European Commission challenges legality of German Volkswagen law, March 2003

The European Commission launched a legal challenge against Germany on 19 March 2003 over the Member State's 'Volkswagen law', which the European Commission argues protects Europe's largest car manufacturer from hostile or foreign takeovers.

Amongst its provisions, the 1960 law stipulates that:

• No shareholder may possess more than 20% of the votes in the general assembly regardless of the number of shares owned

• Provides the Land of Lower Saxony, the largest stakeholder, with two seats on Volkswagen's Supervisory Board which plays a major role in the company's strategic decision making

• Thereby provides the state of Lower Saxony with the power to veto any deal that involves selling the company

The European Commission argues that these provisions go against Community law because they may act as a disincentive for other European companies seeking to invest, thereby hindering the exercise of the free movement of capital (Article 56) and the right of establishment (Article 43) guaranteed by the EC treaty. On this basis, the European Commission has sent a letter of formal notice to the German government asking it to justify certain provisions of the Volkswagen law. If the European Commission deems not to have received a satisfactory reply within two months then it may decide to issue a formal request to the German government to amend the law in the form of a so-called 'reasoned opinion'. If the European Commission and Lower Saxony fail to resolve the dispute by these means then the case could go to the European Court of Justice - a process which would take years. However, the European Commission said on 19 March 2003 that it would drop the legal action if Germany made substantial changes to the law although it declined to specify what these would need to be.

The launch of legal action had been expected earlier in March 2003 but the Commissioners could not agree how to proceed. At a meeting of the European Commission on 5 March 2003 Frits Bolkestein, the European Commissioner with responsibility for the EU's internal market, failed to secure support for the legal challenge with Günter Verheugen, Michaele Schreyer and Romano Prodi all voting against it.

The latest move is likely to trigger a fight between the European Commission and the German government, which has said it will defend the Volkswagen law. In a statement issued by the German government on 19 March 2003, it said:

'The Federal Government is convinced of the compatibility of the Volkswagen law with European right'.

Gerhard Schröder, the German Chancellor, is likely to be particularly angered by the European Commission's since he has already criticised the EU executive for repeatedly attacking Germany 's industrial base. In his fight for re-election in 2002, Schröder promised to protect the Volkswagen law.

The European Commission's challenge to the Volkswagen law is part of a wider crackdown on governments' attempts to protect domestic companies from competition and takeovers, so-called 'golden shares' as the Commission seeks to formalise an EU-wide takeover code. It has recently launched formal proceedings against Italy, the Netherlands and Denmark on 'golden shares' cases after it won a case in the European Court of Justice in June 2002 against France and Portugal.

Links:
European Commission:
	19.03.03:	Press Release: Free movement of capital: Commission asks Germany to justify its Volkswagen law [IP/03/410]
The German Federal Government:
	19.03.03:	Lack of understanding over European Union procedures against Volkswagen law [in German] You can use Altavista Babel Fish Translation to translate the webpage
BBC News Online:
	19.03.03:	EU challenges VW takeover law
	04.06.02:	EU court boosts foreign mergers
European Sources Online: Financial Times:
	19.03.03:	Germany and Brussels in spat on Volkswagen protection
	06.03.03:	Brussels delays moves to act against VW
	05.03.03:	Germany faces EU move on VW law
	04.10.02:	Commission nearer action on VW law
European Sources Online: European Voice
	06.03.03:	Commission performs emergency stop over VW action
	03.10.02:	Commission planning challenge against VW law 'before Christmas'
European Sources Online: In Focus
	European Court of Justice rules on 'golden shares' in Portugal, France and Belgium, June 2002

Helen Bower

Compiled: Thursday, 20 March 2003

The European Commission launched a legal challenge against Germany on 19 March 2003 over the Member State's 'Volkswagen law', which the European Commission argues protects the car manufacturer from hostile or foreign takeovers.