The EU Commission has announced plans to take legal action against Germany over its controversial 'Volkswagen law.'
Volkswagen in Wolfsburg, Germany: Since 1960 guaranteed jobs in Lower Saxony
A spokesman for the European Commission announced in Brussels on Wednesday that a law that blocks hostile takeover bids of the automobile giant Volkswagen is in violation of European Union treaties. The announcement heralds the start of legal action against the German state.
EU Internal Markets Commissioner Frits Bolkestein maintained that the law, which came into existence in 1960, prevents the free flow of capital among the fifteen European Union member states.
"We fear that investors from other countries will be scared away from investing in VW," a spokesman for Bolkestein said in Brussels.
Under the terms of the law no shareholder may possess more than 20 percent of the votes in the general assembly despite how many shares he or she holds.
But the most contentious issue is the position of the state of Lower Saxony, which has the power to veto any deal involving selling the company. Lower Saxony is the greatest shareholder with 18.2 percent of shares.
Reactions from Lower Saxony
The state of Lower Saxony has reacted to the news with calm, stating that with the support of the federal government, it would prove "beyond doubt" that the VW law conforms with EU legislation.
"The EU Commission has conceded that the individual terms of the Volkswagen law do not violate EU law, but that the combination is the source of disapproval," Lower Saxony Premier Christian Wulff said. He concluded that EU legal action would be unsuccessful.
Not a case of "golden shares"
Critics of the European Commission believe that the law is not disadvantageous to the likes of foreign investors, and as such, cannot be deemed a "golden share" law. Some states use golden shares to wield their influence in strategically important companies. Since the European Court of Justice ruling last summer on golden shares, the Commission has already called on four EU states to put a stop to takeover blocks of this nature.
The Commission ruling is politically sensitive given that German Chancellor Gerhard Schröder -- formerly premier of Lower Saxony -- has repeatedly expressed his support for the existing law designed to keep Europe's largest automobile manufacturer in the northwestern German state.
Germany now has two months to respond to the Commission's concerns. But if the two parties cannot reach agreement Germany could find itself facing a trial at the European Court of Justice.