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Brussels, 24 November 2010

Free movement of capital: Commission seeks Portugal's compliance with Court ruling on special powers in Portugal Telecom

The European Commission has decided today to ask Portugal for information on measures taken to comply with a July 2010 Court of Justice ruling (C-171/08) that the Portuguese State's special rights in Portugal Telecom were in breach of EU rules on free movement of capital . The Court of Justice of the EU found that Portugal's 'golden' shares are an unjustified restriction on the free movement of capital and that by maintaining them in force, Portugal has failed to fulfil its Treaty obligations. Portugal now has two months to inform the Commission of measures taken. In the absence of compliance, the Commission may refer the case for the second time to the Court and ask it to impose a lump sum and/or penalty payment on Portugal.

What is the aim of the EU rules in question?

Free movement of capital is at the heart of the Single Market and is one of its 'four freedoms'. It enables integrated, open, competitive and efficient European markets and services. For citizens it means the ability to do many operations abroad, as diverse as opening bank accounts, buying shares in non-domestic companies, investing where the best return is, and purchasing real estate. For companies it principally means being able to invest in and own companies in other European countries and to take an active part in their management.

How is Portugal not respecting these rules?

In the privatisation of Portugal Telecom, the Portuguese State and other public entities were allocated privileged shares ("golden" 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 on important corporate decisions concerning Portugal Telecom, e.g. approval is required by a majority of A-shares for the acquisition of shareholdings exceeding 10% of the company’s share capital. Also, pursuant to Portugal Telecom’s articles of association, important corporate decisions, including any decision amending these articles of association, cannot be approved without the majority of the votes of class A-shares.

The Commission, of the view that the special rights were in breach of EU rules, brought the case to the EU Court of Justice in 2008 (see IP/08/120). On 8 July 2010, the Court of Justice of the European Union ruled that "…by maintaining in Portugal Telecom… special rights, such as those provided for in that company’s articles of association for the State and other public sector bodies, allocated in connection with the State’s golden shares in Portugal Telecom", Portugal has failed to fulfil its obligations as regards the free movement of capital under Article 63 of the Treaty on the Functioning of the European Union . The Court rejected a number of justifications put forward in its defence by Portugal for maintaining special rights in the company – public security, possible disruption of the capital markets and the need to ensure a certain degree of competition in the telecoms market In outlawing Portugal's special rights in Portugal Telecom, the Court confirmed its case law in a long series of previous decisions against several Member States regarding their special rights in privatised companies. Since the Court ruling,and despite receiving in early September a reply to an administrative letter sent in July, saying that Portugal was studying the best way to comply with the ruling , the Commission has not subsequently been informed by the Portuguese authorities of the measures taken to ensure compliance.

How are citizens and business suffering as a result?

As a consequence of the special rights maintained by the Portuguese State, direct investors are hindered from effectively participating in the management and control of Portugal Telecom. In addition shares held by individuals may be adversely affected by the risk that the State may not approve an important decision, proposed by the organs of the company as being in the best interests of the company and its ordinary shareholders.

More information

Free movement of capital:

Latest information on infringement proceedings concerning all Member States

For more information on infringement procedures, see MEMO/10/605.

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