The European Court of Justice has said that Germany’s so-called Volkswagen Law, that protects the automaker from takeover by limiting investors’ voting rights, violates European Union rules.

The advocate general, an adviser to the European Court of Justice, said yesterday the law hindered the free flow of capital and could not be justified.

An action against the Federal Republic of Germany was brought before the Court of Justice of the European Communities on 4 March 2005 by the Commission of the European Communities, claiming that the Volkswagen Law is an infringement of the free movement of capital.

Specifically, the Commission criticises:

The right of the federal government — notwithstanding that it has sold its entire holding — and of the Land of Lower Saxony, as long as they are shareholders, to each appoint two members of the supervisory board of the company;

The limitation of voting rights to 20% of the share capital where any shareholder exceeds that percentage; and

The increase to more than 80% of the share capital represented for the adoption of resolutions of the general shareholders’ meeting.

The advocate general’s opinion is not binding on the court.  It is the role of the advocates general to propose to the court, in complete independence, a legal solution to the cases for which they are responsible.  The judges of the Court of Justice are now beginning their deliberations in this case. Judgment will be given at a later date.

A decision to remove the law would pave the way for Porsche to take over Volkswagen. Indeed, Porsche CEO Wendelin Wiedeking, is reported as saying in the past that, with a change in the law, Porsche could essentially have control of Volkswagen. This is because attendance at German annual general meetings tends to be so poor, it is not necessary to own 50% of the company to have control. As the largest shareholder, with a corresponding proportion of the voting rights, Porsche would essentially have control.

The state of Lower Saxony is Volkswagen’s second largest shareholder with a 20.8% stake. It maintains that stake for political reasons because Volkswagen is such a large employer in the state. It has been reported that if its influence were reduced it would likely sell its stake, possibly to Porsche.

Bernd Osterloh, head of the Volkswagen workers council, also supports the law because it ensures that a variety of interests are represented equally. He appears to be hoping that the state of Lower Saxony will retain a stake and continue to exert its 20.8% influence on the company, and represent Volkswagen workers.