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Brussels, 13th October 2004

Free movement of capital: Commission takes Germany to the Court of Justice on Volkswagen law

The European Commission has decided to take Germany to the European Court of Justice with respect to certain provisions of a 1960 law privatising Volkswagen (VW law). This state measure, based on a 1959 agreement between the Bund (federal government) and the Land of Lower Saxony, prevents any shareholder from acquiring more than 20% of voting rights and confers a special blocking minority right on any shareholder which has20% of voting rights. Additionally, the law confers on the Bund and the Land a specific right of mandatory representation on the company's Supervisory Board, irrespective of the number of shares they hold. Traditionally, both the Bund and the Land held roughly 20% voting rights in VW, whereas nowadays the Land is its main shareholder, with roughly 20% voting rights and 2 mandatory members of the board. The Commission considers that these provisions of the VW law make it substantially less attractive for other EU investors to acquire the company's shares with a view to participating effectively in management decisions or controlling it, and so are contrary to EC Treaty rules on the free movement of capital (Article 56) and the right of establishment (Article 43).

The Commission’s decision concerns those aspects of the VW-law (Act on the transfer of shares in Volkswagenwerk GmbH to private partnership in its version of 31.07.1970) that may dissuade investors in other Member States from the acquisition of shares and capital investments in VWAG and so hinder the exercise of the free movement of capital and the freedom of establishment guaranteed by the EC Treaty. These are a 20% voting cap, a 20% blocking minority and mandatory representation of public authorities on the VW board.

The German authorities in their reply to the Commission’s reasoned opinion sent in March 2004 (see IP/04/400) refused to amend the Volkswagen law as requested. The Commission considers Germany’s arguments in defence of the VW-law to be unsatisfactory in the light of the relevant Court of Justice case law.

In its rulings of 4 June 2002 in Commission v France (C-483/99), Commission v Belgium (C-503/99) and Commission v Portugal (C-367/98), the Court concluded that 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 the free movement of capital foreseen under Article 56 of the EC Treaty. The Court also established that economic grounds cannot justify obstacles prohibited by the Treaty (see ruling of the Court of 4 June 2002, Commission v Portugal (C-367/98)).

In its decision of 5 November 2002 ("Überseering", case C-208/00), the Court has specified that as a general rule the acquisition of shares in a company incorporated and established in another Member State is covered by Treaty rules on the free movement of capital, and that the EC Treaty provisions on freedom of establishment apply (Article 43) in cases where the shareholding confers a definite influence over the company's decisions and allows shareholders to determine its activities.

The Commission consequently takes the view that the above provisions of the VW law are incompatible with Community law on the freedom of capital movement and the right of establishment guaranteed by Articles 56 and 43 of the Treaty respectively.

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