Volkswagen takeover protection law illegal, says EU judge

A German law protecting Volkswagen from hostile takeovers was declared illegal by European judges today.

The 47-year-old law restricts the free movement of capital and therefore breaches EU rules, said the European Court of Justice in Luxembourg.

The verdict against state control in a privatised industry is a victory for the European Commission, which launched legal action against the so-called “Volkswagen Law” in 2004.

Under the law, any shareholder in Europe’s biggest car maker cannot exercise more than 20% of the firm’s voting rights – regardless of their stock holding.

The move, adopted when VW was privatised, was designed to shield the company’s home area of Lower Saxony from the risk that a foreign takeover of the plant could affect politically-sensitive issues, such as employment levels, in the area.

Lower Saxony and the German Federal State were even given two seats each on VW’s key supervisory board.

But today’s ruling said any national measures likely to deter investment by limiting shareholders’ “lasting and direct economic links” with a company amounted to an illegal restriction on capital movements between EU countries.

The free movement of capital could be limited by national measures only if they could be justified by legitimate interests, said the judges.

But the Federal Republic of Germany had failed to offer justification, apart from “setting out general considerations concerning the need for protection against a large shareholder which might by itself dominate the company”.

There had been no explanation about why it was necessary for the Federal and State authorities to maintain an “irremovable” position in the capital of Volkswagen, or why the Volkswagen Law was appropriate to preserve the jobs generated by Volkswagen’s business, added the judgment.

Lower Saxony currently still owns a 20.8% stake in the firm, and fellow German carmaker Porsche, which owns a 27.4% share in Volkswagen, welcomed a ruling which could clear the way for a full Porsche takeover bid for VW.