Such mechanisms prevent the free flow of investments.
In an attempt to improve cross-border European flow of capital, the European Court of Justice issued a ruling on 23 October 2007 against a German law, the so-called “Volkswagen law” which allowed the German government and the state of Lower Saxony to control the car manufacturer, Volkswagen. The battle between the European Commission and the German government has been going on for many years and has come to represent the European fight against state controlled private companies.
In almost all European countries, corporate ownership systems exist whereby certain shareholders use a number of different types of controlling mechanisms to maintain control over companies. These shareholders usually only hold a small percentage of the total number of shares, i.e. they have a limited financial stake in the company, but are given control through different mechanisms, for example, multiple voting rights or through shareholders’ agreements which limit other shareholders’ rights to vote or appoint member of the board of directors. The controlling mechanisms are used by both private persons and by governments. In relation to private persons it is usually the family which founded the company who wish to remain in control while at the same time limit their financial risk. In relation to governments, the controlling mechanism is usually a means for the government to remain in control of formerly state-owned companies after they are privatized.
In the case of the Volkswagen law, the German government and the state of Lower Saxony hold special shares, so-called golden shares, which give them the right to each appoint two members to the supervisory board of directors. There is also a law which prevents any other shareholder from owning more than 20 per cent of Volkswagen’s voting rights, regardless of the size of their shareholding. These mechanisms give the German government and Lower Saxony control over the company despite only holding a small percentage of the total number of shares. The ultimate effect is the ability to stop any form of takeover by another company. Porsche, another car manufacturer, which currently holds approximately 31 per cent of the shares, could therefore not gain control over the company despite holding the largest number of shares.
The European Commission has long argued that such mechanisms prevent the free flow of investments between the member states. It has previously won another case against the Netherlands which wished to remain in control of its postal service and telecoms company. On the other hand, the countries argue that they use these controlling mechanisms in order to protect national interests, in the case of the Volkswagen law, national employment interests. The European Court of Justice ruled that protecting national employment interests is a legitimate aim but that the Volkswagen law was not a justified means to do this. We will have to wait to see which country will be the next target in the European Commission’s fight against national protectionism.
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