European Court of Justice Advocate Finds Against German Anti-Takeover Law

In an eagerly anticipated case, the Advocate General of the European Court of Justice has opined that Germany’s anti-takeover ``Volkswagen Law’’ restricts the free movement of capital through the intervention of the public sector. In an action brought by the European Commission against the Federal Republic of Germany, the Advocate General found that the requirement of respect for the system of property ownership enshrined in the EC Treaty was not respected since provisions of the German law tend to keep property in the hands of those who own it in the face of a hostile takeover bid. Thus, the Advocate General proposed that the Court of Justice find against Germany. Commission of the European Communities v Federal Republic of Germany. Case C-112/05.

The legislation allows the federal government and the Land of Lower Saxony to each appoint two members of the supervisory board of the company (equivalent to the board of directors in the US).. It also limits voting rights to 20 per cent of the share capital where any shareholder exceeds that percentage. Further, the law increases to more than 80 per cent of the share capital represented for the adoption of resolutions of the general shareholders meeting.

It is interesting to note that, regarding the justification for restrictions on the free movement of capital based on the legislation’s objectives in terms of social and economic policy, the Advocate General considers that the German Government’s approach is too broad and too far removed from reality and is not based on overriding reasons relating to the public interest.

While the Advocate General’s opinion is not binding on the Court, it has been reported that the Court usually agrees with such opinions. The role of the Advocates General to propose to the Court a legal solution to the cases for which they are responsible. The Court of Justice is now beginning its deliberations in this case. Judgment will be given at a later date.

The Advocate General believes that allowing the government to appoint four members of the supervisory board dissuades those wishing to acquire a significant number of shares in the company. As regards the blocking minority and the limitation of voting rights, the Advocate General pointed out that the reduction of the voting rights to 20 per cent coincides with the percentage of shares held by the federal government and the Land of Lower Saxony at the time the law was passed. The Advocate General takes the view that, in those circumstances, anyone wishing to acquire a sufficient number of shares in the company to sit on the management bodies would have serious doubts about acquiring more than one-fifth of the capital because they would have no voting rights above that ceiling.

Moreover, even if they did succeed in mobilizing every small shareholder, there would be no real possibility of achieving any change with more than four-fifths of the company capital in the shareholders’ meeting because the federal government and the Land could block it with their minority holding. Thus, the national legislation strengthens the position of the federal government and the Land, preventing any intervention in the management of the company.