EU Kills Law Shielding VW From Takeover

The European Union's highest court struck down a German law shielding Volkswagen AG from hostile takeovers, clearing a path for Porsche AG to increase its influence - and possibly even take control - at Europe's biggest automaker.

The decision Tuesday is expected to have ramifications across Europe, where many governments have tried to protect companies they see as vital to their economies from takeovers, particularly foreign ones.

German politicians and labor unions had argued that the 47-year-old law was needed to protect local jobs, but the European Court of Justice said the measure was illegal and limited "the free movement of capital" that is a tenet of the EU.

The ruling is a triumph for the European Commission, which has fought several battles against European governments and their "golden shares" in critical companies.

The court ruled that the "VW law" discouraged foreign investors from taking a stake in Volkswagen, because German authorities - the state of Lower Saxony is its second-biggest shareholder - are able "to exercise considerable influence" over the company.

"This situation is liable to deter direct investors from other member states," the court said in a statement.

The law caps a shareholder's voting rights at 20 percent, whatever the size of its holding.

European Union regulators took Germany to court in 2005 over the law, saying the right to do business anywhere in the 27-nation bloc is hindered if governments interfere with companies.

The EU has since lined up or threatened cases against Spain over allegations it is protecting energy companies like Endesa SA, Italy for blocking a takeover attempt of highways company Autostrade SpA, and Poland for hindering Italy's UniCredit SpA from consolidating its grip over a local bank.

Volkswagen said in a statement it would examine the ruling and its "potential consequences."

Germany's federal Justice Ministry said it would move immediately to comply with the ruling.

The country's biggest industrial union, IG Metall, criticized the ruling. Union leader Juergen Peters said it was a sign of European institutions' distance from ordinary people if "free movement of capital and thus the interests of investors are given a higher value than the interests of employers."

For Porsche, which has spent about euro5 billion (US$7.08 billion) building up a 31 percent stake in Volkswagen since 2005, the ruling gives it carte blanche to increase its holding.

Porsche Chief Executive Wendelin Wiedeking said the company was "naturally very interested in being able to fully exert our voting rights" in Volkswagen. However, he did not refer to the possibility of a takeover - which many analysts expect.

The Stuttgart-based automaker - which has reportedly secured a euro10 billion (US$14.2 billion) line of credit to buy Volkswagen shares - said it did not plan to immediately raise its stake but that the issue would be addressed when its supervisory board meets next month.

With the 20.36 percent of Volkswagen held by Lower Saxony, the two already hold more than 50 percent of Volkswagen - meaning the door already is closed for any would-be foreign suitors.

Volkswagen's board chairman and former CEO, Ferdinand Piech, is a member of the family that controls Porsche.

"Today's decision marks an historic moment where VW moves from the status of a state-controlled company to that of a family-run company," Morgan Stanley analyst Adam Jonas wrote in a research note.

He added that Volkswagen would benefit from more control by Porsche and its executives given that they are some of the "most skilled capitalists in the global auto sector, with an obsession for efficiency, product quality and brand management - all skills which can help VW greatly."

Were Porsche to acquire Volkswagen, it would be a case of a smaller company gobbling up its larger partner.

Porsche sold 97,515 cars in the year ended July 31, with sales rising 3.4 percent to euro7.4 billion (US$10.48 billion). The company expects its pretax profit for that year to be significantly more than the euro2.1 billion it posted for 2006.

Volkswagen - whose brands include Seat, Skoda, Audi and Lamborghini - sold 3.1 million cars in the first six months of 2007 and expects its sales for this year to top the euro104.9 billion it reported in 2006. It earned euro1.96 billion (US$2.78 billion) in the January-June period.

Porsche shares soared 4.4 percent to euro1,713.92 (US$2,427.94). Volkswagen initially rose after the ruling, then dropped back 3.1 percent to euro174.80 (US$247.62).

The court said Germany did not explain why it needed to protect workers by keeping "a strengthened and irremovable" stake in Volkswagen. It also rejected German government arguments that its special position protected minority shareholders.

Lower Saxony's governor, Christian Wulff, said the state accepted the decision. He said it would stand by its stake in Volkswagen and that its aim was "for VW to be a successful company with high sales and satisfied employees with secure jobs, particularly at sites in Lower Saxony."