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Brussels, 31 January 2008

Free movement of capital: Commission refers Portugal to the European Court of Justice over special rights held by the State/public entities in Portugal Telecom

The European Commission has decided to refer Portugal to the European Court of Justice as it considers that the special rights held by the State in Portugal Telecom discourage investment from other Member States in violation of EC Treaty rules.

In the privatisation of Portugal Telecom, the State and other public entities were allocated privileged shares (A-shares). Although the number of A-shares was reduced over the successive privatisation phases, their privileges, as defined in the Articles of Association of Portugal Telecom, were maintained. These privileges include special powers to appoint one third of the board and the chairman of the Company, as well as veto powers on the election of Directors and the audit board. They also include other important corporate decisions such as distributions of profits; capital increases; bond issues; opening of branches and changes in the registered office; changes in the Articles of Association; and the approval of the acquisition of holdings above 10% of the company's ordinary shares by shareholders engaged in a competing activity. The Commission considers that, in violation of EC Treaty rules, these special powers constitute an unjustified restriction on the free movement of capital and the right of establishment (Articles 56 and 43 of the EC Treaty), in so far as they hinder both direct investment and portfolio investment.

Following the reply of the Portuguese authorities to the letter of formal notice (IP/05/1594), the Commission invited Portugal to abandon the special rights held by the State and public entities in Portugal Telecom (IP/06/440). The Commission considers Portugal's arguments in defence of the special rights unsatisfactory in the light of the relevant Court of Justice case law.

Portugal argues that the special rights are rights with a private-law character and are justified and compatible with the EC Treaty. Portugal also argues that the rights are applied in a non-discriminatory way and based on reasons of security and public order as well as on other imperative reasons of general interest.

In the Commission's opinion, the special rights of the Portuguese State in the company go beyond what is necessary to meet their intended objectives.

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