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Brussels, 19th March 2003

Free movement of capital: Commission asks Germany to justify its Volkswagen law

The European Commission has decided to send a formal request to Germany to provide justification concerning certain provisions of the 1960 Volkswagen law (VW-law), as subsequently modified and reflected in the company's statutes. This state measure, based on a 1959 agreement between the Bund and the Land of Lower Saxony, de facto today reserves some special rights to the Land of Lower Saxony which with share voting rights of roughly 21% has over the past years traditionally been the biggest single shareholder of the German carmaker. The Commission is concerned that certain provisions of that law could act as a disincentive on investment from other Member States, in violation of EC Treaty rules on the free movement of capital (Article 56) and the right of establishment (Article 43). The Commission's request takes the form of a letter of formal notice, the first stage of infringement procedures under Article 226 of the EC Treaty. In the absence of a satisfactory reply within two months, the Commission may decide to issue a formal request to the German Government to amend the law in the form of a so-called 'reasoned opinion'.

The Commission is concerned that the following provisions of the VW-law (Gesetz über die Überführung der Anteilsrechte an der Volkswagenwerk Gesellschaft mit beschränkter Haftung in private Hand, i.e. Act on the transfer of shares in Volkswagenwerk GmbH to private partnership, in its version of 31.07.1970) may dissuade investors in other Member States from the acquisition of shares and capital investments in Volkswagen AG and are, as a result, liable to hinder the exercise of the free movement of capital and the freedom of establishment guaranteed by the EC Treaty:

  • a 20% voting cap, in combination with a 20% blocking minority

    In derogation from general German company law applicable to listed companies, any shareholder holding more than 20% of voting shares in VW may only cast a maximum of 20% of the votes in a shareholders' meeting.

    In combination with this 20% voting cap, a majority of more than 80% of shareholder votes is required for important decisions in the company.

    Both provisions are linked to a 1959 agreement between the Federal Government (Bund) and the Land of Lower Saxony, which in principle reserves 20% of VW shares to each of those two public actors and represents a public settlement contract having predefined the content of the subsequent VW-law.

    Though the Bund has in the meantime sold its stake in the company, the Commission is concerned that the interconnected functioning of the 20% blocking minority and the 20% voting cap, contained in an ad hoc state measure (the VW-law) in practice give a special right of veto concerning strategic decisions to Volkswagen 's biggest single shareholder, i.e. the Land of Lower Saxony, that currently holds roughly 21% of the voting shares.

  • mandatory representation of public authorities on the Supervisory Board

    The VW-law also provides that, for as long as the Federal Government and the Land of Lower Saxony own shares in the company, they should each have two seats on the Supervisory Board (consisting of 20 members, only half of which represent the shareholders, the other half representing VW employees). Consequently, by means of a state measure and in derogation from normal German company law, 4 out of the 10 members representing shareholders can be directly appointed by public authorities.

    Since the Bund has in the meantime disposed of all its shares, the Land of Lower Saxony is now de facto the only party entitled to delegate two members to the Supervisory Board.

    The Supervisory Board plays a major role in the company's strategic decision making, including, inter alia, the establishment and relocation of production facilities and investment decisions.

In expressing its concerns, the Commission takes account both of the ruling of the European Court of Justice of 23 May 2000 (Commission v Italy, case C-58/99), according to which, inter alia, a right to appoint members in the company's Board of Directors is liable to be contrary to the obligations of a Member State under Articles 43 and 56 of the Treaty, and of the Court's rulings of 4 June 2002 --Commission v France (C-483/99), Commission v Belgium (C-503/99) and Commission v Portugal (C-367/98) -, according to which legislation which is liable to dissuade investors in other Member States from capital investments may render the free movement of capital illusory, and thus constitute a restriction on movement of capital.

Furthermore, in its decision of 5 November 2002 ("Überseering", case C-208/00), the European Court of Justice has specified that as a general rule the acquisition of shares in a company incorporated and established in another Member State is covered by the Treaty provisions on the free movement of capital, and for cases in which the shareholding confers a definite influence over the company's decisions and allows the shareholders to determine its activities, it is the Treaty provisions on freedom of establishment which apply.

The Commission is consequently concerned that the above provisions of the VW-law could be incompatible with Community law both on the freedom of capital movement and on the right of establishment as guaranteed by Articles 56 and 43 of the Treaty respectively.

Recent general information on infringements concerning all Member States may be consulted at:

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