Brussels, 30th March 2004
Free movement of capital: Commission asks Germany to amend the Volkswagen law
The European Commission has decided to send a formal request to Germany to amend 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, confers special rights on shareholders which have 20% of voting rights. Additionally, the law confers on the Bund and the Land a specific right of mandatory representation in 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 argues 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. The infringement procedure was initiated by sending a letter of formal notice in March 2003 and the reply by the German authorities has not changed the Commission's view that certain provisions of that law 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 reasoned opinion, the second stage of infringement procedures under Article 226 of the EC Treaty. Should the German authorities not take satisfactory steps to remedy the infringement of Community law within two months of receiving the reasoned opinion, the Commission may decide to refer the case to the European Court of Justice.
The infringement procedure concerns in particular 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, Gesetz über die Überführung der Anteilsrechte an der Volkswagenwerk Gesellschaft mit beschränkter Haftung in private Hand) that 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. These are a 20% voting cap in combination with a 20% blocking minority, and mandatory representation of public authorities on the VW board.
20% voting cap, in combination with a 20% blocking minority
In derogation from general German company law, 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, notwithstanding the number of shares owned, a majority of more than 80% of shareholder votes is required for important decisions in the company, meaning that any shareholder who holds 20% of voting rights enjoys a veto over company decisions.
The Commission is concerned that these provisions may in practice give a special blocking minority right to VW's biggest single shareholder, the Land of Lower Saxony, whose shareholding has historically been and continues to be the equivalent of roughly 20% of the voting shares. Both of these restrictions have been imposed by the State acting in its capacity as a public authority rather than as the result of the normal operation of company law. They therefore fall under the scope of application of Article 56 EC (see ruling of the European Court of Justice of 13.05.2003 in case C-98/01, British Airport Authority, point 48).
The 20% blocking minority and the 20% voting cap result in the VW-law granting special powers to any shareholder having just 20% of the voting rights (currently, the Land) as compared to all other - present or potential - shareholders in Volkswagen. Such special powers are liable to dissuade potential investors from other Member States and thus constitute a restriction on cross-border direct investment within the EU in violation of EU Treaty rules on the free movement of capital and the right of establishment (Articles 56 and 43 respectively).
Mandatory representation of public authorities on the board
The VW-law also provides that, for as long as the Federal Government (Bund) 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, half of which represent the shareholders). Consequently, by means of a state measure and, additionally, in derogation from normal German company law, 4 members out of the 10 members representing shareholders can be directly appointed by public authorities.
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. Since the Bund has in the meantime disposed of all its shares, the Land of Lower Saxony is now the only party entitled to delegate two members to the Supervisory Board. However, since this ad-hoc provision vests both the Bund and the Land with a representation right which is not proportional to their degree of participation in the company's capital, the Bund may easily get its special right back by acquiring just two VW shares.
The Commission considers that the VW-law's provisions concerning the mandatory representation on the board are liable to dissuade investors in other Member States from the acquisition of shares and capital investments in Volkswagen AG and consequently hinder the exercise of the free movement of capital and freedom of establishment guaranteed by the Treaty.
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 of Justice 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 movement of capital (in breach of Article 56 EC).
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 EC Treaty provisions on freedom of establishment which apply (Article 43).
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.
Recent information on infringement proceedings against Member States can be found at the following website: