Tuesday, October 22, 2013

Advocate General Advises Court of Justice to Reject European Commission Action against Germany over Volkswagen Anti-Takeover Law

The Advocate General of the E.U. Court of Justice issued an opinion urging the Court to dismiss the European Commission’s action against the Federal Republic of Germany to impose penalties for failure to fully comply with the Court's earlier ruling on the amti-takeover Volkswagen law. In his opinion, Nils Wahl found that German federal legislation enacted after the Court’s ruling fully complied  with that ruling. The Advocate General’s Opinion, while persuasive, is not binding on the Court of Justice. It is the role of the Advocates General to propose to the Court, in complete independence, a legal solution to the cases for which they are responsible. The Judges of the Court are now beginning their deliberations in this case. Judgment will be given at a later date.

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.

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).

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. But the Commission contends that 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.

The Advocate General shares the German government’s reading of the 2007 judgment that the Court found two infringements: the first in relation to the provision on the appointing rights and the second in relation to the provisions on the capping of voting rights and on the blocking minority combined. Therefore, reasoned the Advocate General, by repealing the provision constituting the first infringement and by repealing one of the two provisions constituting the second infringement, Germany has complied fully with the 2007 judgment.
In the Advocate General’s view, the use of the expression in conjunction with in the operative part of the 2007 judgment excludes, on its own, the interpretation proposed by the Commission. In addition, he found that the grounds of the 2007 judgment also fail to confirm the view taken by the Commission. In this respect, he emphasized that the Court, taking into account notably that the Land of Lower Saxony retained an interest in the capital of Volkswagen of approximately 20 %, considered it appropriate to analyze the provisions on the capping of voting rights and the blocking minority together and explicitly referred to the cumulative adverse effects of the two provisions on investors’ interest in acquiring stakes in Volkswagen.

The Advocate General further pointed out that the purpose of the present proceedings is not to determine whether the provision on the blocking minority, considered on its own, infringes EU law, but only whether Germany has complied with the 2007 judgment. With respect to additional complaints put forward by the Commission in the present action, namely that also the Articles of the Association of Volkswagen should have been amended, the Advocate General urged the Court to reject those complaints as inadmissible, because the Articles of Association were not scrutinized by the Court in the 2007 judgment.