Germany in the Dock

The European Commission launched legal action on Thursday, June 5, against Germany over a new "Volkswagen law" that retains Lower Saxony's de facto veto over takeover bids for the company, a spokesman said.

The commission, which considers that the law breaks EU competition rules, gave Germany two months to respond before the case would go back before the European Court of Justice, the spokesman said.

The action comes after what the commission considers as Berlin's failure to comply with an October 2007 ruling of the European Court of Justice, which said it violated European Union competition regulations.

Labor leaders and the German state of Lower Saxony voiced dismay.

Under-fire state premier fights back

Christian Wulff, premier of the state and a Volkswagen board member, said the EU move was "regrettable" and "obviously shows they are not willing to accept the good arguments of the German government."

He said Germany would prove that its draft legislation on Volkswagen's voting structure met European Court of Justice criteria, since it had eliminated a former cap on any larger shareholder's voting rights at 20 per cent, while leaving a veto in place.

The Volkwagen Group works council, representing blue- and white-collar workers, attacked Brussels.

"As the group directly affected, we demand that the EU Commission give us a hearing," said council chairman Bernd Osterloh in Wolfsburg, where Volkswagen has its head office. He said the state's veto was "an important protective factor for labor."

Volkswagen's unusual governance means that decisions about layoffs at the automaker, which also owns the Audi, Seat and Skoda brands, are often politically influenced, especially when labor groups and politicians ally against value-driven investors.

EU seen to be siding with Porsche

In the battle over Volkswagen, the European Union has effectively taken the side of Porsche, the sports car manufacturer which owns 31 per cent of Volkswagen and seeks majority control.

Porsche resents the veto power vested in Lower Saxony, owner of 20.8 per cent of Volkswagen shares.

Since most Volkswagen workers are also voters in Lower Saxony, Wulff's influence on the company has often been used to protect jobs.

The EU's executive, the European Commission, has long maintained that this gives the state an unfair advantage, since German company law normally fixes veto powers at a minimum of 25 per cent of a company's equity.

The court on October 23 judged that the original version of the 48-year-old law broke EU rules, impelling the German government to announce on May 27 a draft revision of the Volkswagen Law.

Court ruling circumvented

The new law is an attempt by Berlin to preserve its veto in the face of an October 2007 ruling by the European Court of Justice which struck down the "Volkswagen law," saying it violates EU competition regulations.

After the 2007 ruling, German officials removed provisions limiting voting rights of shareholders and set guidelines for who would sit on the VW supervisory board. But they exploited ambiguous terms within the court ruling regarding the level of holding required to block major decisions.

Germany's original "Volkswagen law" dates back to 1960 when the company was being privatized. The law aimed to protect it from hostile takeovers by foreign companies and ensures that workers play a significant role in decision making.