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ECJ to Make Crucial Decision on Germany’s VW Law

Published: 12 December 2006
The European Court of Justice is opening the case on Germany’s highly controversial “VW Law”.

Global Insight Perspective



The ECJ is starting its hearing on the so-called VW Law, a piece of German corporate legislation that is being challenged by the European Commission.


The German government and state of Lower Saxony, which is VW's second-largest shareholder, are supporting the law, as they believe that the stock capital of such a major company as the VW Group has to be spread widely and not dominated by one shareholder. On the other hand, Porsche, VW's single largest shareholder, shares the Commission's view on the matter, but for different reasons.


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 European Court of Justice (ECJ) is starting proceedings in the case of the so-called ”Volkswagen (VW) Law”, a protective piece of German legislation that has been criticised by the European Commission for the past two years. If, as is largely expected, Europe's highest court eventually rules that the legislation has to be abolished, this would have significant implications for the balance of power at Europe's largest carmaker and the company's ongoing restructuring drive.

A Debatable Law...

The Commission's endeavours 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.

VW Takeover Law: The Details

The law that prevents VW from being acquired in a hostile takeover works as follows: it places a cap on voting rights in the company at 20%, irrespective of the number of shares owned in the company. The regional government of Lower Saxony, however, owns 21% of the company, meaning that it will always retain the right of veto in the company and can therefore block any decisions (such as takeover bids) that it does not support.

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.

...And Possibly Obsolete

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 departing 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. 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. The sports-car manufacturer has been waiting for the right time to make a move that would give it a blocking minority stake in VW. Should Porsche exercise its options, this would result in the sports-car manufacturer 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.

Outlook and Implications

From the Commission's perspective, the case is crucial, as it will create a precedent and warn other EU member states that protective trade barriers and anti-competitive measures will be consistently challenged. The case opens today and a final ruling can be expected in the second half of 2007, with a preliminary ruling possible in the first quarter of next year. Porsche's plans to increase its stake tie in with the potential abolition of the VW Law. As Wiedeking said in an interview with the Welt am Sonntag newspaper, "Given the low attendance at German annual meetings, there is not necessarily a need to hold 50% of the company to have control". For the German government and the state of Lower Saxony, which is VW's second-largest shareholder with a  20.8% stake, the VW Law and the state's representation on the company's supervisory board has been a ”social guarantee” for the region's largest employer.

Nevertheless, the arrival of Porsche in the VW Group's capital is seen by many as a subtle takeover move by the sports-car manufacturer, but in the event that the ECJ eventually decides to scrap the VW Law, then Porsche will have enough power to exert its influence over Europe's largest carmaker without having to pay a premium to acquire it. In addition, Porsche is predicting that its sales and profit growth will slow down over the next two years, in line with lower sales of its volume and profit driver, the Cayenne, and a stabilisation of the overall premium and luxury car market. Until the sector returns to a more favourable point in its cycle, Porsche's investment in VW will yield much-needed returns and keep the company in good stead before the next growth phase arrives in 2009 with the new Panamera.

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