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Brussels, 4 April 2006

Free movement of capital: Commission asks Portugal to abandon the special rights held in Portugal Telecom

The European Commission has sent Portugal a formal request to abandon 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 infringement procedure was initiated by a letter of formal notice in December 2005 (IP/05/1594). Having analysed the reply from the Portuguese authorities, the Commission still considers that the special powers act as a disincentive to investment from other Member States in violation of EC Treaty rules. 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 Portuguese authorities not take satisfactory steps to remedy the infringement of EU law within two months of receiving the reasoned opinion, the Commission may decide to refer the case to the European Court of Justice.

Legal basis of the infringement procedure

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 powers 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 considers 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 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 required 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.

After a second phase in 1996, 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 by 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 are to 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. Of particular interest in the EU context is Article 9 of the Articles of Association providing 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.
The latest information on infringement proceedings concerning all Member States is available at:

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