Volkswagen Law
October 23, 2007
The European Commission brought the case to the European Court of Justice in Luxembourg, arguing that that the "Volkswagen law" violates EU rules on the free movement of capital. On Tuesday, the court voted in favor of the commission and will now order Germany to change the law.
Striking down the law allows Porsche to raise its 31-percent stake to a majority. Porsche has made no secret of its desire to expand beyond its traditional luxury sports car market.
Commenting on the ruling, the company said it had secured enough options to let it "significantly" raise its holding in VW, but did not say whether these would be enough to gain majority control.
"There is no decision on how we will proceed," Porsche spokesman Frank Gaube told Reuters news agency in Luxembourg.
"We will take the decision to the supervisory board and this will be a decision for [them]," he said.
The German government said it accepted the court's ruling. "We will start the legislative procedure immediately in order to make the changes," a spokesman for the German justice ministry told Reuters.
Tight state control
The "Volkswagen law" was introduced in 1960 as the then state-owned VW, which was founded in the wake of World War II, was being privatized. Originally, the state government of Lower Saxony and the federal government each held onto 20 percent of the shares (the federal government sold its stake in 1965).
The crux of the "Volkswagen law" is that regardless of the amount of capital it owns, a shareholder cannot hold more than 20 percent of the voting rights in the company, making a company takeover impossible.
The law also stipulates that Lower Saxony has the right to appoint two members to VW's supervisory board, allowing them to block the majority needed to adopt resolutions.
After Porsche, Lower Saxony is the second-biggest investor in VW, with 20.3 percent of the capital.
Porsche takeover expected
Porsche has long railed against the restriction on its voting rights.
"To have 31 percent of the capital but only 20 percent of the voting rights is clearly discrimination," said Porsche's chief executive Wendelin Wiedeking on the eve of the court decision.
Now that the court has ruled against the law, Lower Saxony has two choices. It could either withdraw from VW, or raise its stake by five percent to 25 percent. Under German corporate law, a 25-percent share gives a shareholder a blocking veto.
Tuesday's ruling is seen as a test case to establish the extent to which EU governments can protect companies they see as vital to their economy.
For years, the European Commission has fought to abolish such protectionist laws.
Similar action has either been taken or threatened by the European Commission against Spain over allegations it is protecting energy companies like Endesa SA, against Italy for blocking a takeover attempt of highways company Autostrade SpA, and against Poland for hindering Italy's UniCredit SpA from consolidating its grip over a local bank.