Volkswagen privileges
July 24, 2009
Some observers are saying that it was only the VW law which prevented Porsche from succeeding in its ambitious plan to take over the larger company. And it was Porsche's failure to finish off the takeover after having spent so much money which led to its disastrous financial problems. Those problems in the end could only be solved by VW's takeover of Porsche.
The original VW law dates from the privatization of the company in 1960. It guaranteed the state of Lower Saxony, which owned 20 percent of the shares, that it could continue to block developments of which it did not approve. In addition, the law ensured that, however many shares anyone else had, they could only have a maximum of 20 percent of the votes.
EU objections
The EU Commission, which is the defender of the free movement of capital in the European Union, said over ten years ago that it was not happy with the law. It took the matter to the European Court of Justice, which ruled in 2007. The court's ruling, says Christian Democrat MEP Klaus-Heiner Lehne, was a bit ambiguous.
"In the court's decision, they said that the combination of the threshold of 20 percent with other rules is declared invalid," he points out. "But in the argumentation for the judgment they clearly said that every rule in company law which is an obstacle to the freedom of capital movement is in conflict with European law."
That gave the government a way out. It revised the law, removing the restriction on the voting rights of other shareholders, but leaving the 20 percent veto for Lower Saxony. In addition, it required an 80 percent majority for certain important decision.
That meant that other shareholders would have to win 80 percent of the votes to get something through, but they couldn't get 80 percent of the shares because of Lower Saxony's holding.
Porsche's misjudgment
Porsche's CEO, Wendelin Wiedeking, had argued in public for the abolition of the VW law, and probably, like many, he assumed that the European court's finding would lead to its abolition, making Volkswagen subject to the same laws as every other company. Under those laws, if Porsche could buy 75 percent of the shares, it would win control of the company.
But, with the revision of the law, Porsche was faced with the need to buy more than 80 percent of the shares, as well as the impossibility of doing so because of the state-owned 20 percent.
"The mistake that the Porsche management made," says Lehne, "is that they underestimated both the strong lobby behind the Volkswagen law in favor of Lower Saxony, and the close connections which probably exist between [the Lower Saxony state capital] Hanover and Berlin on this matter."
Lehne would like to see the EU Commission take the case back to the European Court to clear the ambiguity he sees in its original judgment. He said, "Probably they will do that after they've been re-nominated."
No urgency in Brussels
The Commission took the case up again formally at the start of the year, saying that the new law did not fulfill the court's requirements, but the proceedings are currently at a standstill. Reuter's news agency reports that senior EU officials say that Commission President Jose Manuel Barroso does not want to risk a confrontation with the German government shortly before his expected re-nomination in the fall.
But the Social Democrat Justice Minister, Brigitte Zypries, has called on the Christian Democrat Chancellor, Angela Merkel, to nip any such discussions in the bud.
"The CDU is damaging the economic position of the country when it casts doubt on the VW law," she said.
Michael Lawton
Editor: Susan Houlton