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The German government has invoked a controversial law to prevent VW from passing into foreign hands, which could incur EU legal action. However, the dispute may well turn out to be purely theoretical as none of VW’s rivals look to be in a strong enough position to buy it.

Volkswagen (VW) has struggled with falling profits and share prices this year due to unfavourable exchange rate conditions. On top of this, falling demand and an aging portfolio of vehicles means that VW has seen its position weaken in the market and the company has become vulnerable to a takeover.

Its problems, however, are far from unique and in the current economic climate few rival players are in any position to take advantage of the situation. Nevertheless, a German law has been enacted which enables the government of Lower Saxony, which holds 20% of VW shares, to cap other shareholder voting rights at 20%, thus ensuring that it has the final say in shareholder decision making and the power to vote down any attempt to transfer control of the company to foreign investors.

This regulation allows the German authorities to dominate internal decision making over VW’s ownership and to prevent any change in ownership that may affect jobs within the company and, in turn, the Germany economy as a whole.

However, such regulation would seem to directly conflict with the EU’s over-arching directives on competition and the free flow of capital between member states. These directives are designed to increase competition and cross-border investment with regard to mergers and acquisitions.

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The issue has brought about direct confrontation, with the German government holding its stance on the matter and the EU investigating the possibilities for legal action. If such legal proceedings occur, they would have profound ramifications for the European car industry. If successful, this would allow further merger activity and raise the possibility of a further removal of manufacturers from their national origins.

However, the issue may turn out to be little more than an exercise in legal theory. With the industry in its current slump, little takeover activity is expected for VW, as none of its rivals seem to be in a position to afford the asking price.

SOURCE: DATAMONITOR COMMENTWIRE (c) 2003 Datamonitor. All rights reserved. Republication or redistribution, including by framing or similar means, is expressly prohibited without prior written consent. Datamonitor shall not be liable for errors or delays in the content, or for any actions taken in reliance thereon.