The EU and Germany's Volkswagen law - briefing

27 November 2008
by eub2 -- last modified 27 November 2008

The European Commission decided on 27 November to ask Germany formally to modify the 1960 law privatising Volkswagen (VW law) following a ruling of 23 October 2007 by the European Court of Justice. The Court found that three provisions of the VW law attribute unjustified special rights to German public authorities (the Land of Lower Saxony and potentially also the Federal Government) and that by maintaining them in force, Germany has failed to fulfil its obligations under the EC Treaty rules on the free movement of capital (Article 56). The request for compliance with the Court ruling takes the form of a ‘reasoned opinion’, the second stage of the infringement procedure under Article 228 of the EC Treaty related to compliance with Court of Justice rulings. In the absence of a satisfactory reply from Germany within two months of receiving the reasoned opinion, the Commission may decide to refer the matter to the European Court of Justice.

On 23 October 2007, the European Court of Justice ruled in case C-112/05 that "by maintaining in force Paragraph 4(1), as well as Paragraph 2(1) in conjunction with Paragraph 4(3), of the Law of 21 July 1960 on the privatisation of equity in the Volkswagenwerk limited company" Germany has failed to fulfil its obligations under the EC Treaty rules on the free movement of capital (Article 56).

These three provisions of the VW law (which are also reflected in provisions of the Articles of Association of the company) grant the following special rights to German public authorities (the Land of Lower Saxony and potentially also the Federal Government):

• automatic representation of public authorities on the board stipulated in §4 (1) VW-law (Art. 12 Articles of Association in their version as of March 2006);
• a 20% voting cap stipulated in §2 (1) VW-law (Art. 24(1) 3rd sentence and Art. 25 Articles of Association) as well as
• a 20% blocking minority stipulated in §4 (3) VW-law (Art. 26(2) Articles of Association).

A draft law amending the VW law, which is currently in the legislative approval process, abolishes the provisions providing for the representation of public authorities on the board (a rule which remains in Article 12 of VW's Articles of Association) and the 20% voting cap. However, the draft law, which has not yet entered into force, does not modify the provision establishing a 20% blocking minority, and no changes are foreseen to the VW Articles of Association, which contain provisions equivalent to all the above provisions of the VW law.

The Commission decided on 4 June 2008 to send a letter of formal notice under Article 228(1) EC. By virtue of Article 228 (1) EC, if the Court finds that a Member State has failed to fulfil an obligation under the Treaty, the State shall be required to take the necessary measures to comply with the judgment of the Court of Justice ("the ruling").

Judgment of the Court of Justice in Case C-112/05
Commission / Germany

Freedom to provide services
THE VOLKSWAGEN LAW RESTRICTS THE FREE MOVEMENT OF CAPITAL

Source: European Commission