EU Sues Berlin Over Volkswagen Law

BRUSSELS -- The EU Commission on Wednesday dragged Berlin to court over a law that shields carmaking icon Volkswagen from hostile takeovers, the culmination of a long campaign to break down barriers to foreign investment.

The lawsuit is the parting shot of pro-market Internal Market Commissioner Frits Bolkestein at Germany's protective industrial system, which has been defended by Chancellor Gerhard Schr?der.

The European Union executive has repeatedly asked Germany to scrap a 1960 law which gives VW's home state of Lower Saxony effective control of the firm through a minority stake.

The challenge will not change the fate of VW overnight since the European Court of Justice, the EU's highest court, takes on average two years to issue a verdict in such cases.

But if the court does throw out the law, a company that began its life in 1938 and rose to fame with the beloved Beetle in the 1970s could become the target for a takeover bid. Two years ago U.S. carmaker Ford was said to be interested.

Shares in VW, the worst performer in the European car sector this year, extended early gains as the market started to speculate over possible bids.

"If the VW law is overturned, of course, that will trigger takeover speculation. VW could move more into view for potential buyers and that fires the imagination," said a Frankfurt trader.

VW shares were up about 2 percent at 33.97 euros ($42) in early trading.

The VW law caps shareholders' voting rights at a maximum of 20 percent, regardless of the number of shares owned, and requires an 80 percent majority for key decisions. The law also confers a de facto blocking minority to Lower Saxony, VW's biggest shareholder, which has a voting stake of 18.2 percent.

VW declined to comment on the commission's decision.

But Lower Saxony came out fighting after the commission decision, insisting that the law was permissible under EU rules.

"We are convinced that the VW law complies with EU law. We think the European Court of Justice will rule in our favor and are eagerly awaiting [the plaintiff's] justification of the lawsuit," a spokesman for the state's chancellery said.

Schr?der, who was the premier of Lower Saxony and sat on VW's board for eight years, has fiercely defended the law, saying it is needed to protect jobs at Europe's largest carmaker.

Berlin and Brussels have often argued over industrial issues, with Schr?der saying that the EU neglects the needs of German firms.

Previous spats include Germany's successful bid to water down EU rules to spur cross-border takeovers, a clash on EU plans to free up the market for spare car parts and a dispute over a German can recycling system.

The VW law is a surviving symbol of Germany's postwar industrial success and of a type of social corporatism that fights to withstand global competitive pressures.

"VW fits well into the German social model. It is a company trying to strike a balance between the global world and the peculiar German way of social capitalism," said Katinka Barysch, chief economist at the Center for European Reform.

But the commission says the VW law violates EU rules on the free movement of capital and allows Lower Saxony to keep a grip on the privatized carmaker in a way that is similar to golden share schemes repeatedly defeated by the EU executive in court.

"The only real defense a state can advance in order to justify a golden share are overriding general interests," said Bernard Amory, head of the EU practice at law firm Jones Day. "It is hard to find this justification in a carmaker."