Volkswagen Law Overturned by EU highest court over German objections

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Aug 14, 2000
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Businessweek

EU court overturns 'Volkswagen law'

By MATT MOORE
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FRANKFURT, Germany

The European Union's highest court struck down a German law shielding Volkswagen AG from hostile takeovers, clearing the way for Porsche AG to increase its influence -- and possibly even take control -- at Europe's biggest automaker.

The decision Tuesday is expected to have ramifications across Europe, where many governments have tried to protect companies they see as vital to their economies from takeovers, particularly foreign ones.

German politicians and labor unions had argued that the law was needed to protect local jobs, but the European Court of Justice said the measure was illegal and limited "the free movement of capital" that is a tenet of the EU.

The ruling is a triumph for the European Commission, which has fought several battles against European governments and their "golden shares" in critical companies.

The court ruled that the "VW law" discouraged foreign investors from taking a stake in Volkswagen, because the German federal government and the region of Lower Saxony -- a major shareholder -- are able "to exercise considerable influence" over the company.

"This situation is liable to deter direct investors from other member states," the court said in a statement.

The law caps a shareholder's voting rights at 20 percent, whatever the size of its holding.

In its ruling, the court also rejected the right of both the German federal government and Lower Saxony, which holds 20.36 percent of Volkswagen, to appoint two members of the board as long as they are shareholders of the company.

For Porsche, which has built up a 31 percent stake in Volkswagen in recent years in anticipation that the VW law would be struck down, the ruling gives it carte blanche to increase its holding.

Porsche Chief Executive Wendelin Wiedeking said the company was "naturally very interested in being able to fully exert our voting rights" in Volkswagen. However, he did not refer to the possibility of a takeover -- which many analysts expect.

Between them, Porsche and Lower Saxony already hold more than 50 percent of Volkswagen -- meaning the door already is closed for any would-be foreign suitors.

After the announcement, Porsche shares soared 4.7 percent to euro1,715 (US$2,429.47) in Frankfurt while Volkswagen gained 2.3 percent to euro184.50 (US$261.36).

The court said Germany did not explain why it needed to protect workers by keeping "a strengthened and irremovable" stake in Volkswagen. It also rejected German government arguments that its special position protected minority shareholders.

Lower Saxony's conservative governor, Christian Wulff, said the state government accepted the decision. He said Lower Saxony would stand by its stake in Volkswagen and that its aim was "for VW to be a successful company with high sales and satisfied employees with secure jobs, particularly at sites in Lower Saxony."

"The state government wants to ensure this along with the other major shareholder, Porsche," Wulff said.

European Union regulators took Germany to court in 2005 over the law, taking their cue from rights enshrined in the EU's founding treaty that proclaim basic economic freedoms such as the right to do business anywhere in the 27-nation bloc.

That right is blocked if governments interfere with companies, the EU executive said.

It has since lined up or threatened cases against Spain over allegations it is protecting energy companies like Endesa SA, 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.

Volkswagen -- German for "people's car" -- is one Germany's best-known companies. From the ashes of World War II, it has become Europe's largest automaker, with brands from the more affordable Seat and Skoda to the upscale Audi and the speedsters hand-built by Lamborghini.

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AP Business Writer Aoife White reported from Brussels, Belgium.

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