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Brussels, 24 November 2011

Free movement of capital: Commission refers Germany back to the Court for failure to fully comply with the Volkswagen law judgement – Background

In 2001, the Commission initiated an infringement proceeding against Germany concerning golden shares in Volkswagen. The company was privatised in the 1960s. A tailor-made law from 1960, the VW Law, mainly granted three statutory privileges in favour of German authorities (so-called "special rights") these being:

(1) Mandatory State representation: The VW law ensured significant influence of the State in VW’s supervisory board (former §4(1)). It provided for two seats each (out of 20) for the Federal Government and the Land of Lower Saxony for as long as they own shares in the company (which, de facto, only the Land does: 20.01% of VW's shares).

(2) A 20% voting cap: In a derogation from German company law, any shareholder in Volkswagen holding more than 20% of voting shares could only cast a maximum of 20% of the votes in a shareholder meeting (former §2(1) VW Law). Even if this applied to all shareholders, it particularly suited the Land of Lower Saxony with its 20.01% shareholding.

(3) A 20% blocking minority. For resolutions which under normal German company law require a majority of more than three-quarters of the share capital, the VW law sets the threshold at more than four-fifths. Consequently, shareholders in VW do not need to hold 25%, but only 20% of the shares to be able to block decisions on matters such as capital increases or changes to the Articles of Association (part of the statute of a company. Again, the privileged blocking power applies to all shareholders, but it particularly favours the Land of Lower Saxony with its 20.01% of VW shares.

On 23 October 2007, the Court of Justice of the European Union, hereinafter CJEU, ruled that the privileges in question infringed the EC Treaty (case C-112/05). The Court declared that by maintaining in force the relevant provisions, "namely Paragraph 4(1), as well as Paragraph 2(1) in conjunction with Paragraph 4(3), of the Law of 21 July 1960 on the privatisation of equity in the Volkswagenwerk limited company, the Federal Republic of Germany has failed to fulfil its obligations under Article 56(1) EC". This Article established the free movement of capital before the Lisbon Treaty moved it to Article 63 Treaty on the Functioning of the European Union (TFEU).

The subject of the ongoing procedure is Germany's implementation of the 2007 ruling. Under Article 260 TFEU, Member States are required to take all necessary measures to comply with a CJEU ruling. Following the 2007 ruling on the VW law, Germany amended the law as from December 2008. However, the amending law abolished only two out of three privileges, the state representation in the supervisory board and the 20% voting cap. The third privilege, the 20% blocking minority, was maintained (§4(3) VW Law). According to the explanatory memorandum of the amending law the abrogation of the provision in question was not required. It refers to the wording of the 2007 judgement which examines the cap on voting rights (former §2(1) VW Law) alongside the blocking minority. From this the memorandum concluded: "The conjunction between these provisions must be brought to an end. This is being complied with by abolishing §2 VW Law. That ends the link". Corresponding to the VW Law, the 20% blocking minority is also laid down in VW’s Articles of Association (Article 25 (2)).

By contrast to the German position, the Commission has always taken the view that each of the three provisions individually restricts the free movement of capital and, therefore, all of them, including the 20% blocking minority, need to be abolished. For this reason, the Commission initiated the procedure under ex-Article 228 EC (now Article 260 TFEU) because of Germany’s failure to fully implement the 2007 judgement. The letter of formal notice was sent to Germany in June 2008, and in November 2008 it was followed up by a reasoned opinion ( IP/08/873 and IP/08/1797 ). Since then, all avenues for negotiation on an amicable solution have been thoroughly explored and eventually, despite all efforts by the Commission, found to be a dead end. Therefore, the Commission decided to bring the case again before the Court.

The Commission is aware that, in principle, German company law allows that a company’s Articles of Association derogate from the legal majority requirements and fix the blocking minority at 20% as VW’s Articles of Association do. However, it is open to the shareholders to decide whether or not to make use of this power. By contrast, the majority requirements currently laid down in VW’s Articles of Association do not result from the will of the shareholders but from the VW law. Only if, in line with the Court’s judgment, the provision in question is repealed by the German legislator, VW’s shareholders are free to decide whether or not to fix the blocking minority at another rate than foreseen in general company law.

The Commission is of the view that the 20% blocking minority was imposed on VW’s shareholders by the legislature in order to procure for itself a blocking minority. It enables the Land of Lower Saxony to block important decisions in VW on the basis of the interest of approximately 20% which it has held since VW was privatised. However, a legislative instrument allowing German public authorities to oppose important resolutions in VW on the basis of a lower level of investment than would be required under general company law is liable to deter direct investors from other Member States. It constitutes, as has been found by the Court in its judgement of 23 October 2007, an unjustified restriction on the free movement of capital as enshrined by Article 63 TFEU.

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