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European court expected to dump 'Volkswagen Law'

The European Court of Justice is expected to rule tomorrow against the so-called "Volkswagen Law," paving the way for Porsche to take control of the continent's biggest carmaker.

Striking down the 40-year-old law, which prevents Volkswagen (VW) from being taken over, would allow Porsche to raise its 31-percent stake to a majority.

Porsche has made no secret of its desire to expand beyond its traditional focus on the luxury sports car market to create a truly global group.

The law was introduced in 1960 as VW, which was founded in the wake of World War II, was being privatized and was designed to shield the company from foreign attempts to control it.

The crux of the law is that regardless of the amount of capital it owns, a shareholder cannot hold more than 20 percent of the voting rights in a company.

The law also stipulates that the authorities in Lower Saxony, the German state where VW is based, have the right to appoint two members to VW's supervisory board, allowing them to block the majority needed to adopt resolutions.

Lower Saxony is the second-biggest investor in VW with 20.3 percent of the capital.

Porsche has long objected to the restriction on its voting rights in the firm.

"To have 31 percent of the capital but only 20 percent of the voting rights is clearly discrimination," Porsche chief executive Wendelin Wiedeking said.

The European Court of Justice is widely expected to rule in favor of the European Commission's opinion that the law is restrictive, obliging Germany to revise it.

In February, the court's Advocate General Damaso Ruiz-Jarabo Colomer said he believed the law contravened European legislation because it constricts the free movement of capital within the 27-nation bloc and restricts foreign investment.

The Luxembourg-based court agrees with the opinion of the advocate general in eight out of 10 cases.

If the law is changed, Porsche will enter a "decisive" phase in its attempt to take control of VW, Wiedeking said.

It will probably only be a matter of time before Porsche takes a majority share.

Ferdinand Piech, who is both the head of the VW's supervisory board and co-owner of Porsche, is already rattling the saber, promising big changes at VW.

The creation of a car group with global reach would be the realization of Piech's long-held dream.

The grandson of Ferdinand Porsche, who set up Porsche and created the mould-breaking VW Beetle at the request of the Nazis, 70-year-old Piech is the driving force between the two carmakers' rapprochement.

A question mark hangs over the future involvement of Lower Saxony, however, where elections are scheduled to take place in January.

The state could either withdraw from VW, or "adapt" to the new situation by raising its stake by 5 percent to 25 percent. Under German corporate law, a 25 percent share gives a shareholder a blocking veto.
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