocate General clearly rejects this view. In a statement, the Advocate General's office explained "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." If, as expected, the court follows the recommendation of the Advocate General, the final ruling on the VW Law will have a crucial impact on the carmaker's shareholding structure and future balance of power.
Porsche has built a 27.4% stake in VW and has received approval from its supervisory board to potentially increase its holding to 29.9%, just below the 30% level that would force it to make a full takeover offer under German law. Last month the sports-car manufacturer said that it was preparing to increase its share capital by 50% by issuing up to 8.75 million additional common and preferred shares. This capital increase could generate about 9 billion euro based on the current share price, which will provide sufficient capital for potential acquisitions. Should Porsche exercise its options, this would result in it gaining a veto right and potentially allow the company to block any important decisions at VW such as plant closures, capital increases or mergers and acquisitions, while the State of Lower Saxony would lose its influence over VW.