Court scraps Germany’s ‘Volkswagen law’

Germany will lose its ‘golden shares’ in car manufacturer Volkswagen, following a ruling by the European Court of Justice which says that the 1960 ‘VW-Gesetz’ contradicts EU rules on the free movement of capital.

The disputed law was challenged by the Commission in 2005, on the grounds that it was against the free movement of capital and freedom of establishment. The law contained a number of provisions which were meant to guarantee the German federal government and the Land of Lower Saxony a lasting influence over Volkswagen, independently of the shares that they held. In particular, it stipulated that: 

• The federal and regional government were each entitled to send two representatives to Volkswagen’s supervisory board, provided that they held Volkswagen shares (the so-called ‘golden shares’);
• other shareholders could only exercise voting rights equivalent to 20% of the Volkswagen share, even if they held a higher proportion of that share, and;
• in the general assembly, resolutions could only be passed when they represented 80% of the shares – 5% more than foreseen under German law. 

The German government has sold its former 20% equity but is still present on the Volkswagen board, while Lower Saxony continues to hold 20.8% of the corporation’s shares. This means that, effectively, Lower Saxony could block all resolutions and exercise full control over Volkswagen, even though it owns only slightly more than a fifth of the company’s shares. 

The Court agreed with the Commission’s reasoning that the law restricts the free movement of capital, because it restricts the opportunity for investors to participate in the company. It went on to say that the ‘golden shares’ and the right to appoint representatives to the supervisory board were likely to deter investors from other member states because they allowed the authorities more influence than reflected in their investment. 

The Court stressed that member states’ governments do have a right to restrict the free movement of capital, but only if they demonstrate a legitimate interest, which the German government failed to do in this case. 

While the Court argued on grounds of the free movement of capital across member states’ borders, the most likely beneficiary of the ruling is Germany’s own Porsche, which has acquired a 31% stake in Volkswagen and is rumoured to be seeking control of the company. The manufacturer of luxury sports cars is seeking to acquire a majority in Volkswagen with a view to diversifying its range of products and thus bypass the EU’s manufacturer rules on CO2 emissions. 

In EU circles, the Court’s ruling has received attention also because of parallels to Austrian energy company OMV’s pending takeover bid for Hungary’s MOL (see EURACTIV, 27/09/07), which Hungarian authorities are trying to hamper using legislation along the lines of the VW law. 

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