The European Commission has decided to refer the Federal Republic of Germany back to the EU Court of Justice for failing to fully comply with the Court's previous ruling on the anti-takeover ``Volkswagen law’’. In 2007, the Court of Justice ruled that Germany’s ``Volkswagen Law’’ restricted the free cross-border movement of capital through the intervention of the public sector. The Court found that capping the voting rights of every shareholder at 20 percent regardless of their shareholding violated the requirement that there be a correlation between shareholding and voting rights. The Court also held that provisions in the law conferring two seats each on the company’s supervisory board (equivalent to the board of directors in the US) for the German Federal Republic and the State of Lower Saxony, regardless of their shareholding, also constituted a restriction on the cross-border movement of capital. (European Commission v. Federal Republic of Germany, No. C-112/05).
The Volkswagen law was hammered out in 1960 with the participation of workers and trade unions that, in return for relinquishing their claim of ownership rights in the company, secured protection against any large shareholder gaining control. The legislation allows the federal government and Lower Saxony to each appoint two members of the supervisory board and gave them each a 20 percent stake.
Subsequent to the Court’s opinion, Germany enacted legislation abolishing the provisions providing for the representation of public authorities on the board and the 20 percent voting cap, noted the Commission, but the legislation did not modify the provision establishing a 20 percent blocking minority in favor of Lower Saxony. Further, no changes were foreseen to the VW Articles of Association, which contain majority voting requirements mirroring the VW law and which were considered as a State measure by the Court.
There is no room for piecemeal compliance with the Court’s judgment, said the Commission, since EU Member States are required to take all necessary measures to comply with the entirety of the judgment of the Court of Justice. Despite entreaties from the Commission, German authorities declined to make further changes to the law. The Commission has always taken the view that each of the three provisions in the Volkswagen law individually restricts the free movement of capital and, therefore, all of them, including the 20 percent blocking minority, need to be abolished.
The free movement of capital is at the heart of the EU Single Market, emphasized the Commission, and allows for open, integrated, and efficient markets. For citizens it means the ability to undertake a range of operations abroad, such as buying shares in non-domestic companies. For companies, it means the ability to invest in and own companies in other EU countries, and to play an active role in their management.
The Commission is aware that, in principle, German company law allows a company’s Articles of Association to derogate from the legal majority requirements and fix the blocking minority at 20 percent. But, the Commission emphasized that in this instance the 20 percent blocking minority was imposed on VW’s shareholders by federal legislation in order to procure for government authorities a blocking minority. In effect, the legislation enables the Land of Lower Saxony to block important decisions in VW on the basis of a 20 percent interest.
The Commission said that legislation allowing German public authorities to oppose important resolutions in VW on the basis of a lower level of investment than would be required under general company law is liable to deter direct investors from other Member States. It constitutes, as has been found by the Court to constitute, an unjustified restriction on the free movement of capital enshrined by Article 63 of the Treaty on the Functioning of the European Union..