Brussels, 14 December 2005
Free movement of capital: Commission asks Portugal to submit its observations on special rights held by Portugal in Portugal Telecom
The European Commission has decided to send Portugal a formal request to submit its observations on the special rights held by the State/public entities in Portugal Telecom and established in the privatisation decree-laws and Articles of Association of the Company. The legal framework governing the privatisation of Portugal Telecom provided for privileged shares (A-shares), the majority of which were to be held by the State/public entities. Although the number of A-shares was reduced during the successive privatisation phases, the corresponding privileges, as defined in the Articles of Association of the Company, were maintained. These privileges include special power to appoint one third of the board and the chairman of the company and several veto powers on resolutions on the election of Directors and the audit board; decisions on profit distributions; capital increases; bond issues; opening of branches and changes in the registered office; changes in the Articles of Association; approval of holdings - by shareholders engaged in a competing activity - above 10% of the company's ordinary shares. The Commission is concerned that, in violation of EC Treaty rules (Article 56-Free movement of capital and Article 43-Right of Establishment), these special powers constitute an unjustified restriction on the free movement of capital and the right of establishment, in so far as they hinder both direct investment and portfolio investment. The Commission request is in the form of a letter of formal notice, the first stage in the infringement procedure laid down in Art 226 of the EC Treaty.
The privatisation process of Portugal Telecom
Decree-Law N° 44/95 (22/2/1995) governed the first phase of the privatisation of Portugal Telecom, with the sale of 27% of share capital. The Decree-Law provided for the possibility of introducing A-shares (with attached special rights) in the Articles of Association of the Company and imposed that "the majority of such shares shall be held by the State or by other public entities". A limit of 10% on participations by a single entity in the company was also foreseen in the Decree-Law.
The Articles of Association specified the privileges for the Portuguese State/public entities attached to the 47.5 million A-shares.
The Portuguese State abandoned its position as a majority shareholder at the third privatisation phase in late 1997 (Decree-Law 226-A/97 of 29/8/1997) and the privatisation process was completed with Decree Law 227-A/2000 of 9/9/2000 (5th privatisation phase). However, 500 A-shares (versus 1,666,484,550 ordinary shares) are provided for in the current Articles of Association of the Company (Article 4).
The majority of these A-shares should be held by the State/Public entities
(Article 5) and the special rights attached to this type of shares are defined
in Articles 14, 15 and 19. The Portuguese State/public entities are granted
special power to appoint one third of the board and the chairman of the company
and several veto powers are foreseen on resolutions on the election of Directors
and the audit board; decisions on profit distributions; capital increases; bond
issues; opening of branches and changes in the registered office; changes of the
Articles of Association. Of particular interest in the EU context is Article 9
of the Articles of Association foreseeing that "shareholders engaged in
competing activities may not hold more than 10 % of the company's ordinary
shares without having received permission from the general meeting". This
permission can be denied by a veto of a majority of A-shareholders.