EU Threatens to Scrap “Volkswagen Law”

Dámaso Ruiz-Jarabo Colomer, the Advocate General at the European Court of Justice has informed the judges of the ECJ that Germany’s “Volkswagen Law” is illegal under the EU and must be scrapped. The AG’s advice is usually followed (but not inevitably) by the court, so this statement is a genuine threat to the way Volkswagen is owned and operated. The changes envisioned would be improvements.

According to Bloomberg, “The German government created the Volkswagen Law in 1960, when the carmaker was privatized, to prevent a takeover. The federal government and Lower Saxony kept a 40 percent stake, and the remaining 60 percent was sold to private shareholders. The federal government has since sold its holding.” It also caps at 20% the voting rights of any owner, regardless of the size of its stake. Thus, Porsche, which currently owns 27.4% of VW, gets 20% of the votes when it comes to decision making. Also, 20% is enough to veto any policy decision. Moreover, the federal government and the government of Lower Saxony get to name two appointees each to the ten-member advisory board.

Should the ECJ support Mr. Ruiz-Jarabo Colomer’s opinion when it deliberates this summer, they will be enhancing the free flow of capital within Europe. And while government has a role to play in the proper functioning of the market, giving the government of Lower Saxony 20% of the company and a veto over company policy results in a firm that is more responsive to opinion polls than the marketplace. By the way, when news of the opinion hit Frankfurt, VW’s shares rose 1% to €85.96.

Of course, should the law get tossed on the scrap heap, Porsche may well be interested in taking over VW. A company spokesman played it safe saying, “We welcome the opinion of the advocate general. This confirms our stance on the VW Law and we assume that the court will follow the position of the advocate general.”

On the other hand, VW is valued at €30 billion or thereabouts. That’s a huge bite for Porsche to digest. While there is a temptation to buy up more VW shares, Porsche’s board has authorized purchasing only 29.9% of the total stock available. The company may be satisfied to get rid of the government’s veto and to get all of its votes counted.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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