EU Rejects VW Law Amendments

German Government Comes Under Pressure to Act on VW Law

According to the Financial Times (FT), the European Union (EU) has rejected the proposal for a redrafted VW Law that was formulated by German Minister of Justice Brigitte Zypries. The EU Internal Markets Commissioner Charlie McCreevy, responsible for ruling on the decision, has written to Zypries to say that the German government's proposed amendments to the law are not far-reaching enough. The VW Law had been subject to a redrafting by the government following an European Court of Justice (ECJ) ruling in October that decreed that the law restricted the free movement of capital within the EU.

In January the German government submitted a revised version of the 48-year-old VW Law that is designed to protect the largest German volume carmaker from hostile takeovers. The redraft retained the crucial right of a blocking minority held by any single shareholder with a 20% stake or above. This means that the State of Lower Saxony, which has a 20.1% stake in the Volkswagen (VW) Group, would retain its historical veto over any major decisions made by VW's management board. As a result at present, a majority of 80% of shareholders is required to take significant management decisions. Porsche is currently VW's biggest single shareholder with a 31% stake in the company, and in March the company's supervisory board took the decision to increase this shareholding to a majority stake (see Germany: 4 March 2008: Porsche Board Agrees to Increase Stake in VW to 51%), undoubtedly with a view to exerting autonomous management control over the company. This is also illustrated by the fact that the Porsche's biggest single shareholder Wolfgang Porsche has recently taken a seat on the VW supervisory board (see Germany: 14 March 2008: VW Confirms Wolfgang Porsche as Board Member) while Porsche CEO Wendelin Wiedeking has also taken up a seat at VW's premium Audi brand. Porsche is pushing to have the blocking minority threshold raised from 20 to 25%, which is the normal limit under German law. This would then mean that the State of Lower Saxony would no longer have a large enough shareholding to veto management decisions.

The German government is now under some pressure to act on the blocking minority component of the VW Law. McCreevy reportedly warns the German government in the letter that the EU reserves its right to open formal proceeding against the German government over "non-respect" of a court ruling as well as reminding Germany of its EU treaty obligations.

Outlook and Implications

It is unlikely that the existing VW Law will be drastically changed any time soon. The issue is too politically divisive in Germany for the country's government to quickly redraft the law again in a way that would abolish the State of Lower Saxony's blocking majority. As a result the status quo that is stopping Porsche from taking unfettered management control over VW is likely to remain in place, at least in the short term. However, by the same token the German government also wants to avoid being seen to be acting illegally by the rest of the European community in what amounts to an act of arch protectionism. This issue would appear to hinge on how keen the EU is on upholding the original judgment of the ECJ ruling that was made last October (see Germany: 23 October 2007: EU Court Rules "Volkswagen Law" Illegal). If the EU continues to pressure the German government it is inevitable that a change to the law will eventually have to be effected.

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